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TOP 100: Executive Summary

14 Apr, 2003 By: Judith M., Melinda S.

This week, Hive4Media will bring you Video Store Magazine's Annual research project, the Top 100. Two parts of this series will appear every day this week in this space. Today we begin with this executive summary and the industry's top revenue generators.

With Wal-Mart neck-and-neck with Blockbuster in total revenue from video, industry pundits grudgingly conceded in 2002 that DVD was making home video more and more of a commodity business. This was the year when sales definitively triumphed over rentals, and DVD was the victor over VHS.

When all was tallied, consumers spent a hefty $21 billion renting and buying videos, thanks primarily to the surge in popularity of DVD. Sales soared to $12.1 billion, a 12.2 percent increase from the previous year, with DVD leading the way. DVD sales for 2002 were up 68.5 percent from 2001, more than offsetting a decline in cassette sales of nearly 40 percent.

Rentals, meanwhile, dropped sharply. Consumers shelled out just $8.9 billion on video rentals, down 11.5 percent from 2001.

According to the DVD Entertainment Group, more than 25 million DVD players were sold to consumers in 2002, pushing the number of DVD households in the United States to more than 40 million. More than 10 million homes boasted two or more DVD players. When DVD-ROM drives and DVD-capable video game machines are included in the mix, there are more than 95 million DVD playback devices in U.S. households.

DVD buy rates among mainstream households were only a little lower than they had been for early adopters, and the national press was not just writing about the death of the videocassette, but also wondering whether rental was falling out of favor.

A Year of Retail Highs and Lows
The mass merchants that have led sellthrough since that segment of the business started saw their video revenue and unit volume explode in 2002. Costco, Target and Wal-Mart (which includes Sam's Club) were all rewarded for aggressively courting video buyers.

Video specialists big and small, meanwhile, tried to make sense of a shift many never expected would come, at least not so soon.

Blockbuster blew out much of its VHS inventory and announced a greater push for sellthrough, a dramatic change that unnerved investors and briefly sank the chain's stock price. Other video specialists, from Movie Gallery and Hollywood Entertainment to the small independents, stuck by their rental guns and began a more quiet transition from VHS to DVD.

DVD sales skyrocketed during 2002, but retailer margins remained razor-thin. During the fourth quarter, a price war erupted among the big discount chains in which new releases could be bought for less than $15 -- at a loss of up to $3 off the wholesale price. Savvy rental dealers, thus, found a new source of low-cost product to fill in their inventories.

Music retailers, already hit by two down years of CD sales, found the curative powers of DVD greatly diminished. By the end of 2002, Wherehouse Entertainment was on the verge of bankruptcy, Tower Records and Video was in trouble, and Best Buy management was privately regretting its purchase of the Musicland chain.

This is not to imply all was well in deep-discount land. Kmart, for years the nation's No. 2 mass merchant, went bankrupt and shuttered hundreds of stores. Ames, after an unsuccessful attempt at a court-supervised reorganization, announced it was going out of business and began liquidating its 327 stores. And while DVD was certainly a bright spot on every discount chain's horizon, the deep discounting of new releases took a toll on profits, prompting chains to press studios for more low-priced catalog product.

While mass merchants certainly increased their sellthrough clout, it wasn't all due to their aggressive push in DVD. Shrewd marketing and a keen awareness of their primary demographic -- families with children -- prompted them to maintain VHS inventory levels at a time when many other classes of trade were abandoning the format.

Online & Other Sectors
For the online sector it was a mixed bag. On the rental side, niche player Netflix recorded its best year ever, as consumers signed up for the convenience of home-delivered DVD rentals in record numbers. Revenue soared for the market leader, but not without attracting the attention of the two brick-and-mortar giants, Blockbuster and Wal-Mart, both of which began me-too subscription services.

On the sales side, Amazon posted double-digit growth in online revenue from its video sales segment. Name recognition, aggressive marketing and a consumer-friendly Web site supported its growth. Other online video sellers, however, saw their once sky-high fortunes stall and sputter, as consumers began finding a wide selection of DVDs, often at loss-leader prices, at a wide spectrum of retailers from mass merchants to supermarkets.

The year also saw the beginnings of what may be a big trend in 2003: the reentry of the grocery segment into the video business. Many supermarkets had gotten out of rental when the arrival of revenue-sharing complicated what had previously been a simple business. DVD's size and pricing is once again making home video an attractive proposition, this time as an impulse buy.

Video Store Magazine has broken down the Top 100 into 10 categories, each representing a key class of trade. The Top 100 is a yearlong project consisting of surveys and interviews with key retailers, studio executives and financial analysts -- supplemented by an extensive review of financial statements, annual reports and other data.

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To read about the Top Video Revenue Generators, click here.

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