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Race to the Bottom: Widespread Previously Viewed Title Sales and Shorter Windows Are Driving Down DVD Prices

8 Oct, 2004 By: Holly J. Wagner

How low can you go? With video rental in limbo and previously viewed titles (PVTs) looking like the lifesaver in a drowning pool, retailers' drive to offer consumers the kind of value they want may be driving DVD prices lower than suppliers ever dreamed.

Blockbuster Video has a standing offer of two for $20. But Hollywood Video couldn't sit still for that, so the chain offered three for $25, a price Blockbuster now offers as well. Hollywood countered, offering its $9.99 PVTs at three for $20. Blockbuster's Movie Trading Company stores offer pre-viewed discs without boxes or liner notes at the rate of five for $20.

A lot of futures may be hanging on PVT pricing. The sliding price structure is a slippery slope for public companies.

“To achieve Blockbuster's expected revenue goals and margins, Blockbuster needs to sell its previously rented product at or above an expected price,” the company noted in filings with the Securities and Exchange Commission. “At the same time, it is important that Blockbuster maximize its overall rental stream through its allocation of store space. Blockbuster may need to turn its inventory of previously rented products more quickly in the future in order to make room in its stores for additional DVDs or new initiatives.”

The same pressures are affecting retailers throughout the industry. Early on, selling off rental stock earlier in the cycle became a way for rentailers to compete with mass merchants' first-week pricing. But the forces driving prices down are more varied and complex as the industry shifts toward more used trade — and the pressure isn't all coming from the mass merchants. Online sellers, independent rentailers and studio reprices also factor into the downward spiral. To some extent, it is simple compression of the entire entertainment market cycle.

“I think you are at a point now with multiplexes where everyone realizes you are going to roll out a film on 4,000 screens, and you will exhaust that [audience] within 30 days,” said Ralph Tribbey, author of The DVD Release Report.

Repricing Compression
Tribbey, who compiles statistics on various aspects of DVD releases, has mapped the compression of the studio repricing cycle since the inception of DVD. Of 13 titles that made at least $25 million in box office and were released on DVD in 1997, the average time to studio repricing was 1,139 days. This year, new DVD titles at that box office threshold are averaging 156 days to reprice.

“It kind of trickles down from theatrical. The majority of business is done in the first week,” said Todd Zaganiacz, owner of Video Zone and a principal of the New England Buying Group. “The issue becomes, how can they keep people buying that same title? There is only so much stuff they can put on it. Pricing becomes the thing they can tinker with.”

The trend has taken a toll on video specialty retailers.

“We do a small amount of used trade. We had a good run at sellthrough a couple of years ago. The Wal-Marts and the Kmarts had not taken their prices so low that we could not compete with them,” said Dan Adler, owner/operator of Video Village for 18 years. “Now, the problem is the price reduces in about 30 days. At six weeks at the outside, they price-reduce about $5. And within 45 days, or as short as 30 days, it is already in Ingram's system that they are going to reprice it.”

The repricing cycle is unlikely to get much shorter, Tribbey said.

“You reach a point of equilibrium where you can't push it any faster because of solicitation cycles,” he said. “With the used market, we have all of these perfectly good DVDs that have gone out into the rental market. The studios can't keep selling it for $28 when any consumer in the marketplace can go out and buy it for $7 or $8.”

Indies a Control Point?
That price is too low, some retailers contend, and independents could be the culprits.

“Right now, used discs are not as prevalent as they will be in years to come. If anyone is going to affect the price of used, it's going to be the independents who are buying for $3 and selling for $7, because they should be pricing it higher,” said Ed Geiske, COO of used-product chain Preplayed. “They have a lot more power than they realize because they are fragmented. They are going to set a stage for pre-owned that could hurt.”

Zaganiacz agreed.

“It is happening, but the difference becomes what the individual stores decide to do. If you are left with too many copies, you will blow them out at lower prices,” he said. “Consumers start to expect that, and they will wait to see if it comes down.”

That's not surprising, since most of the chains begin promoting previewed DVD as available a few weeks after street date. A Hollywood Video mailer delivered Oct. 7 offered Twisted, which streeted Aug. 31, as available pre-viewed Oct. 3. Indies have similar practices.

“With a title like Fahrenheit 9/11, we don't know what the studios are going to do [with repricing],” Zaganiacz said. “It becomes a three-week period on DVD. We make room for that PVT window.”

Retailers tinker with PVT pricing, too. The average selling price of a pre-viewed DVD in 1999 was $14.51, while the average price in June of this year had slipped to $9.70, according to Video Store Magazine Market Research.

Some genres, such as TV DVD and special interest, are more insulated from PVT price drops, but others take a disproportionate hit, Tribbey said.

“You can't make a blanket statement because it is on a category basis,” he said. “In certain categories, pricing is stable or on the rise. If you look at catalog movies, that genre is just getting the crap beat out of it.”

That may be part of the motivation behind Paramount, MGM and Universal offering catalog titles new for $9.99 in stands at supermarkets and specialty retailers.

Market Saturation
Market saturation on new, hot titles cuts two ways: it helps supplier numbers, but reduces PVT demand.

“On new theatrical stuff, the studios have been surprisingly disciplined at maintaining price. We are not seeing the aftermarket or any of these other issues,” Tribbey said.

But saturation on the hottest titles not only forces rentailers to sell off PVT sooner, it drives PVT prices down online.

“The online and brick-and-mortar prices are going to vary greatly for different reasons,” Geiske said. “With movies that have come out in, say, the last five months, that movie has come out, it has been advertised to pieces, everyone's got it; 98 percent of them are going to sell them on eBay or Amazon. Everybody is selling that title. They are all competing with each other on the same thing. To sell mine, I have to sell it for about six bucks.”

The used trade is also contributing to erosion in the rental market, Tribbey said. In effect, rentailers are cannibalizing their own business.

“Part of the decline in rentals is because when a consumer walks in on Friday to rent something and they see they can get a used copy, they get that instead of renting,” he said. “Probably 10 or 15 percent of the decline in the rental business is because consumers have switched from rental to used.”

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