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Latest Rev Share Deals Are Studios' First Steps In a Search for a New Rental Business Model

16 Feb, 2003 By: Kurt Indvik

As we recover from the post-holiday sellthrough hangover, there is renewed supplier interest and focus on the rental market. This has manifested itself in a couple of new revenue-sharing programs combining DVD and VHS announced by Fox through Rentrak last week and by Warner the week prior. I think it's only the beginning of a series of maneuvers by suppliers to hedge their bets on the rental side of the market to maintain as much margin as they can.

Studios are getting less and less of the rental pie even as they stoke the sellthrough furnace which has, to date, more than made up for the slip in rental revenues. The cost of DVDs has been a terrific boon to rentailers whose margins have improved as DVD rentals increase, even as, perhaps, their overall gross revenues were dented by a burgeoning sellthrough business.

In the early stages of DVD's emergence, there was still plenty of higher-margin VHS business for studios, but as DVD penetration continues, naturally, rentailers are taking less and less VHS. And, to the likely chagrin to studios, DVDs are also turning out to be a successful used product, another very positive aspect of the business for rentailers that studios get no share of.

Meanwhile, while selthrough enjoyed a stupendous rise in unit and dollar volume in 2002, there is that lingering question for suppliers that won't go away: When do buy rates per DVD household start to fall (as many have expected they should have already begun to do), and how far will the fall be? What pricing levels are going to be necessary to keep sellthrough viable and how does all this dovetail with a lower margin rental business.

Because what isn't in much doubt is that DVD player penetration will continue and, eventually, VHS inventory requirements will be small. The DVD/VHS rev-share deals may be a temporary opportunity for some rentailers to lessen their overall cost of goods and provide studios with a better cut of the rental business. But I won't be surprised this year to see a test of some rental window and rental-priced DVD program (on select titles). That has the potential to be a longer term solution for studios as they try to figure out a business model as rental and sellthrough seek to find their equilibrium.

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