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DVD Tipping the Scales This Quarter

12 Dec, 2002 By: Kurt Indvik

The disc rolls on.

As one theatrical hit after another reaches the video sales bins this fourth quarter, many of these titles score 65 percent to 80 percent of initial unit sales on DVD.

And that's with DVD household penetration still bubbling below 40 percent.

By the time DVD players are in half of all U.S. households, some studio executives predict DVD will account for as much as 90 percent of total video sales on some titles.

But the rate of DVD growth is hard to gauge, and studios are split on how to adjust pricing and marketing to maximize both cassette and disc revenue.

Some are inclined to push DVD, while others plan to use the sellthrough momentum built by DVD to spur VHS sales. Still others are “platform neutral,” preferring to put their marketing effort behind the title and not the format.

Surging DVD sales are still outpacing projections.

“No matter how aggressively we forecast our allotments, we're always undercalling our DVD,” said Bob Chapek, president of Buena Vista Home Entertainment.

The public's DVD-fueled buying appetite doesn't seem to be abating, despite earlier predictions that buy rates would fall dramatically as DVD entered the mainstream.

“The first 10 percent of DVD households consumed more than the last 30 percent of VHS households,” said Benjamin Feingold, president of Columbia TriStar Home Entertainment.

“The number of units sold per household is not decreasing as we get deeper into the household penetration,” he added.

In an effort to maximize the potential of each title, studios are constantly surveying consumers' intent to buy in both formats. And what they're finding is that consumer habits continue to change as the business grows. For example, whereas in the VHS era family titles tended to sell best, in the early days of DVD action and adventure was the hot ticket. Now, as DVD penetration increases, the family genre is once again picking up steam.

These changes have resulted in some wild swings in the DVD-VHS splits. Spider-Man generated 80 percent of its sales on DVD; Ice Age, about 60 percent; and Spirit: Stallion of the Cimarron, 40 percent in DVD sales. Certainly, these films appeal to different strata within the family market, but they are all family films, nonetheless.

Riding DVD's Coattails
Buena Vista Home Entertainment is bent on using DVD to power VHS sales.

“Consumption is so strong right now and you have so much momentum [from DVD] that it's sometimes better to let VHS ride those coattails and also take advantage of strong sellthrough promotion,” said president Bob Chapek. “To separate VHS from DVD to live on its own right now would be disadvantageous.”

Accordingly, the studio is going the sellthrough route on VHS as well as DVD with many of its titles, including those that in the past would have been naturals for rental, like the upcoming Signs and Sweet Home Alabama.

Still, DVD continues to dominate sales at Buena Vista, accounting for 60 percent of sales of Monsters, Inc. and 70 percent of first-day sales of Lilo & Stitch.

Chapek said the family market is driving DVD sales to new levels.

“For a moment in time, you had ‘R'-rated titles at the top of the charts, but now family titles are dominating the sellthrough charts,” he said.

At DreamWorks Home Entertainment, executives say they're not about to abandon the VHS market -- or the rental business.

“We approach everything on a title-by-title basis,” said Kelly Sooter, head of domestic home video. “We consider the property, the VHS audience and its propensity toward the title, and the DVD household and how they are reacting to the title.”

Spirit: Stallion of the Cimarron was priced for sellthrough on both DVD and VHS, with the DVD priced at $19.95 and the videocassette four dollars less. VHS accounted for 60 percent of Spirit's early sellthough numbers, even though the Spirit DVD had a boatload of extras and a unique make-your-own-movie feature. Sooter said DreamWorks “was caught a little short on how big the VHS was,” but insists she's not surprised.

Unlike so much of today's sellthrough marketing, the DreamWorks campaign for Spirit was not DVD-centric. It focused on the movie, not the format.

“If all the ads are geared to the DVD household, already you have segregated your VHS potential,” Sooter said. “VHS households don't know they are being talked to.”

As a result, she said, VHS sales are lower than they should be. “People are leaving money on the table … by not marketing VHS,” Sooter said.

Still, some titles are ideally suited for DVD, so rental pricing for the VHS might make more sense. That's the case with Minority Report, which streets this week.

Accelerating DVD's Future
Columbia TriStar Home Entertainment, a key player in getting DVD off the ground in 1997, sees things differently. The studio is not “format neutral,” Feingold said.

“I've said publicly it's going to be hard to find a videocassette in 24 months for a live-action, adult-oriented product,” he said. And if Columbia TriStar is nudging the envelope a little by flexing its marketing muscle at the DVD, so be it.

Not surprisingly, 80 percent of Spider-Man sales and 75 percent of Men in Black II sales were DVD, even though the VHS versions were also priced for sellthrough. The studio's next big hitter, XXX, due Dec. 31, will be priced for sellthrough only on DVD.

“With XXX, we believed, as in the case of Black Hawk Down, that substantially everyone who wanted to own the movie will want to own it on DVD,” Feingold said.

Columbia TriStar also is moving toward a DVD-centric approach with its catalog.

The studio has already dropped “several hundred” titles from VHS for reorder if these titles are also available on DVD, Feingold said.

“Strategically, we probably want to have a core group of films available on VHS as the format declines,” he said. “We don't want to break our bond with the VHS customer. But it's logical to put your resources into the growing format. My view is we made the DVD future, and we should be accelerating it.”

No One Basket
Warner Home Video's leadership in DVD has not dissuaded it from VHS, which continues to be “a large and profitable business for both studios and retailers,” said Mike Saksa, VP of marketing.

“The VHS decline is not as accelerated as some thought it would be,” he said. “We believe retailers who have exited VHS have done so prematurely and are missing out on a profitable opportunity.”

Warner has all but abandoned rental pricing, releasing both DVD and VHS editions of new movies directly to sellthrough.

Saksa said that spills over into marketing, which generally supports both formats.

“The market is going to continue to favor DVD, and we will continue our releases to reflect that,” he said. “But there is still great opportunity for retailers to make a lot of money by effectively merchandising VHS.”

Craig Kornblau, president of Universal Studios Home Video, agrees.

“You still have 50 million or more homes that have a VHS player but not a DVD,” he said. “There is still a huge VHS business out there, and we are continuing to look at it carefully and manage it with as much detail as we always have.” That includes lots of research to determine the intent to buy among both DVD and VHS households.

Kornblau believes that studios whose marketing focus shouts DVD and whispers VHS will undersell their product and not realize its full potential.

“We market content, we market product -- whether we put it on a VHS or DVD,” he said.

For example, 25 percent of Universal's sales of E.T.: The Extra-Terrestrial were on VHS when the classic was reissued last fall, even though it had never before been available on DVD. Moreover, E.T. had already sold millions of copies during its two prior VHS releases.

“That really blew us away,” Kornblau said. “It just tells you how strong the VHS market really is.”

The newest “The Land Before Time” title, Journey to Big Water, which debuted just last week, also is “shipping bigger amounts of VHS than we expected,” Kornblau said.

Retailers are struggling with the same DVD-VHS balancing act. Some, like Circuit City, have completely dropped VHS, while others, like Best Buy, still carry at least a token selection of videocassettes.

Wal-Mart and the other mass merchant chains offer the biggest selections of videocassettes, often selling them at rock-bottom prices.

On the rental side, market leader Blockbuster Inc. is merchandising DVD and VHS new releases side by side, and while many smaller shops are following suit, some are giving up on VHS.

If studios were to phase out rental pricing, rentailers might increase their cassette buys, said Ted Engen, president of the Video Buyers Group, which represents about 2,000 storefronts.

“The problem everybody is having is balancing that transition [to DVD],” he said. “Meanwhile, we still have to keep the VHS customer happy.”

But the sellthrough potential of used DVDs is much stronger than that of previously viewed cassettes, Engen said, which tends to give DVD an edge even if pricing is the same. “It takes almost twice as long to sell a VHS as it does a DVD,” Engen said. “You can always plan on getting about $10 for a DVD, but most VHS can't sell for more than about $5.”

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