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HIVE EXCLUSIVE: Weak Economy Not Likely to Spoil Video’s Q4

31 Aug, 2001 By: Joan Villa

Video and games may be among the few bright spots on the holiday horizon, as retailers from mass merchants to online sellers try to unscramble mixed economic signals and predict consumer spending in the all-important third and fourth quarters.

With the holiday sales season launching next month, consumer confidence is down, layoffs are up and the general retail outlook is a mixed bag of earnings warnings or cautious optimism. Video, however, led by a robust title selection and surging consumer interest in DVD, seems poised to bethe holiday’s big winner.

“This fourth quarter is shaping up to be better than last year and we didn’t think that was possible,” says Joe Malugen, c.e.o. of 1,050-storeMovie Gallery, which recently raised full-year revenue projections amid higher expectations for same-store sales growth through December.

With a healthy sellthrough slate consisting of DreamWorks’ Shrek, theexpected announcement of New Line’s Rush Hour 2, Warner’s Swordfish, theexpected bow of Universal Studios’ Jurassic Park III and numerous special edition DVDs including Paramount’s The Godfather series, WaltDisney’s Snow White and the Seven Dwarfs and 20th Century Fox HomeEntertainment’s Star Wars: Episode 1 — The Phantom Menace, videospecialists will profit both from sales and the boon of low-priced rental product.

“We’re pretty bullish about how strong the year’s going to close given the title selection coming and the DVD format that’s gotten peopleexcited,” says Tom Adams, president of Adams Media Research.

Alexander & Associates projects $3 billion in VHS and DVD sellthrough sales for the final 13 weeks of the year, consisting of 36% DVDpurchases totaling 71 million units. The flipside, however, is that while there are 23 million DVD players, a full 70 million homes have VCRs only, putting VHS high on many shoppers’ lists, says president Bob Alexander.

“The conventional wisdom is that the purchase market is going to be more heavily DVD than VHS this fourth quarter,” says Alexander, who disagrees with the theory. “We think the market is going to want VHS. We thinkit’s undershipped and we don’t think buyers are going to reorder. And if you don’t put it on the shelf you’re not going to make the sale.”

Alexander believes the size of the VHS market may be under-tracked by reporting services such as VideoScan, which does not get data fromAmazon.com or Toys ‘R’ Us. And those lost VHS units may represent a VHS opportunity for retailers.

Studios, too, are aware of the paradox that DVD may be driving excitement in the business but the real purchase power may still belong to the 93 million VCR households.

“If you look at the people actually out there purchasing VHS and DVD, this is the largest video purchasing market ever and still the lion’s share of the business will come from VHS,” notes Kelley Avery, Dreamworks head of worldwide video. Avery says Dreamworks opted to reward the VHS consumer with an extended Shrek ending — a bonus usually reserved for DVD — coupled with an aggressive $15.95 VHS price. The film’s marketing campaign will target both VHS and DVD sales, she adds.

Warner Home Video also believes video will be a top gift-giving choice based on 33.6% domestic growth in the first half of 2001 over thesame period last year. That strong growth compares to 9.8% for books, 3.2% for total retail sales and a 5.5% decline for music, according to studio executives.

Retailers aren’t carrying thebreadth of titles they should, warns Trevor Drinkwater, v.p. ofsellthrough sales. He would like retail to expand space allotments to allow for consumer interest in DVD as well as the 327 million VHS units Warner projects will be sold this year, declining only slightly from 330million units in 2000.

Best Buy video guru Joe Pagano says his chain has recently undergone a“refinement” of its product mix, but there wasn’t a “land rush” to video.

Amazon.com is one retailer without shelf restrictions that plans to stock ample supplies of both DVD and VHS, with the belief VHS is still a“strong growth business,” insists Jason Kilar, v.p. and general manager of DVD and video. “It’s safe to say we will not be walking away from VHS anytime in the next decade at least,” Kilar says.

Industry observers also believe packaged movies deliver a “feel-good” gift experience that boasts a reasonable price point and high value — a winning combination for satisfying cost-conscious shoppers in lean economic times. “If things are tight you still have to give a gift,”reasons Valley Media c.e.o. Peter Berger. “A $25 DVD is better than a $75 cut-glass bowl.”

Wal-Mart expects to struggle meeting “double-digit” earnings growth in the second half amid a “difficult economy to predict,” explainsspokesman Tom Williams. However, the discount chain has recently attracted new shoppers who spent tax rebate checks on televisions,computers, video game hardware and DVD players, based on Wal-Mart’s owntracking, Williams says — a positive indicator of what may lie ahead for the holidays. “Through this economy, we find that it’s so crucial to be in stock and be ready,” he adds. “Electronics is a very popular area forus and it’s a crucial area and we will be.”

Brisk hardware sales of both DVD players and new game formats are expected to drive software sales and rentals. Banc of America Securitiesanalyst Shelly Hale recently upped her fourth quarter revenue targets for games retailer Electronics Boutique based on sales expectations for new game systems, many of which play DVDs.

Not everyone is so cheery. “I was relatively optimistic for the fourth quarter and that’s rapidly going away,” warns retail analyst DennisMcAlpine with Auerbach, Pollak and Richardson. But an expected cutback in spending could mean consumers will buying lower priced gifts, hesays. “And to that extent video will fit in well.”

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