First-Quarter Results Prove Rental Model is in Serious Trouble13 May, 2004 By: Thomas K. Arnold
The sharp drop in rental revenue our industry experienced in the first quarter of this year — estimated at 16.5 percent, according to our market research department — is alarming, not just for the sheer magnitude of the decline, but also for the fact that soaring DVD sales couldn't offset an overall 4.3 percent decline in home entertainment consumer spending.
Each year, the home entertainment market has gotten bigger. In year-end stories going back into the late 1990s, we've seen studio executive after studio executive gloat over the public's infatuation with DVD and how sales records continue to fall. Through it all, we've been hearing that rental is flat or slightly down, but that overall spending is way up because consumer just can't stop buying DVDs.
I don't see the first-quarter results as a sign that the DVD boom is fading. After all, consumers spent 12.9 percent more on DVD purchases this quarter than in the first quarter of 2003. But I do see it as an indictment of the rental model, a sure sign that despite Joe Retailer in Podunk's insistence that his store is still doing fine, the rental industry is in serious trouble.
While studios have been so caught up in the euphoria of DVD sellthrough in recent years that they've all but ignored rental (maybe because they don't get a cut), the fact remains that rental was and still is a major component of the home entertainment pie and that we had all better become attuned to the fact that a major part of our business is slip-sliding away.
I must confess, I always thought rental would be second fiddle to sellthrough once DVD became ubiquitous, but I never once imagined this part of the business would get hit so hard, so fast — and that it would actually drag down the overall spending tally.
We know what the big chains are doing about it. Blockbuster is trying to find other ways to make money, like cracking the used-DVD market, while Hollywood is going private, perhaps not wishing to call attention to itself at a time when any company that depends on rental is coming under the microscope of the investment community.
But what are the other retailers doing about it? I'd love to hear from you at the e-mail link above. Just don't write and tell me things aren't really that bad.
Rest assured, they are.