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Nobody Is Looking at the Other Looming Price War

19 Oct, 2004 By: Holly J. Wagner

The major rental chains were already trying to best each other on a la carte rental pricing and terms when Netflix dropped its price-cut bomb. Chains' willingness to discount used DVDs seems almost bottomless — who would have imagined that more than half the perceived value of a used disc is in the packaging?

But it seems likely that the Netflix price cut, to which Blockbuster responded almost immediately with its own undercut and added perks, is the beginning of a difficult and potentially bloody price war so big that the fallout could hit a lot of folks.

First, Blockbuster and Hollywood have been experimenting with $1 one-night rentals. When subscriptions are cheap, it will drive down the perceived value of a la carte rentals for a lot of people. Independents as a group have been loathe to offer subscriptions, but the new pricing landscape may force them to do it.Then there are the wild cards: DVD vending machines and McDonald's.

With $1 nightly rentals offered under the soon-to-be retired golden arches (at least in one city), the video store no longer need be a destination. Unless, of course, you want to sell your discs.

You might go to Wal-Mart to buy — Wal-Mart counts on that — but if McDonald's, or even a supermarket chain, offers convenient rentals for $1 a night or less, reasons to go to the video store dwindle.

So buying used discs becomes the next point of distinction in the industry — the only thing a customer can get at a specialty store that he or she can't get at a big box or via online rental.

It also becomes part of the pricing equation: What happens to all those used discs the other chains are buying from consumers? Are they merely pass-through resale items? I doubt it. If I was trying to launch online rentals, I would be backfilling my rental stock by paying consumers $5 to $8 per disc for titles that would cost $13 or $15 through typical distribution channels. That lowers my cost of goods and, hey, after the first time you play them they're all used discs, aren't they?

Pundits questioned Netflix's decision to amortize its catalog stock over three years instead of one. It will make Netflix's balance sheet look better, but it also sets up another question: Can the chains that buy used discs — movies or games — from consumers amortize them the same way and at the same rate as their new disc purchases from studios and distributors? Can we take their word for it if they tell us the used trade is a separate line of business not related to rentals? That seems unlikely at chains that offer rentals, since it was born of rental selloff. It seems only logical that the reverse would be true: You sell to consumers when you have too many of a title, and buy from them when you have too few.

So, while everyone is looking at the price war of the moment, they may be losing sight of the next front: How much do you pay for used discs, and do you pay cash or only store credit? My guess is that people will be happy with store credit through this holiday season, when they trade to buy presents. But at other times of the year, when purchases are less concentrated, they may hold out for cash.

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