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TK's MORNING BUZZ: Retailers Respond to DVD's March Toward the 50% Mark in Total Transactions, in Percentage of Store Copies -- and to a Move to Two-Tier Pricing

10 May, 2001 By: Thomas K. Arnold

In Monday's column, I asked retailers to predict when DVDs are going to account for at least 50% of all video transactions, and when DVDs are going to pass the 50% mark in their stores.

As is quite often the case, Tom Hannah, the owner of Video Quest in Joliet, Ill., was first out of the gate with his response. Tom writes, "Your question is a little complicated and one would need a crystal ball to answer. I expect that in two areas (children's and adult video) VHS will hold on for quite some time. With respect to the mainstream new release section, I would expect DVD to reach 50% in early 2002.

"By the fourth quarter of this year I'll be bringing in more copies on DVDs than VHS. The reason is not so much customer demand but more one of studio pricing. Ever since they flooded the market by giving Blockbuster hundreds of copies of the big hits, new releases have no legs. Under revenue-sharing most of our profits are eaten up by the upfront and end fees. The truth is that a VHS tape now rents slightly better than a DVD and the resale value is a lot less. The simple economics are that there are no profits in rental-priced VHS tapes."

Yesterday, I played devil's advocate and asked retailers if a move to two-tier pricing on DVDs, which many of them had so ardently opposed in the past, would really be such a bad thing.

One retailer wrote, "How can you offer a product to the public, for a long time now, then shoot the price to the moon? I could care less about the price. If any other business did this it would fail. All they [consumers] will do is tune in, turn off, and drop out."

Another observed, "With DVD at sellthrough pricing we have a level playing field. And everyone seems to be forgetting what the CUSTOMERS want. Many of them want to own movies and, in particular, they want to own NEW RELEASES, not just stuff they can watch on cable TV."

And, from a new reader who I assume is a consumer, "I have purchased more than 300 DVDs since the format's launch. If what you are proposing becomes reality I would probably buy 60% to 70% fewer DVDs and just rent them. I think DVD rentals will eventually put VHS out of business, and there is a certain segment of the public that would just rent not buy anyway, so why not let the current pricing standard remain as is and please everyone except maybe the greedy Hollywood studios who can never make enough!"

Our DVD guru, Ralph Tribbey, was even moved to respond with what I felt was a most insightful commentary: "I figure that the DVD household penetration rate was right around 14.5% at the end of March. But according to our own magazine, DVDs generated one-third of all video sales during the first quarter. This de facto increase in overall sales from the better-margined, higher-priced DVDs (relative to VHS sellthrough) could significantly mitigate any potential move to two-tier pricing on the part of the key theatrical sources, namely, the studios. If this trends holds, revenue generated from DVD could easily offset revenue lost from VHS rental copy sources, for a net increase to the key rights-holders. Thus, I see no urgency to move to two-tier pricing."

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