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Is DVD Being Devalued?

9 May, 2002 By: Jessica Wolf

In the fall of 1993, a flurry of promotions between studios and fast-food chains let consumers buy such videos as The Addams Family and animated “X-Men” titles for $4.99 to $5.99 along with a meal purchase.

Retailers cried foul, and a Video Software Dealers Association (VSDA) statement denounced the deals for “devaluing” videocassettes in the public's eye.

How times have changed. Wal-Mart and the other big discount chains routinely blow out DVDs for as little as $5.88 and no one's saying a word.

Moreover, new DVD releases -- even double-disc extravaganzas like Shrek -- rarely set consumers back more than $20 at key retailers like Best Buy.

It wasn't until the mid-'90s that consumers could pick up videocassettes for as little as they can buy DVDs today -- a nearly 20-year wait for a cycle that's taken DVD less than five.

“VHS built the sellthrough business through many years of gradual price declines, but by the time DVD came along the purchase habit was well-established and suppliers were able to take advantage of that right out of the shoot,” said analyst Tom Adams of Adams Media Research.

“DVD is a completely different monster,” added Mick Blanken, owner of Superhitz Moviez & Gamez in Delaware, Ohio. “VHS didn't start out as a sellthrough product.”

DVD's sellthrough origin may have made it more vulnerable to devaluation than VHS.

But it wasn't just low studio pricing that triggered what one observer calls the “freefall” of DVD street prices to $16 or $17 for new releases and well below $10 for catalog titles.

Online Sellers Went Deep Discount
When DVD was launched five years ago, among the most eager sellers were Web sites like Buy.com and Reel.com that were firm believers in deep discounting. Eager to stand apart from their many competitors (not to mention traditional retailers), these dot-com fledglings discounted DVDs by as much as 25 percent.

“The online guys, in particular, had to heavily discount because they were charging a delivery charge on top of that,” said analyst Adams. “In answer to that, the brick-and-mortar retailers felt obliged to discount heavily as well, and the two pipelines fed on each other in chasing the price down.”

“The Internet was the main source of really low-priced DVD product in 2000,” added media analyst Greg Durkin of New York based Alexander and Associates. “But in 2001, that shifted to retailers like Sam's Club and Costco.”

A price war is raging between the biggest online retailer and the brick-and-mortar kingpin over Harry Potter and the Sorcerer's Stone.

Amazon.com is preselling the DVD, which streets May 28, for $19.95, $7.04 (or 25 percent) off what it claims is the list price. Wal-Mart doesn't engage in advance sales, but its online subsidiary does. Walmart.com's price is the same as Amazon's, but shipping is included. At Amazon, it's $2.98 extra. Walmart.com promises delivery “on or just after” street date; Amazon promises delivery by May 30.

Low First-Week Pricing
Discounting also is prevalent on the brick-and-mortar side. Best Buy not only offers low first-week pricing on new titles -- often below MAP -- but just about every week touts new special deals in its circulars and newspaper inserts.

Recent examples include “instant rebates” when consumers buy A.I. Artificial Intelligence or Training Day and certain other titles that effectively lower the purchase price by an additional $4 or $5.

Wal-Mart, Kmart and Target also regularly price titles below MAP for the first week of release and Wal-Mart promises to beat competitors' prices on selected titles.

Wherehouse used to offer consumers 20 percent off the list price on any DVD, but recently began implementing other types of discounting programs like an in-store promotion offering 20 percent off to consumers who buy three DVDs. Last month, shelftalkers in Wherehouse stores touted every $19.99 DVD on sale for $15.99.

“We're using other promotions and pricing strategies to drive sales and enhance our customer loyalty,” said Paul Ramaker, VP of movies for the Torrance, Calif.-based audio-video combo chain.

The broadscale deep discounting prevalent among mass merchants and club stores concerns some retailers, who believe using new releases as loss leaders is a mistake.

“The wholesale cost of movies is about $17 on DVD, and occasionally you see Costco go to $14.99, losing $2 per disc,” Blockbuster chief John Antioco said during a recent earnings call. “How much can you afford to lose to build traffic?

“We don't think loss-leader strategy will work forever,” he added. “Our research shows unless you get to a retail cost of under $8, it doesn't make any difference on purchase intent.”

Other retailers, more resigned to this practice than Antioco, simply shrug and buy DVDs for their own inventories at mass merchants and club stores.

Premiums and Club Deals
Not only is the street price of DVDs spiraling downward far faster than it did for videocassette, the digital format also is being used as a premium a lot earlier in its life cycle than VHS.

Most recently, Chevron offered a free DVD copy of the recently streeted theatrical title On the Line (from Buena Vista Home Entertainment) to anyone who applied for a Chevron credit card.

Then there are the clubs. An outgrowth of the old record clubs that used to hawk eight 8-tracks for a penny, mail-order outfits like Columbia House tried the same approach with VHS but never really profited as much as they did with music.

With DVD, they're at it again -- with a vengeance. Columbia House is going after the DVD-hungry public with “four DVDs for 49 cents” deals in its marketing. Consumers get titles like Shrek and Gladiator for pocket change and agree to “buy four more movies in the next two years at regular Club prices (currently as low as $19.95 plus shipping and handling).”

The Previously-Viewed Trend
Most Hollywood Entertainment and Blockbuster Video stores have huge bins in which titles, some of them a few weeks old, sell for around $10 or $15.

Some chains are even trying to get a leg up on their competitors by advertising used DVDs in advance of street date, giving them a back-end guarantee for surplus rental product.

Blockbuster ran a full-page newspaper ad for Training Day the Sunday before it was released, offering “quality guaranteed” used DVDs of the title for $9.99.

Movie Gallery began taking preorders for used copies of the Harry Potter DVD in late February. The sale price is $17.99 and discs will be ready to ship June 25. Movie Gallery's Web site also offers a coupon for two used DVDs for $22.

Blanken believes used-DVD prices at the big chains are getting too low and may lower the public's perceived value of DVDs.

”The Fast and the Furious and American Pie 2 moved out at $9.99, and their normal price on previously viewed is $16.99, so it's only a matter of time before we see the price erode,” Blanken said.

“In my opinion it's totally unnecessary,” he said. “If they do it too soon, all they're going to do is cut revenue and devalue the product. They'll do the same thing on DVD as they did on VHS, and now their VHS is collecting dust just like everybody else's.”

Still, Blanken said, the big chains aren't the only ones taking advantage of a buying public that more than ever is ready to purchase previously viewed product.

“Our [Superhitz] sales revenue has climbed tremendously” since used product entered the mix, Blanken said, noting that sales now account for 25 percent of DVD revenue.

Despite the abundance of inexpensive DVDs, consumer perception of a disc's value hasn't suffered, observers say. This explains the conspicuous absence of cries of outrage from retailers.

“I think the perceived value of DVD is still very high, no matter what price point is being paid,” said Wherehouse's Ramaker.

Additional reporting by Thomas K. Arnold and Joan Villa.

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