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Resilient: Rental, Sellthrough are Holding up in Downturn

27 Mar, 2009 By: Erik Gruenwedel


Packaged-media retail and rental continue to fare better than expected despite an economic downturn that has crippled consumer confidence.

Indeed, DVD sales (excluding Blu-ray) are down 10.5% to $1.45 billion through March 22, according to Home Media Research, with rental up significantly and earmarked for $8 billion in revenue this year, according to Adams Media Research.

Wal-Mart Stores, which reportedly controls 40% of DVD sellthough, last month said it would remain on the offensive in marketing packaged-media exclusives, citing strong fourth-quarter (ended Jan. 31) growth in DVD and Blu-ray Disc revenue.

Wal-Mart, in addition to Target, Best Buy and other national chains, aggressively promoted the recent disc release of Summit Home Entertainment’s Twilight.

Minneapolis-based Best Buy, which reported a 11% drop in packaged-media sales in the most recent quarter (ended Feb. 28), attributed the decline more to consumer spending cutbacks rather than the state of entertainment software.

The No. 1 CE retailer, which reportedly sells a large percentage of all Blu-ray titles, said the recent shuttering and termination of liquidation sales at bankrupt Circuit City Stores allowed it to maintain a strong (21% of revenue) entertainment-software presence going forward.

“This environment presents a tremendous amount of opportunity, and we intend to take full advantage of those opportunities,” said Brian Dunn, president of Best Buy.

Throughout the downturn, DVD rental has quietly kept pace.

Most notably, Netflix topped 10 million subscribers, including 600,000 new members since the beginning of the year. Since its launch in 1999, Netflix has posted 30% compound annual subscriber growth and remained profitable.

“It’s an impressive metric, considering the economic environment,” said Edward Woo, research analyst with Wedbush Morgan Securities in Los Angeles.

Blockbuster last week reported its sixth consecutive quarter of same-store sales growth. It also announced a partnership with TiVo to integrate the Blockbuster OnDemand download service to TiVo digital video recorders later this year.

“It is clear that the video rental industry is a strong beneficiary of the current economic crisis,” said Stacey Widlitz, analyst with Pali Capital.

Tom Adams with Adams Media Research said value-added streaming services contributed to the general buzz about the rental market.

“Streaming is in a long line of innovations — from the superstore replacing the mom-and-pops to revenue-sharing copy-depth problems, subscription and kiosk — that are all new ways to do the business,” Adams said. “It all keeps consumers happy and coming back.”

Jim Orr, president of Davenport, Iowa-based Movies America with nine stores, including locations in Illinois, said business was actually up a couple of points from last year, which surprised him.

“We are seeing people come back to rental,” Orr said. “People don’t want to spend a dime extra if they don’t have to.”

Indeed, rental kiosks from Redbox, Moviecube, DVD Play and The New Release continue to expand their business models, predicated on a tight-fisted consumer. They are expected to collectively surpass 20,000 units by the end of the year, according to Pali Capital.

Widlitz said with rental titles available for $1 per day at kiosks, consumers remain less likely to purchase a DVD for $15 to $20.

“The lower price and increasing convenience of rental are driving growth,” she said.

Movies America’s Orr said home entertainment’s ongoing transformations from brick-and-mortar to digital mandate rentailers adapt to the changing trends.

 “The biggest change out there besides the recession is that we have the mailman as a competitor [i.e. Netflix] and the wonderful people operating [rental kiosks],” Orr said.

He said it was economically unfeasible for his business to compete with kiosks on pricing due to the overhead running multiple 4,000-square foot stores.

During monthly city council meetings, Orr questioned how Redbox was allowed to market ‘R’-rated movies to minors.

“We’ve actually had them pull all the ‘R’-rated movies out,” Orr said.

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