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TOP 100: Market Growth a Result of Affordable Hardware, Flood of Software

30 Apr, 2004 By: Judith McCourt

By anyone's standards, 2003 was a banner year for home entertainment, with consumers spending a record $24.7 billion buying and renting home entertainment product, including previously viewed sales.

DVD penetration passed the 50 percent mark, according to DEG: The Digital Entertainment Group, and the DVD player assumed a dominant role in mainstream America's family room. According to the DEG, nearly 57 million U.S. households had at least one DVD player, and more than 20 million homes had multiple players by the close of 2003.

The prevalence of cheap DVD players — some were selling for as little as $19.99 during the holiday season — helped propel DVD sales to record heights, with software shipments for the year cracking the 1 billion-unit mark for the very first time.

All of this led to big changes in the home entertainment market. Wal-Mart surpassed Blockbuster as the top video revenue generator for the first time, underscoring the fact that DVD is a commodity business and consumers are aggressively buying and collecting movies.

All told, the top 10 video revenue generators captured $15.4 billion of the $24.7 billion spent by consumers in 2003. The top five players — Wal-Mart, Blockbuster, Target Stores, Hollywood Entertainment and Best Buy — were a mighty force, each commanding more than $1 billion in consumer home entertainment revenue and collectively accounting for more than half of all home entertainment revenue spent last year at retail.

While the video sellthrough market in 2003 grew 15.8 percent to $14 billion, up from $12.1 billion a year earlier, the DVD market grew 35.9 percent to $11.8 billion. The top 10 DVD revenue generators' share grew even more — a whopping 46 percent — as DVD-playing capability penetrated mainstream U.S. households.

Collectively, the top 10 DVD revenue generators accounted for $8.9 billion, or 75.1 percent of the dollars spent by consumers buying discs last year. The top three players — Wal-Mart, Target and Best Buy — each generated more than $1 billion in DVD sales.Mass merchants have steadily gained market clout as consumers have made discount chains — and big-box “club” stores — their No.1 choice for buying DVDs and cassettes.

The top 10 players in this retail segment accounted for $8 billion, or 57.3 percent of the total sellthrough pie, up from 53.2 percent in 2002. The top five players accounted for a larger percentage of the tally, with Wal-Mart, Target Stores, Costco, Sam's Club and Kmart generating 55.6 percent of all dollars spent at sellthrough in 2003, up from 52 percent a year earlier.

Underscoring the strength of the mass merchants is the shift in consumer purchase destinations. Video Store Magazine's 1996 Consumer Home Entertainment Study found that 41 percent of consumers bought their videos primarily at mass merchants and discount stores. By 1998, that number had jumped to 51 percent; and according to the most recent (2004) count, 57 percent of consumers said they most often buy their DVDs at mass merchant outlets.

The Wal-Mart Powerhouse

Wal-Mart, with estimated video sales of $4.34 billion in 2003, is the undisputed sellthrough market share leader and the overall No. 1 video revenue generator in the United States, unseating Blockbuster.

Wal-Mart's meteoric rise parallels American consumers' love affair with video sellthrough. In 1993, when the video market was rental-based, Wal-Mart did an estimated $163 million in sellthrough on a base of $4.7 billion, giving it a market share of 3.5 percent. The overall mass merchant sellthrough leader in 1993 was Kmart, with $257 million and a 5.5 percent market share.

As consumer spending on sellthrough gained in popularity, Wal-Mart followed its core consumer, making a wider range of video product available at a competitive price. By 1995, Wal-Mart surpassed Kmart as consumers' No. 1 purchase destination and never looked back.

In 1996, home video sellthrough spending increased to $7.3 billion, a 16.6 percent increase for the year. In that same year, Wal-Mart customers, for the first time, spent more than $1 billion on video. Wal-Mart's take soared to $1.25 billion of the $7.3 billion sellthrough market, giving the mass merchant a 17 percent share.

When DVD entered the picture in 1998 — its first full year of availability nationwide — the mass merchants were slow to get on board — not surprisingly, given that their customers were not early adopters of the DVD format.

By 2000, Wal-Mart began its full-court press into the DVD market to finish the first year with $375 million in DVD sales, giving it a second-place finish to Best Buy, whose strategy had been to aggressively pursue the early adopters. In 2001, Wal-Mart became the No. 1 seller of DVD product, with estimated revenue of $905 million, or 17.6 percent of the market. Wal-Mart's strategy to follow its customers has paid off, with consumers spending $3.3 billion on DVDs at the mass merchant's locations in 2003. Wal-Mart has also been a primary catalyst in driving down prices of catalog titles, with “dump bins” in high-traffic aisles selling DVDs for as little as $5.88 — a surefire way to grow Wal-Mart's DVD market as well as the overall market.

Music and Consumer Electronics Stores

The rise in the strength of mass merchants and “big box” stores has weakened the position of music and consumer electronics stores. Already hit by the decline in music sales, these retailers faced stiff competition in 2003 as mass merchants and club stores offered a wide selection of product at competitive prices — including drastic first-week discounting in which virtually any new release could be bought for less than $15.

In 2003, the top 10 music and consumer electronics stores generated $3 billion in consumer video spending, or 21.5 percent of the market. Overall, the top 10 posted a 21 percent year-over-year growth rate, outstripping the overall video market, which grew 15.8 percent. Still, their growth was significantly less than the 35.6 percent that DVD enjoyed in 2003. Best Buy, the earliest pioneer in the DVD industry, turned in the strongest performance for the sector, with an estimated $1.33 billion in sales last year, up 28.4 percent from a year earlier.

Online In Focus

According to Video Store Magazine's 2004 Consumer Home Entertainment Study, 85 percent of all DVD households have personal computers, and three-quarters of DVD households have Internet access.

On the sellthrough side, Amazon.com has maintained its position as No. 1 online seller of home entertainment product, with an estimated $350 million in video revenue in 2003, a 16 percent increase over the previous year.

According to Video Store Magazine's consumer survey, 4 percent of DVD buyers said the Internet is their channel of choice when purchasing discs.

Amazon.com and Netflix were the big online winners, leveraging sales on the back of DVD. On the rental side, Netflix continued to soar, growing its revenue to $272.2 million, a 78 percent year-over-year growth.

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