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It Was a Rollercoaster Year at the Video Rental Counter

9 Jan, 2003 By: Melinda Saccone

It was a bumpy year in the rental market.

The year started out with a bang, with U.S. consumer rental spending setting a record high in the first quarter of the year, thanks to strong releases and consumers' honeymoon with DVD.

At the end of March, disc rentals posted a 111 percent increase over comparable spending in 2001, offsetting a 10.4 percent decline in cassette rentals.

However, as 2002 waned so did comparable year-over-year aggregate rental spending, leaving annual U.S. consumer rental spending in the red by year's end.

In 2002, consumers spent $8.9 billion on disc and cassette rentals, down 11.5 percent from the $10.03 billion spent in 2001. So after such a stellar start, what happened?

The year marked the decline of the cassette and mainstream adoption of disc. As the year progressed, more and more consumers opted to take advantage of low prices and buy discs rather than rent them. DVD Entertainment Group estimates that by the end of 2002 there were more than 40 million U.S. households with set-top players.

DVD rentals exploded to $3.2 billion for the year, up 114 percent from comparable 2001 tallies. Disc rentals more than doubled in 2002, accounting for 36 percent of all rentals, up from14.9 percent in 2001.

DVD started the year with great momentum as early adoption gave way to mainstream acceptance and retailers adjusted their product mix to favor disc. DVD's low price let rentailers bring in more copies of discs into their stores while maintaining profit margins, and that translated into a ready supply of new releases. DVD rentals flourished in the first seven months of the year, surpassing the $1.5 billion spent on disc rentals in all of 2001.

Meanwhile, cassette rentals eroded in 2002 as consumers, retailers and studios moved to disc. Low margins on rental-priced cassettes helped boost that transition as DVD's sellthrough price made its margins more attractive. Many studios adopted a flat pricing on VHS to try to counter the trend, and Warner abandoned rental pricing altogether.

VHS new-release rental inventory purchases declined in 2002, according to surveys conducted throughout the year by Video Store Magazine market research. At year's end, independent retailers said 54 percent of their new-release purchases were in the VHS format, down from almost three-quarters at the beginning of the year.

It's no surprise then that by year's end, VHS rentals shrank to $5.7 billion, down 33 percent from the $8.5 billion consumers spent renting cassettes in 2001.

Studios also started to scale back on the format. MGM phased out all but 200 key VHS catalog titles; Columbia TriStar stopped releasing cassette editions of catalog titles that have been issued on DVD.

Playing Quarters
Looking back at the 2002 rental market by quarter shows the steady decline in VHS rentals over the 12-month period. While DVD rentals ended the year posting triple-digit gains, disc rental growth began to slow by midyear when DVD sales exploded.

Consumer spending at the rental counter on combined DVD and VHS rentals in the first quarter of the year skyrocketed to a record-setting $2.5 billion, up 3.8 percent from comparable 2001 tallies.

Record-setting hardware sales in the fourth quarter of 2001 launched DVD rentals in the first quarter of the year, with the format accounting for nearly one-fourth of all rental transactions.

At the end of March, DVD rentals registered $591 million, more than twice the $280 million spent in the first three months of 2001. Meanwhile, VHS rentals dropped to $1.9 billion, a 10.4 percent deficit from first-quarter 2001.

During the second quarter, VHS rentals dropped 33 percent from the same period in 2001, registering $1.27 billion. Meanwhile, disc rentals posted a nearly 200 percent increase, totaling $739.9 million. However, for the first time, triple-digit gains in DVD rentals were not enough to offset VHS declines, dragging overall spending for the quarter into the red. Consumers spent $2.01 billion on combined rentals in the second quarter of the year, down 6.3 percent from the $2.15 billion spent during the comparable period in 2001.

At the end of the first half, VHS rentals were down 21.1 percent from 2001 tallies, while DVD rentals were up 152.2 percent. Growth in disc rentals continued to post gains in the triple digits, but began to show signs of slowing by the end of June as explosive sales cannibalized rentals.

According to Nielsen VideoScan, by midyear cumulative DVD unit sales were up by more than 70 percent from 2001 tallies. Disc sales growth had some retailers rethinking their strategies for the year. Blockbuster announced it would aggressively pursue sellthrough.

Historically, the third quarter has been one of the strongest rental quarters, second only to the fourth quarter. But the third-quarter spending boost at the rental counter never materialized in 2002. Third-quarter rentals dipped 22 percent below spending in third quarter 2001. Third-quarter spending on cassette rentals dropped a precipitous 45.5 percent, and disc rentals couldn't make up the deficit.

By the fourth quarter, consumers' desire to own the hot fourth-quarter releases sealed a down year at the rental counter. Consumers spent $2.2 billion at the rental counter in the last three months of the year, down 18.3 percent from spending during the comparable period in 2001.

Warner Wins in Market Share
Warner Home Video, which also distributes New Line and HBO product, was the hands-down winner in the market-share rental sweepstakes in 2002. The studio's releases accounted for 20 percent of all rental transactions and generated $1.78 billion in U.S. consumer rental spending for the year. Warner, which adopted a sellthrough-price-only strategy last year, had a steady rollout of box office heavy-hitters in the last seven months of 2002, securing market-share dominance in four of seven months (June, August, September and October).

Buena Vista Home Entertainment and Universal Studios Home Video tied for second place, both with 15.9 percent of rental transactions in 2002. July was the only month Buena Vista cashed in as market-share leader, but the studio's release schedule kept it competitive throughout the year. Universal historically releases its heaviest hitters in the first quarter of the year, and last year was no different. The studio dominated the rental market for the first four months of the year.

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