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TOP 100: Video Revenue Generators

14 Apr, 2003 By: Stephanie Prange

The year 2002 may be remembered as the year former Warner Home Video president and DVD market architect Warren Lieberfarb was proven right in his notion that video was destined to be a sellthrough business -- just as he lost his job. It may be remembered as the year the rental market began to wane as a percentage of the video business. But it also may be remembered as the year Wal-Mart -- in a photo finish -- came within spitting distance (when Sam's Club is included) of being the top video revenue generator.

Already the studios' top customer for more than five years, Wal-Mart -- thanks to the growth of DVD sellthrough in 2002 -- closed in on top rentailer Blockbuster, which held on to its top video-revenue-generator spot by a nose. Indeed, Blockbuster and Wal-Mart were almost neck-and-neck in this category that includes all DVD and VHS sales, rentals and late fees. Remarkably, the giant mass merchant made such strides against a video specialist while selling everything from lawn chairs and tires to clothing and food.

“Wal-Mart for years has been a leader in VHS sellthrough and, since DVD came around, has taken an aggressive leadership role as well, particularly in bringing DVD to the mass consumer,” Thomas Lesinski, then-EVP-and-GM for Wal-Mart category captain Warner Home Video, said last April.

Wal-Mart's growth as a video revenue generator is symbolic of a greater shift taking place in the industry as consumers are increasingly buying DVDs. Blockbuster executives acknowledged as much last year when the chain announced plans to make a major push into the sellthrough business, hoping to grow its 3 percent sellthrough market share. “Our plan is to triple our retail share by 2006,” Blockbuster chairman and CEO John Antioco told Wall Street analysts in July.

“Until now, retail has been largely an afterthought for Blockbuster,” he said in October. “The majority of our customers have not perceived Blockbuster as a place to buy movies. ... That is going to change.”

The No. 1 rental chain transformed its stores to better delineate rental and retail sections, and accommodate more sellthrough titles.

In December, Blockbuster executives revealed a clue as to why the chain had pinned more of its hopes to the sellthrough juggernaut. The chain slashed its fourth-quarter earnings forecast in half, blaming falling rentals that were being cannibalized by a strong sellthrough business. The results seemed to indicate consumers were buying rather than renting many of the fourth quarter's top hits. The news sent Blockbuster's stock plummeting 30 percent and dragged down the other top rentailers' share prices as well.

But it wasn't only the shift to sellthrough that helped Wal-Mart's fortunes. A major competitor, Kmart, was in the throes of bankruptcy, cutting stores and personnel. (Kmart dropped from this year's Top 10 list.) Kmart's woes also helped Target pick up some business, although video -- especially DVD -- remained a bright spot for the troubled mass merchant and kept the chain among the top players in the industry. While studios remained cautious in shipping to Kmart, the chain was still an important force in 2002, launching aggressive pricing on such hits as Monsters, Inc. to drive business.

“Using a vehicle like DVD is part of the strategy [to remake the chain],” director of marketing Dave Karraker said in the fourth quarter. “Anything that contributes to driving traffic to stores becomes [more of] a higher priority this year than last.”

“They're still a player in the industry with the capability of ordering a respectable amount of product,” one sales executive told Video Store Magazine in September.

While the long-standing trends of sellthrough and DVD growth were prime movers in 2002, the two biggest players in the business -- Blockbuster and Wal-Mart -- took notice of a new wave in video rentailing: the online rental model. Online DVD rentail pioneer Netflix filed its initial public offering early in the year and forged its way toward the 1 million-customer mark in 2002.

The big guys soon announced their entry into the business as well. In October, Wal-Mart announced its online site, Walmart.com, would begin offering DVD rentals, and Blockbuster fessed up to its long-rumored ownership of an online DVD rental site of its own, DVDRentalCentral.com (now filmcaddy.com). Blockbuster spokesperson Karen Raskopf said the site was part of the company's research into “niche markets,” but that executives remained “skeptical about the size of the market for DVD online rental.”

“We think going forward the answer is the store-based subscription model,” she told Video Store Magazine in October. Blockbuster began testing such a model, and No. 2 rental chain Hollywood Entertainment's CEO, Mark Wattles, suggested he was open to it as well.

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