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DVD Juggernaut Can't Offset Double-Digit Rental Drop

13 May, 2004 By: Judith M., Melinda S.

An uptick in DVD purchases could not offset a sharp 16.5 percent drop in the rental market and the continued freefall in cassette sales.

Consumer spending on home entertainment fell 4.3 percent, to $5.6 billion, in the first quarter of 2004.

Buena Vista Home Entertainment, with releases that attract more buyers than renters, was the market leader for the quarter with $892.5 million in combined rental and sales revenue. The supplier generated an estimated $599.2 million at the sales counter alone. A well-paced release schedule of solid performers, along with the strong legs of fourth-quarter mega hits Finding Nemo, Pirates of the Caribbean: The Curse of the Black Pearl and Freaky Friday, boosted studio performance.

Consumer sales on DVD and cassette purchases registered $3.45 billion for the quarter, up 5 percent for the 13-week period ended March 31, 2004.

DVD sales came in at $3.13 billion, up 12.9 percent for the quarter. Sales got off to a good start in January, a month that typically produces heavy retail spending as the latest wave of new DVD hardware owners starts to collect DVDs. New releases, such as Columbia TriStar Home Entertainment's (CTHE) S.W.A.T. and Universal Studios Home Video's (USHV) American Wedding, hit the retail pipeline early in the quarter when consumers were still primed to spend.

The power of the franchise kept February afloat. Buena Vista Home Entertainment's direct-to-video release Lion King 1-1/2 fueled sales for the month. The sequel to the classic Lion King, which holds the record as the No. 1-selling video of all time with combined sales skirting the 40 million-unit mark, reinforced the power of the franchise. The release was the top seller for the quarter, tallying combined VHS and DVD sales of 6.97 million units and bringing in an estimated $156 million at retail. Spy Kids 3-D: Game Over (Feb. 24), another Buena Vista franchise hit, turned in a solid sales performance, tallying 3.44 million units by March 31 and generating an estimated $78.77 million at retail.

March tallies were boosted by another highly recognizable franchise, Dr. Seuss. Universal's Dr. Seuss' The Cat in the Hat (March 16) sold 3.95 million units and grossed $91.75 million at retail, making it the No. 3 revenue generator for the first quarter.

Cassette sales continued to plummet, falling 37.5 percent for the quarter to register just $319.8 million, down from $511.78 million in the first quarter of 2003. VHS accounted for 13.6 percent of the unit sales and 9.3 percent of the revenue tally. With the exception of the children's nontheatrical and fitness genres, cassette sales are all but dead. Sixty-four percent of children's nontheatrical sales are now DVD. This genre, however, was the biggest contributor to the VHS sales tally, accounting for an estimated $110 million of the $319.8 million spent on cassettes.

Meanwhile, consumer spending at the rental counter in the first 13 weeks of 2004 reached its lowest level in three years, as a weaker than last year's new-release slate coupled with heightened competition from the sales counter dampened consumer demand.

Declining rentals were expected by many retailers as the box office strength of first-quarter releases was off 14.7 percent from theatrical titles released during the same quarter last year. The weaker lot of releases translated into a 16.5 percent decline in rental revenue for the quarter.

Consumers spent $2.1 billion renting discs and cassettes in the first 13 weeks of the year, down from the $2.5 billion spent during the comparable period last year.

DVD rentals accounted for 71 percent of total rental spending for the quarter, up from 52 percent in 2003.

While disc rentals posted a record high, registering $1.5 billion in the first quarter, it wasn't enough to offset the rapid decline in cassette rentals. VHS rentals were off 50.4 percent from the comparable 13-week period in 2003, generating $600 million.

CTHE took top billing in the rental market share sweepstakes, which helped propel them to the No. 2 spot in overall market share for the quarter with $847 million. The studio's releases generated $421.4 million at the rental counter, accounting for 19.8 percent of all quarterly rental revenue.

Columbia TriStar's S.W.A.T. was the top-renting release in the first quarter, earning retailers $69.9 million in rental revenue and an additional $22 million in previously viewed sales revenues.

USHV, which historically has dominated the first three months of the year, ended the quarter in second place, with a 16.4 percent rental market share. The studio placed third overall, with $785.1 million in combined rental and sales revenue.

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