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Growth, Value and Balance Priorities for 2002 -- Part 3

28 Jan, 2002 By: Thomas K. Arnold

How do you see the rental conundrum shaking out? Are DVD sales to rental dealers cannibalizing sales of rental-priced cassettes and, if so, what are studios doing to even the score? Or, are the buy rates among DVD households so high that the question is moot?

Amodei: The score is even already. DVD sales at sellthrough and rental have more than evened the score.

Andersen: This question is by no means moot and broader questions must also be asked: Are current business models aligned to consumers' desires and their disposable dollars? How will consumers respond to changes in the sequential delivery of movies? Current low levels of cannibalization of VHS rental turns by DVD rental turns must be tracked with regularity, but examining rates of "exchange" between sellthrough and rental models is a greater challenge. Most certainly, there is room for economic growth in both models.

Blanken: Rental will remain healthy, regardless of the format, as long as product is available on equitable terms. Right now, DVD sales are cannibalizing sales of rental cassettes. I do not see the studios doing anything at the moment. However, rumors abound as to the various scenarios they are examining. I think this may possibly change within the next year or so. I only think it is a moot point today. At the point where DVD hardware penetration reaches or exceeds 50 percent, I believe the studios will more aggressively attempt to find ways to increase their revenue on a title. Historically, that means that either prices will go up or revenue-sharing will be more of a focus--or both.

Chapek: One of the many factors encouraging the transition to DVD is the DVD sellthrough availability of titles day-and-date with VHS rental. We believe that studios will continue this practice as long as overall business is maximized with this model and consumers continue to have near-insatiable demand for DVD sellthrough products as they rebuild their libraries.

Fink: There is some cannibalization going on and it is growing. VHS still remains the dominant format in the rental business but suppliers will be forced to acknowledge the price differentials between VHS and DVD as the DVD-rental market expands. There is evidence of reaction as copy-depth programs and flat pricing has brought the cost of VHS on a per-unit basis down significantly over the past year. I think there will be some further movement to lowering VHS pricing but the fact is, for the most part, new release VHS is still primarily a rental fixture with little chance of sellthrough success regardless of price point. Day-and-date DVD releases have proven to be collectable primarily due to format and features. There is greater justification and probability of success with a "sellthrough" pricing strategy on DVD than there is for VHS when it comes to new releases.

Malugen: Clearly, there is about a one-to-one cannibalization of VHS rentals for each DVD rental. The DVD purchases currently more than offset that cannibalization. This is an issue studios are well aware of.

Pagano: I'm not qualified to comment on the rental channel as our business is sellthrough. My instincts are that the consumer wins by having the choice to rent or collect

Scavelli: I think the rental market is very safe and secure for at least two years and possibly five or even more, depending on many factors. You have to take into account cost of movies, for one, and cost of rentals, for another—as well as the time it takes for a formidable video-on-demand platform to be developed. Yes, DVD sales are cannibalizing sales of rental-priced VHS cassettes, but not in an arithmetic fashion. First, there are different levels and types of consumers, and, secondly, the DVD buyer and the VHS renter are often from different classes of consumers. As far as what are the studios going to do about whatever cannibalization does occur, I think they are all trying to figure that out right now. Obviously when a unit of packaged media is replaced by a different unit of packaged media and the new unit is one-fourth the price of the original unit, there is going to be a loss in revenue that needs to be made up.

Sooter: Right now the rental market serves both formats. Consumers seem to be satisfied.

Thomas: MGM hasn't pitted VHS against DVD in the rental arena. We want consumers to rent in any format they choose--there's not a tradeoff situation. The excitement that comes with a new format is beneficial in every channel.

Thrasher: I see the rental segment of our business slowly declining over the next five years. It will continue to be a large part of the video business, but not the be-all/end-all performer that it had been through much of the 1980s and ‘90s. The reality is that DVD helped to lower the overall cost of goods to dealers on the VHS format for rentals. It certainly helped everyone in the industry to see such an explosion of growth on the DVD format to allow all parties to share the wealth. I believe the current buy rates on DVD are such that any upward pressure on price would be a grave mistake. One only has to look at the audio business to see what mass resistance to higher prices could mean: declining sales and a business in constant turmoil from both the creative and financial sides of the ledger.

How big is the video market and are bigger things ahead in 2002?

Is DVD cannibalizing rental-priced VHS?

What does the future hold for DVD extras?

What is the single biggest challenge facing the video industry this year?

Will 2002 be the year for VOD?

What would be the biggest mistake retailers or studios could make in the coming year?

What advice would you give your colleagues?

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