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TK's MORNING BUZZ: Signs Are Pointing Toward a Faster-Than-Expected Takeover by DVD

24 May, 2001 By: Thomas K. Arnold

We're still a month away from the year's midpoint, but already signs are pointing toward a faster-than-expected takeover by DVD on all fronts. The president of one leading independent supplier told me that as far back as January, DVD sales were generating more revenues than VHS. And according to a report just in from the Reuters news service, USA Home Entertainment is shipping to retailers more than 1 million VHS copies of Traffic "and more than twice that number on DVD."

A few months ago, I reported that studio executives predict the rental-priced VHS cassette may fade away within two years. Now, I think the rental cassette's demise may come about a lot earlier.

Ever since revenue-sharing and copy-depth programs came into play more than three years ago, studios have been kidding themselves. They have retained a high list price on rental cassettes, but the effective price -- what retailers actually pay -- has been steadily declining. Still, technically, the price hasn't changed -- until MGM's bombshell of a few weeks back in which the studio cut the price of Hannibal to $45, with no goals, no matrix, no incentives, no bonus goods.

Depending on how MGM does, I predict that's going to be the way to go in the future. Freed of administering and processing complex programs, distributors are going to have more time to actually sell product. Studio executives aren't stupid; if something works, they're all likely to at least try it, regardless of who went first.

Meanwhile, the steady rise in popularity of DVD is going to make any price discrepancy more pronounced. Why should a VHS cassette cost so much more than a DVD of the same movie? As DVD penetration continues to soar, more and more retailers are going to be asking themselves that question and I imagine my good friend Tom Joliet of Video Quest in Joliet, Ill., won't be the only one talking about going all-DVD.

Studio executives, ever-conscious of the total revenue pie, are going to seek ways to maximize their take. If demand for VHS rental product drops, the only way to stimulate sales is to lower the price. With DVD, it's the opposite -- demand is so high, and is expected to grow higher still, that at least some studios are eyeing a price increase for DVDs out of the gate to offset any declines in VHS revenues. They may lose some sales, but they figure they'll more than make up for that by charging higher prices.

My prediction: A year from now, flat pricing for rental cassettes will be the rule, not the exception, and what that flat price is will be creeping steadily downward to ultimately perch at the high end of current sellthrough levels.

I could be wrong, but I don't think so. Readers?

Comments? Contact TK directly at:TKArnold@aol.com

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