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VHS Keeps Pace as DVD Soars

14 Dec, 2001 By: Seth Goldstein

Viewing the sluggish state of the music industry, home video executives have to be saying to themselves, "There but for consumer demand go we."

CD manufacturing is plunging, from 3.69 billion units last year to 1.5 billion in 2002, according to Cambridge Associates consultant Richard Kelly, speaking at the International Recording Media Association(IRMA)'s annual Marketing Summit in New York. "What the industry needs now are...hits," said IRMA keynoter Strauss Zelnick, a partner in Zelnick Media and chairman of Nippon Columbia and previously chief executive of multimedia giant BMG.

DVD is the hit driving video. It gives Hollywood the opportunity "to sell schlock" along with the good stuff, Zelnick said—an opportunity the music labels sorely lack.

But video isn't getting a free ride, 20th Century Fox's Pat Wyatt told attendees at the Dec. 7 event. The studios had better pay "very careful attention" to consumer preferences if they're to avoid being sucked into a CD-like spiral, she said.

Wyatt, president of Fox Consumer Products, which includes Fox Home Entertainment, noted the "huge amount" of time spent on consumer research and a marketing strategy aimed at turning Fox's "supply chain into a competitive weapon." One result, Wyatt said, has been to promote DVD but "not turn out the lights" on the more profitable VHS.

"We're trying to get both consumers," she emphasized. Despite escalating DVD growth, tape duplication hasn't shrunk as quickly as some analysts had predicted. In his latest IRMA report, Kelly estimated VHS output at 980 million cassettes in 2000, 922 million cassettes in 2001 and projections for 840 million in 2002, still a significant market force.

DVD replication is expected to soar from 284 million discs to 700 million in the same three-year period, he said.

Fox Home Entertainment isn't shy about pressuring major accounts like the mass merchants to retain VHS shelf space. Wyatt said the studio used a successful direct response campaign for three Shirley Temple titles to change the minds of the big chains. After reviewing the numbers, "guess what, Wal-Mart and Kmart took it," she said.

Wyatt acknowledged "it takes work" to keep retailers thinking about VHS. Best Buy has been particularly eager to dump tape in favor of DVD. "We have to show them how they're missing opportunities," according to Wyatt, who used a Wal-Mart commitment to drive home the point.

The studio, she maintains, is "revered by Wal-Mart," which receives studio shipments three times a week. The mass merchant is "far and away our biggest customer," Wyatt said.

Fox has tried to tailor deliveries to fit chain requirements.

Musicland, a Best Buy subsidiary, gets supplied "every single day," she noted. Costco, meanwhile, receives "gigantic pallets" because "they blow through tonnage." Next month, said Wyatt, Fox begins a trial with Target Stores that will let the chain's distribution centers break down Fox shipments into orders for each outlet without repacking cartons.

The business is worth the trouble, she emphasized. After four years of double-digit growth in sales and profits, Fox "is making more money on home entertainment than on theatrical."

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