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SPECIAL REPORT: 2002 Pricing Trends

4 Jan, 2002 By: Joan Villa

Editor's Note—This is the first in a series of articles looking at the pricing trends in DVD and VHS, and their likely impact, emerging as DVD continues its meteoric growth curve in 2002.

Widespread anticipation that DVD pricing would split into rental and sellthrough tiers in 2002 has given way to a new scenario, one that boosts only secondary price points without disrupting the Golden Goose: DVD growth.

No major studios or industry insiders believe prices on high-appeal ‘A' product will increase this year even in the face of the format's rapid adoption by consumers, but a trend toward $29 to $35 "rental" movies in the first quarter may emerge as the norm throughout 2002.

"DVD will bifurcate into two prices, but not $70-$15 like VHS rental and sellthrough, more like $30-$15," predicts analyst Derek Baine of Paul Kagan Associates. "You'll see product initially released in the $25 to $30 range and then over time, just like VHS had a second window, DVD will come out at $20 or below."

Pricing trends and interviews with studio executives bear out the theory. DreamWorks Home Entertainment announced a $32.99 suggested list price for the Jan. 29 Woody Allen DVD Curse of the Jade Scorpion, widely considered a typical rental title under old VHS standards.20th Century Fox Home Entertainment has priced several direct-to-video DVDs at $34.98 in recent years, most recently Venomous, while Buena Vista Home Entertainment has also consistently released rental-oriented product like January's Dragstrip Girl at $32.99.

"I think $32 and $34 is as far as you can push the envelope without going to two-tiered pricing, since you could still make the argument that those are priced to sell," observes Ralph Tribbey, who monitors pricing trends as editor of the DVD Release Report. "The issue is, is somebody going to break and come out with something priced at $119.98?"

‘Why Not Throw It Out There at $10 Higher?'

The question is particularly relevant as DVD penetration surpasses 25 percent of U.S. households and studios weigh whether they're leaving money on the table by failing to introduce rental-priced DVD. So far, DVD has been the Golden Goose reinvigorating video, producing unit sales and revenues that are expected to climb 16 percent and 20 percent respectively this year from 2000, according to research firm Alexander & Associates. Studios, naturally, are reluctant to disrupt this growth curve by raising prices.

But secondary titles destined for rental shelves are a boon to retailers and a thorny issue for studios, who foresee mounting losses as rental dealers buy DVD versions rather than cassettes.

"For the stuff where there is no consumer [sellthrough] demand, why not throw it out there at $10 higher?" contends Greg Durkin, Alexander's research director. "If the studios dump it at the lower price, they're just shooting themselves in the foot because the same number of units are going to go out there. What is the incentive [for retailers] to buy on VHS if DVD is $15?"Secondary titles rarely make it into the sale sections of Best Buy or Wal-Mart, observers note, and with revenue-sharing output deals between the studios and the big rental chains falling apart, studios are clearly worried that sales of rental-priced VHS cassettes will nosedive."What's happening with Jade Scorpion, that's probably the future," concedes the president of one of the six major studios' home video divisions. "You're not going to see a giant shift, all of a sudden, but you are going to see some subtle shifts."The executive says that while price hikes on ‘A' DVDs are unlikely, there's certainly room for movement on obvious rental titles that "the mass merchants are passing on."The Studio View

Kelly Sooter, head of domestic video for DreamWorks, won't comment specifically on Jade Scorpion. "We look at each title individually and determine pricing on a case-by-case basis," she says. "All of our pricing has been consistent with current industry standards."Craig Kornblau, president of Universal Studios Home Video, says he hasn't yet raised prices on secondary DVD product, but may in the future."The key to that is to see how the next 8 million DVD consumers behave," Kornblau says. "We're clearly reviewing it. The good news is we're trying not to make any ‘B' titles, so hopefully we won't have to deal with it. But I think you'll start to see some slight changes."In fact, Universal's price points on rental product appear already to be climbing towards $30, jumping from $26.98 for The Fast & the Furious, released Jan. 2, to $29.98 for both the mid-January release of The Man Who Cried and Mulholland Drive, slated for March.

Benjamin S. Feingold, president of Columbia TriStar Home Entertainment and copresident of the Columbia TriStar Motion Picture Group, says all DVD product from his studio will remain priced for sellthrough, at least for the foreseeable future—in part, because the studio has managed to place ‘B' product with the big retail chains."I think our overall strategy is what it is, and it remains intact," Feingold says. "We're getting broad retail coverage of all our product, including direct-to-video."Columbia, too, tends to price foreign and art house titles at $29.98, according to Tribbey.

Retailers OK With Moderate Hikes

For the most part, retailers accept that studios need to charge more on titles that will sell fewer units.

"I understand and accept that as DVD becomes a mass market product, the studios will need to get a few extra dollars on these limited appeal films or they're not going to be able to make them," says Dave Stevenson, whose Big Picture Video in Syracuse, N.Y., rents mostly DVD. "I personally don't see any harm in that as long as it stays in that limited higher range of $29 to $35. Anything above that and there would be wholesale rebellion among independent retailers."

But Hastings Entertainment chairman and c.e.o. John Marmaduke worries that once pricing rises, it will continue to creep higher as studios give in to what he calls "a get rich quicker solution that fails to forecast long-term trends."

"If we start seeing this price inflation like we saw with VHS in the ‘90s, the end result will be less copy depth, dissatisfied customers and overall lower revenues for the studios," he insists. "I don't think studio marketing departments have the internal discipline not to gradually inflate prices."

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