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DVD Rental Helped the Format Grow

11 Apr, 2004 By: Melinda Saccone

Rental helped get DVD off the ground, even though the format had been positioned for sellthrough. Consumers wanted to try the new technology before they committed to buying discs, and rental dealers embraced DVD as cheap rental product.

As a result, Warner Home Video — the president of which, Warren Lieberfarb, is considered the father of DVD — about-faced from its dogged sellthrough-only stance and in time for the 1997 holidays supported the nascent DVD rental business with a huge $30 million marketing campaign.

West Coast Entertainment was the first major rental chain to back DVD rental, testing the format in 57 of its 600 domestic stores in 1997, the year DVD was launched. Hollywood Entertainment also came aboard early, while Blockbuster lagged — reportedly, over a snit with Lieberfarb over revenue-sharing.

But that's another story. Overall, the early success of DVD rental stunned industry observers who had not only predicted a sellthrough business, but had wanted a sellthrough business, in the belief that if retailers en masse began renting DVDs, the format would merely replace VHS instead of providing Hollywood with a whole new business that would generate substantial incremental revenues.

DVD rental, however, did take off, and with the format's early rental success came talk of DVD eventually going to a two-tiered rental pricing model. After PolyGram Video's conspicuous lack of success with the rental-priced When We Were Kings DVD, however, the consensus among studios was that sellthrough pricing was here to stay.

As day-and-date DVD availability became the norm, the spectre of rental pricing periodically popped into the picture, with studios clearly concerned about a loss of revenue once rental dealers began buying DVDs for $17 wholesale instead of VHS cassettes for $60.

But gradually, those fears diminished. Revenue-sharing and copy-depth programs continued to drive down the net yield from rental-priced cassettes. Meanwhile, studios discovered that the gains in DVD sales far overshadowed any slide in revenue generated from rental-priced cassettes.

By 1998, DVD's first full year in the market, 47 percent of Video Store Magazine's Top 100 rentailers carried discs for rent. A year later, that figure had more than doubled to 84 percent. Even so, VHS still ruled at the rental counter, with DVD rentals accounting for just 1.4 percent of the Top 100 rentailers' gross revenue for 1999. Overall that year, DVD rentals generated an estimated $490 million, or 5 percent of total rental spending by U.S. consumers.

It wasn't until 2003, six years after its launch, that DVD became the dominant rental format in the United States. Discs accounted for nearly 65 percent of all new-release purchases by rental dealers, according to Video Store Magazine market research estimates. The Top 100 rentailers also derived an average of 38.5 percent of their gross revenue from DVD rentals, a reversal from the previous year, when the top revenue-generator was the VHS cassette, with 35 percent of the gross.

For calendar year 2003, domestic DVD rentals generated a whopping $5.2 billion and accounted for 56.1 percent of all rental transactions.

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