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Previously Viewed Sales Offsetting Rental Decline

22 Jul, 2004 By: Melinda Saccone

Consumers have caught on to the value of purchasing previously viewed titles (PVT), making them one of the fastest-growing revenue streams in rentailer outlets and offsetting the steep decline in rental revenue.

By year's end, revenue from PVT sales is expected to account for nearly 20 percent of rentailers' gross revenue, surpassing VHS rentals and generating more than $2 billion, according to Video Store Magazine Market Research projections.

While previously viewed sales are not a new concept for rentailers, the revenue stream has become much more significant in a markedly changing rental landscape. In the past five years, transactional rentals have remained relatively flat, but in the first half of 2004, transactional rentals plummeted 13.2 percent from comparable spending in 2003. And Video Store Magazine projections show that consumer rental spending in 2004 is not expected to rebound in the last half of the year.

PVT sales are helping to offset declining rental revenue and are combating competition from new sales.While core rentals in 2004 are expected to be off more than 15 percent from 2003 tallies, if PVT sales are included in the rental revenue mix, the picture changes dramatically.

Video Store Magazine Market Research projections show consumer spending on rentals and PVT sales should generate more than $10 billion by the end of the year — down a slight 2.5 percent from comparable 2003 figures.

DVD Drives Growth of PVT
Unlike VHS, DVD has spawned a burgeoning aftermarket for discs, where consumers are already primed to purchase.

In the past five years, PVT sales have increased nearly 200 percent. Sales are expected to increase more than 80 percent in 2004 alone, making it the fastest-growing revenue stream in rentailer outlets.

When cassettes dominated the rental landscape, VHS was primarily priced for rental and rentailers were under revenue-sharing restrictions, PVT sales hovered around 6 percent of gross revenue. Previously viewed VHS was more of a salvage product than a top market item. However, as DVD has taken over as consumers' format of choice, PVT sales have tripled.

While in the past rentailers have not been able to compete in the sellthrough market with loss- leader pricing by mass merchants and discount stores, the sellthrough nature of DVDs has meant cheap buy-ins on the front end for rentailers and healthy gains on the back end as they sell off their excess inventory. In other words, PVT discs are a cash cow for many rentailers.

Market Dynamics of PVT Success
The market dynamics behind the success of PVT is a combination of high consumer demand, ample supply of product readily accessible to consumers and competitive pricing.

Consumers' quick acceptance of the disc pushed household penetration to levels early on high enough to sustain a significant demand. By 2001, one-fourth of all U.S. households had the capability to play DVDs. One year later, household penetration reached 40 percent. After just 7 years of the format's existence, more than two-thirds of all U.S. households had DVD playback capability, according to the DEG: The Digital Entertainment Group.

With a growing consumer base rentailers were quick to transition their inventory mix. By 2002, DVD accounted for more than half of all new product purchases, giving rentailers plenty of product to sell at a competitive price once rental demand had been satisfied.

Currently, discs account for more than 80 percent of new release purchases and generate more than 70 percent of all rental revenue.

As rental inventories became disc-dominant so did PVT sales.

At the end of this year, DVD is expected to make up nearly 90 percent of all PVT sales — up from 40 percent just 2 years ago.

Rental Shelf Life Erodes
Depth of copy on the top hits coupled with competition from new disc sales has effectively eroded the shelf life of rental product.

In the past six years, the average rental life of a new hit release has decreased by 60 percent with each copy averaging just 8.2 turns.

In the absence of revenue-sharing restrictions and in response to the shorter life of rental product, rentailers have been much quicker to market with more previously viewed product than in years past.

In the past two years, previously viewed DVDs have become available for purchase after just two weeks on rental shelves. Recently, some of the industry's biggest rentailers have been advertising PVT discs for sale as early as one week after their release date.

In the past six years, the average price of a PVT disc has dropped by 33 percent to just under $10, which has allowed rentailers to compete effectively in the sellthrough arena with DVD. Meanwhile, the increased demand for previously viewed discs has more than offset the decline in price.

Independents Grab Lion's Share of PVT Sales
While it is not surprising that public chains have become very successful at PVT retailing and have significant market share, the majority of PVT sales are still being transacted in independent specialty video stores.

Of the public chains, last year Blockbuster led the nation in PVT sales. According to Video Store Magazine's Consumer Home Entertainment Survey, more than 43 percent of DVD households say they most often rent at Big Blue. It should come as no surprise then that 17.1 percent of all PVT sales occurred in a Blockbuster outlet in 2003, with consumers spending in excess of $200 million purchasing Blockbuster's previously viewed inventory.

Consumers spent nearly $150 million buying PVT titles in Hollywood outlets, giving the nation's No. 2 rentailer nearly 11 percent of all PVT transactions. Movie Gallery was third, with just under 5 percent in market share.

However, a significant majority of PVT sales were transacted in an independent specialty store in 2003. While only one-third of DVD households said they most often rent in a specialty video store, more than two-thirds of PVT sales revenue was generated in an independent retail outlet.

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