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Rental Crystal Ball Hazy for Q4 and the Year

20 Oct, 2002 By: Joan Villa

This year's DVD-to-VHS dynamic is making the fourth quarter a particularly difficult one to predict.

Most research shows year-to-date rentals trailing last year, indicating a weaker finish may be ahead for 2002. Based on rental revenue so far, Video Store Magazine market research predicts rentals will tally $9.5 billion for the year, down from $10.03 billion in 2001.

“Rental revenue will feel the effects of the increasing popularity of DVD as consumers opt to buy rather than rent, particularly with this current wave of adopters who are intrigued by the format and its extensive entertainment value,” said Judith McCourt, Video Store Magazine market research director. “Despite a stellar lineup in

the fourth quarter, it is unlikely that rental revenues will rebound to last year's level especially given the high propensity of consumers to buy during the holiday season.”

But many hold out hope that the industry harbors a wild card in the sheer strength and volume of upcoming fourth-quarter titles.

The season's box office totals $3.1 billion — way beyond the title strength of past holiday periods.

“We think there is no other quarter in which this occurred,” said Video Software Dealers Association president Bo Andersen in a recent address to East Coast retailers. Six titles due by year-end broke $50 million in box office receipts and another 14 surpassed $100 million, he said. “Is there any doubt that there's a chance we can take rentals — which are 3 percent down in revenue and 5 percent down in turns — back up to a high-water mark for our industry?”

Whether that can be accomplished will depend in large part on the unpredictable behavior of DVD owners, according to Adams Media Research president Tom Adams. If DVD player penetration reaches 40 million by year-end, 28 million will still be in the first two years of ownership, a time when consumers voraciously purchase on average 12 to 24 discs per year. That trend was expected to slow as DVD owners gradually returned to the old VHS preference of watching more movies than they wanted to own on DVD as well.

“On the sellthrough side, so much is weighted to the fourth quarter that it can be made up, but on the rental side it's only a little weighted to the fourth quarter because of the strong week between Christmas and New Year's, so it would be tough to overcome a roughly 4 percent year-to-date decline,” Adams observed.

Although Adams has not revised a projection made earlier this year that 2002 video rentals will grow

1 percent overall, he is undertaking a new consumer study that may change his traditional purchase-versus-rental model.

“We're ratcheting up permanently how many movies people will buy, and then we expect rentals per household will continue to decline as they have for the past 15 years,” he explained. “The wild card this year is homes that have had a DVD player for a short time are buying an average dozen to two dozen titles per year, which is so much consumption via sellthrough that it's got to impact rental overall.”

While Adams' research shows similar year-to-date rental declines as VidTrac and Video Store Magazine market research, New York-based Alexander & Associates believes the combined DVD–VHS rental market has grown 3 percent so far this year, based on the firm's weekly consumer polling. President Robert Alexander is bullish that rentals will continue at that pace and make 2002 a banner year.

“Right now you're seeing the growth in DVD is fast enough to offset the decrease in VHS,” Alexander asserted. “Year-to-date DVD rental activity is double what it was last year. It has to stay at that level but it doesn't have to get any better than that for the rental market to show a 2 percent to 5 percent increase over last year.”

Alexander sees evidence that DVD households are renting more frequently than they were in 2001, although they still lag the rental activity of VCR households. However, rentals could slip in the fourth quarter if consumers push sellthrough sales to record territory, he said.

“With the tremendous push on for sellthrough and the huge titles coming out, rental gets swamped,” he continued. “There are some anecdotal rules of thumb that one purchase displaces three rentals. So the big increase in sellthrough in the fourth quarter would reduce rental activity directly, maybe on a 1-to-1 or a 1.5-to-1 basis.”

VidTrac's point-of-sale tracking system shows year-to-date rental spending through September at $6.15 billion versus $6.37 billion for the first nine months of 2001, which is 3.5 percent behind last year. With 74.5 percent of rental revenue typically realized during the first eight months of the year, VidTrac expects VHS rentals — currently at $4.12 billion — to fall short of the $7 billion tallied in 2001, while DVD rentals will climb at least $1 billion over 2001's $1.4 billion. DVD comprises 33 percent of the rental market and is expected to grow to 40 percent by year-end, according to VSDA/VidTrac research director Brad Hackley.

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