ROUNDTABLE: Dusting Off the Crystal Ball7 Feb, 2003 By: Kurt Indvik
The home video business continues to undergo major transformation as it enters the sixth year of DVD's rise to preeminence. What was once a mature industry, in which pricing, distribution and other fundamental issues seemed fairly static, is now a business in which everything is new again and all aspects of the business are being reinvented. Video Store Magazine contacted a group of industry leaders by e-mail and asked them to give their views on what issues and trends will propel the industry in the next year.
Many expect exponential growth in DVD sales at retail, of course, and some see a stable (maybe even upwardly moving) rental business as DVD penetrates 50 percent of American households and taps into a more rental-minded consumer base. Will we see DVD revenue-sharing and rental windows? Some think so. What retail sectors will see growth? What technology will impact home entertainment retailing and rentailing in the coming months? These are just some of the issues tackled by our forum of 11 industry pundits.
VSM: What do you think will be the single biggest trend to watch for in 2003 in the home video marketplace?
Bo Andersen, president, VSDA: One trend mark to watch is just weeks away. DVD weekly rental revenue will surpass VHS rentals this quarter and will do so regularly thereafter. What the industry does with its trend analysis is perhaps more important. In order to support the millions of VCR users, VHS pricing of rental product should mirror DVD pricing.
Bob Chapek, president, Buena Vista Home Entertainment: Whether household purchasing dynamics of DVD remain at the healthy rate that they are at (roughly 15 per DVD household), or whether they will level out as the less zealous mainstream market enters the category.
Benjamin Feingold, president, Columbia TriStar Home Entertainment: You'll see the continuing exponential growth of retail DVD, which should be about 50 percent higher this year in terms of unit sales, both for new releases and catalog. Obviously VHS will continue its decline in units as well. And I think you'll see a blurring of the timeframe between when retailers offer something for rental and when they sell it off as a function of demand.
Jeff Fink, president, sales and marketing, Artisan Home Entertainment: Aggressive advertising, merchandising and promotion of DVD in the marketplace. With what is projected to be 50 million DVD-player households and the potential for 100 million households having some type of DVD capability, look for suppliers to aggressively promote and advertise product availability to consumers. Retailers will be the primary benefactors as they will be the conduit for the bulk of the marketing campaigns and the resultant revenue from sales.
John Marmaduke, president and CEO, Hastings Entertainment: Games becoming an equal partner in the rental store to videos.
Kelly Sooter, head of domestic home video, DreamWorks: One of the biggest trends in the coming year is the ever-shortening theatrical-to-video window. We saw this trend take off in the fourth quarter of 2002 with the announcement that Maid in Manhattan, released theatrically in December, is headed for a March release. Similarly, Harry Potter and the Chamber of Secrets, released theatricaly in November, will be out in video in April.
Tom Warren, owner, Video Hut, and chairman, VSDA board of directors: DVD will continue to grow throughout the year, and rentailers and retailers must match that growth by stocking additional product. However, I expect retailers largely to abandon the VHS market to rentailers and perhaps too soon. Until pricing of [DVD recorders] becomes widely attractive to consumers, a huge portion of the population will keep their VCRs active.
VSM: How do you see the equilibrium of rental vs. sellthrough shaping up for 2003? Will rental continue its decline in the face of an ever-growing consumer appetite for collecting home video?
Andersen: What rental decline? Alexander & Associates pegs rental up almost 1 percent and VidTrac closed the year with rental down only 3 percent -- well within the marginal variance of an unseasonably warm winter, a dry summer in much of the country, and a compressed holiday period. Factoring in the natural preference of new DVD owners to purchase rather than rent, rentailing did well in 2002. Late-adopting DVD owners are fiscal conservatives, and the value equation has always favored rental. Nevertheless, studios are clearly stoking the sellthrough channel and will do so until consumers' intent to purchase starts to decline.
Jim Cardwell, president, Warner Home Video: The figures for 2002 show that rental did not decline significantly when both formats are aggregated. We at WHV believe that the purchase habit for DVD is now well-established among the majority of consumers, but that a large minority will always prefer to rent, and we regard them as important customers, too. We think that the overall decline in rental activity will be slight in the coming years, as DVD rental will grow, offsetting decline in VHS.
Jerry Comstock, president and CEO, Wherehouse Entertainment: I believe DVD sales will continue to grow at a much higher rate than rental. However, the rental market may see some leveling off as DVD rental increases. DVD hardware penetration may have reached into that consumer base who primarily rents. While the ‘AAA' titles will continue to sell at an incredible rate, the next tier of titles may generate a strong DVD rental interest from these consumers.
Feingold: I see rental as being relatively stable principally because many of the films in 2003, the tentpole films, are action-oriented and ‘R'-rated, which will help keep the rental sector up in terms of the equilibrium between sales and rental. There will be an ever-growing switchover to DVD rental because of those movies. I think you'll see more rent-to-buy programs on the rental side, which will permit more units to move into the rental business.
Fink: The rental business should actually increase as DVD households reach the 50 million mark, and many of these consumers transform their home entertainment viewing to DVD. As the marketplace transitions to DVD, there will be a substantial populace who will prefer to rent, instead of own, most films and drive the rental business. This is not to say the appetite for ownership will decrease; instead, there will be a significantly larger pool of DVD owners and households that will drive both an increased sale and rental business.
Joe Malugen, chairman and CEO, Movie Gallery: I expect to see rental remain flat to slightly up with DVD sellthrough flattening out due to the fact that more and more hardware units are being purchased by middle-class Americans who can't afford to amass a large DVD library.
Marmaduke: The rental shift to DVD and rental cannibalization by aggressive DVD prices will moderate as the honeymoon of new DVD purchasers matures and the studios modestly raise list prices.
Warren: There is room for continued growth in sellthrough. Consumers' appetite for building libraries of DVDs is not sated and new DVD consumers will enter the market. Nonetheless, many consumers will recognize that they don't want to own every title and will return to rental. 2003 will be the year of a rental revitalization, a large portion of which will make the rental store the place to both buy and rent.
VSM: What sort of supplier pricing changes might we look for in 2003 in DVD, if any? Any “tests” in strategies you would not be surprised to see?
Andersen: A test of a rental window appears inevitable. It must be accompanied by aggressive and equitable revenue-sharing terms and simplified copy-depth programs or rentailers will underbuy, consumers will go home unhappy, and vast numbers of consumers will vote with their remotes.
David Bishop, president and COO, MGM Home Entertainment: I have been hearing noise about limited-play DVD, and I know there is at least one studio thinking about that concept (not us). Some studios around the world have been working within a rental window, but I don't think that's right for MGM at this time. But that's an area I wouldn't be surprised to see someone try a test in.
Cardwell: WHV expects that new-release DVD pricing will not decline and may even increase slightly for the most popular titles. DVD catalog may show some minor price declines as more titles compete for shelf space. VHS catalog will continue its recent sharp declines, and will -- excepting a limited group of classics, kids' and family titles -- be priced as a commodity.
Comstock: Catalog pricing will continue to decline. The under-$10 category will no longer be the sole domain of independent budget suppliers. There will be a particularly rapid growth of under-$10 product from all major suppliers as consumers look to build their DVD libraries as quickly and inexpensively as possible.
Fink: I would not be surprised to see many and varying tests in pricing strategies for DVD. I believe the day-and-date dynamic of simultaneous rental and sellthrough release will remain the foundation of the business. There will be experiments to test the waters of rental pricing versus sellthrough on titles deemed not sale-appropriate upon their introduction to the marketplace. However, I believe, by and large, the current pricing strategies will remain in place.
Malugen: I would expect to see studios continue with aggressive pricing on catalog inventory as they view that as incremental revenue. Maybe we'll see some price increases on direct-to-video DVD.
Warren: I would not be surprised to have an event title or two tested at under $10 but not as an enduring pricing strategy. Neither would I be surprised to see a continuation of below-MAP pricing at clubs and mass merchandisers. The risk here is to traditional distribution when rentailers turn to the clubs for supply and the costs to distribution of distributing the nonevent titles increases. The pressure to replace diminishing VHS revenue will give birth to rental-priced DVD, widespread DVD revenue sharing and a DVD rental window.
VSM: You can now buy home video practically everywhere. What retail segment do you think holds the most promise for growth in home video for 2003, and why?
Cardwell: Mass merchants will generate significant growth in 2003, but major chain bookstores will become a more important outlet, offering real in-depth selection of DVD catalog titles. We also believe that supermarkets will become increasingly important venues for all forms of video as consumers visit such stores more frequently than mass merchants, video specialty stores or consumer electronic stores.
Comstock: There are two. Grocery has strong growth potential. The customer counts and frequency of visits make grocery a natural for video new-release sales. However, the low volume of revenue compared to other categories in grocery as well as labor considerations may hinder its growth in this channel. Deep catalog retailers of DVD can build business that is neglected from discounters and mass merchants. While the mass merchants concentrate on hit movies at deep discounts, there is growth opportunity for retail specialty stores in catalog.
Marmaduke: Rental stores. The value of previously viewed DVDs will give rental stores a value proposition attractive to the maturing DVD owner base.
Sooter: As the DVD format continues to expand into mainstream households, mass retailers are ideally positioned to maximize its potential. And the grocery and drug channels have an opportunity with customers that they haven't seen in years. DVD titles are being repriced quickly at a good value. With pricing at $5 to $10, VHS titles are also a great impulse purchase.
VSM: On the hardware and technology front, are there any developments you think will impact the home video software business in 2003? PVRs, DVD recorders, HD-DVD? What are you tracking most closely?
Andersen: As much as we should create anticipation for HD-DVD and look forward to DVD recording machines without sticker shock, these are not significant impact elements for 2003. Yet, if American consumers were to turn in great numbers to PVRs for their entertainment stack, everyone in our industry would feel the sting. In an even more profound way than DBS [digital broadcast satellite], PVRs change consumer broadcast viewing habits, and the result would be a reduction in consumer spending on home entertainment.
Bishop: We're spending a great percentage of our time focused on VOD and its emergence, albeit a somewhat slow emergence. We are spending a lot of time studying what the consumer behavior is online -- what their tastes are, their inclination towards new releases versus library and to what extent they are price-sensitive. We also want to know what effect their online behavior has on their purchase and rental behavior outside of VOD.
Chapek: The groundwork needs to be laid in 2003 for technologies that will have a significant impact in the years to come. Specifications for HD-DVD are embryonic now and need to reflect Hollywood's input before becoming final. Also, we must avoid multiple HD formats, as that would lead to consumer confusion and act as a barrier to adoption of the new technology.
Feingold: We have been behind the scenes working closely on HD-DVD. The continuing onslaught of DVD at retail will benchmark HD-DVD as the most important consumer electronics device on the horizon. In the short term, we're watching the explosion of flat-screen TV, which also sets up HD-DVD for great success.
VSM: If you could change one thing in the home video industry today that you think would have a major positive impact on the business what would that be and what do you think would be the outcome?
Bishop: One of the things that concerns me going forward is security and copy protection on our content. I wish we had a more robust security system or encryption on DVD software. I'm looking forward to HD-DVD and the potential of a better solution than the one we have. Piracy is becoming a problem. [It's] not as rampant as in the audio industry, but we need to be mindful of [it] and take action to protect our content.
Cardwell: My hope is that the introduction of HD-DVD is smooth and that the best interests of the consumers who recently purchased today's DVD equipment are considered.
Chapek: Restraint by the industry of the use of DVDs as promotional items, which undermines the value of the product in the eyes of the consumer.
Comstock: Stabilize the pricing on both hits and catalog. The proliferation of below cost pricing of ‘AAA' new releases by some retail accounts convinces the consumer that the value of a major DVD new release is around $15. At the same time many catalog prices are at $20. I believe this confuses the consumer. Try explaining why XXX would be priced at $14.99 when a classic piece of catalog such as Caddyshack is $19.99.
Feingold: What would make the business even better would be the expansion of DVD at retail. Simply put, more square footage at stores, more shelf space. I recently reminded one major retailer that the most undermarketed movie still has a bigger marketing budget than the most heavily marketed book.
Fink: I believe the industry is still lacking a significant cheerleader. Whether it's a generic campaign or image that highlights the extent of what the home entertainment industry offers to consumers, and/or an industry-led campaign that highlights the success of the industry to Wall Street and corporate USA. I think the industry as a whole is lacking the hype-machine other entertainment groups manage so well. The upside to this would be a common message to the marketplace that home entertainment is the No. 1 choice for consumers for their entertainment offerings and should continue to be in light of any and all competing systems of entertainment delivery.
Malugen: Price VHS and DVD the same. Either at sellthrough prices or rental.
Sooter: We are seeing an impact on mid-tier product. Titles with a box office of $25 million to $75 million don't seem to be getting the same return on investment. Moving forward, it is a concern whether we will be able to continue to produce these kinds of movies.
Warren: It's time for a shortening of the theatrical window. Two factors are dominant here: (1) The profusion of screens has yielded theatrical legs that are exceedingly short, and (2) the persisting marketing effects and word-of-mouth from the theatrical run would materially support the video release. We should have Catch Me If You Can in our stores in six weeks. Consumers should not have to be re-educated about a movie they once wanted to see.