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Tiered Pricing Not in the Cards for DVD

18 Jan, 2002 By: Thomas K. Arnold

Last year around this time, the studios were battling a bad case of angst.

A DVD rental market was emerging, despite the studios' best efforts to brand DVD a sellthrough product only. And there were widespread fears that retailers would begin replacing rental-priced VHS cassettes with DVDs that wholesaled for half as much as cassettes were bringing in even under the most generous copy-depth programs.

To fight what many at the time perceived as a growing threat of cannibalization, studios had begun tinkering with ways to even the score. In the fall of 2000, two studios, Fox and Universal, began implementing brief windows between the VHS and DVD release of several key titles, including Big Momma's House and U-571, in the mistaken belief that the big retail sellers of DVD wouldn't be miffed over a delay of just a week or two.

Well, the studios were wrong. Blockbuster supported the concept of windows and even encouraged other studios to follow suit. But the big retail sellers lobbied for maintaining the new status quo, asking the studios, "Why tamper with success?"

"There's no need to confuse the consumer," says Joe Pagano, senior v.p. of enterprise entertainment for Best Buy, long one of the top DVD sellers in the country. "Consumers know they can rent or buy a new title at the same time. They've got it. Ultimately our job is to serve and meet the demands of the consumer, and the one thing we've got to maintain is giving them the opportunity to purchase or rent."

DVD Windows Shut

The windows were shut and never reopened, and Hollywood's brightest minds moved on to Plan B: Developing a two-tiered pricing plan that would work, with implementation tentatively scheduled for the first quarter of 2002, after the holiday sales rush.

As one studio executive said at the time, "No one's going to do anything until after the fourth quarter. No one wants to mess with success."

Now that the fourth quarter of 2001 is behind us, it's looking more and more as though no one's going to do anything, period—at least not as far as ‘A' titles are concerned.

"The success of DVD sellthrough has been so stupendous that nobody wants to endanger that [success] by raising prices," says analyst Tom Adams of Adams Media Research.

"I think what happened was the first 8 million consumers of DVD were incredibly hungry and wanted to own and collect titles, and everyone was expecting that the next 8 million would be more rental-oriented," adds Craig Kornblau, president of Universal Studios Home Video. "But as it turns out, they were not—they were just as passionate about owning and collecting these discs as the first 8 million. So it made no sense for us to change our business model."

This is not to imply that the studios were ever seriously considering mimicking the VHS pricing strategy that had worked so well for them for more than 20 years. Those thoughts went out the window a year or two ago, when it became clear that DVD was rapidly catching on with the movie-buying public.

"We're driven by economics, and it became clear that the combination of VHS rental revenue-sharing and day-and-date DVD was a better economic model than two-tiered pricing," says Benjamin Feingold, president of Columbia TriStar Home Entertainment and the Columbia TriStar Motion Picture Group.

"It's a consumer-centric issue," adds Best Buy's Joe Pagano. "If the consumer wants to rent, it's available in the rental store; if the consumer wants to buy, it's available at retail. Clearly, it's a matter of consumer choice and preference, and that should be all the validation of the wisdom of the existing model that we need."

Tiered Pricing Trial Balloon Never Floated

The strategy at least one of the six major studios were quietly working on in the early part of 2001 was a variation it hoped would offend no one—and not really interfere much with consumer choice and preference.

The plans were to bump up prices only on those new ‘A' DVD releases that were headed for the rental market, while retaining existing low pricing on the DVDs purchased by the big retail sellers like Best Buy and Wal-Mart for direct sale to consumers.

Rental and sellthrough discs would each have a distinctive color, and rental dealers would be prohibited from renting the cheaper sellthrough discs. Any such prohibition would lack teeth, thanks to the First Sale Doctrine, but the studio still hoped to police matters on its own.

As one of its high-ranking executives told Video Store Magazine this past spring, "I don't know if under current law we can stop [retailers] from going to mass merchants [to buy the cheaper discs], but we can stop any mass merchant who is trans-shipping, who is in the business of wholesaling rather than retailing, if we so choose. We can also refuse to sell to direct accounts, and control our product further by limiting or eliminating wholesale distribution."

Meanwhile, international territories became a testing ground for new pricing plans and models—including the "windows" approach that fell flat on its face in the United States. No fewer than three studios, in fact, went the windows route in England and several other overseas markets, releasing a bare-bones rental-priced DVD first, followed by a feature-packed sellthrough version between two and six months later.

Columbia TriStar Home Entertainment launched DVD revenue-sharing in the United Kingdom, France, Japan and Scandinavia, while Warner Home Video implemented a two-tiered pricing plan in Australia in August virtually identical to what one of its competitors was considering for the United States.

The Warner plan caught immediate flack from Australian retailers, who promptly went to court through their trade association to stop the practice. In December, a federal judge sided with the angry dealers, who had accused Warner of breaching the Trade Practices Act and Copyright Act.

By then, however, any fallout from this ruling in the United States was a moot point. DVD sales, particularly in the fourth quarter, had soared beyond anyone's wildest expectations, and any falloff in the sale of rental-priced cassettes to retailers was more than made up for by sales of DVDs to consumers.

Rate of DVDs to Players Holding Steady for Now

"Initially, consumers were buying about 20 discs with every player sold, but expectations were for that figure to sharply drop once player prices declined and DVD entered the mainstream," analyst Adams says. "That sharp drop never happened—it's about 17, today—and frankly, that's amazing.

"There's starting to be a broader pattern of consumption among consumers overall, and at the same time the heavy users are buying so many discs that it's keeping the average up."

Universal's Kornblau agrees, and predicts no end in sight, at least not in the foreseeable future.

"We're all anxiously watching this next wave of 8 million consumers to see if they are consistent with the first two waves or if they will become more rental-oriented," he says. "But my gut feeling is they will be a lot closer to the first 16 million consumers than people think, and we're going to continue to be surprised at consumer interest in owning DVDs."

So now, and well into the foreseeable future, it'll be hands off the current pricing model for ‘A' titles.

"That has been a successful model since day one," says Best Buy's Pagano, "and I don't see what the logic would be to change a successful model."

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