The Annual Report On The Home Video Market For 1999
The ""Revenue Sharing"" Programs In order to provide non-revenue sharing retailers a mechanism for increasing copy-depth over the traditional systems, most studios have established complex buying programs for new releases. Generally, those programs require the retailer to purchase some minimum quantity of a given title at the traditional $70 wholesale price, which if met, entitles the retailer to purchase some additional number of cassettes at a reduced price. The number of additional copies available to the retailer typically varies from 100 percent of the base-line order to as much as 200 percent. In many cases, retailers are required to return a portion of the incremental cassettes to the studio after a fixed period of time, usually for a ""buy-back"" fee representing some fraction of the original wholesale cost. Such programs are referred to as lease/buy-back programs. In other cases, meeting the minimum purchase requirement entitles the retailer to free additional cassettes numbering 20 percent to 30 percent of the baseline, which do not have to be returned. The object of all the programs is to lower the average wholesale price of a retailer's entire allotment of cassettes in exchange for increasing the number of copies the retailer ultimately buys. The programs have been controversial. While some retailers have found them effective, others claim the minimum purchase requirements imposed by the studios are too high, making the programs uneconomical overall. The industry is continuing to experiment with the specifics of copy-depth programs, hoping to find an optimal design. Recently, some studios have begun to experiment with basing minimum purchase ""goals"" on the total dollar investment by the retailer, rather than on a fixed number of cassettes, allowing the retailer some flexibility in determining the number of copies appropriate for the store. Operating Margins Most video rental retailers reinvest between 30 percent and 35 percent of gross monthly revenue in new inventory. Some retailers reinvest slightly lower percentages. Operating margins for retailers (after cost of goods and general operating costs) vary from about 18 percent for the smaller stores, up to 33 percent for larger superstores. At comparable reinvestment percentages, research shows that larger stores have lower levels of operating costs as a percentage of total revenue than smaller stores, reflecting general economies of scale. Among the smallest stores, operating costs represent about 48 percent of gross revenue; among superstores, operating costs represent about 35 percent. Video specialists also realize revenue by selling off unneeded rental copies of movies to customers as demand for the movie begins to decline. Sales of such ""previously viewed"" tapes typically account for 5 percent to 10 percent of a video specialistís gross revenue. DVD The DVD format was introduced in 1997. The size of a music compact disc, but with greater data storage capacity, the DVD format is emerging as an important new configuration in the home video business. New digital ""compression"" techniques allow the studios to squeeze a full-length movie onto a single disc, with picture and sound qualities superior to VHS cassettes. Although originally envisioned as primarily a video sales format, with retail prices under $25 per movie, many retailers have added DVD to their rental inventory as well. As the universe of DVD video players in consumers' homes expands, creating sufficient demand to support a robust rental market, many more retailers expect to embrace the format. As of the end of 1998, it was estimated there were 1 million DVD video players in U.S. homes. As hardware prices continue to fall, consumer electronics retailers report DVD players are selling briskly. DVD optimists say the installed base of players in U.S. homes could exceed 4 million by the end of 1999. Not all studios were enthusiastic about introducing a new home video format, fearing it might erode to the profitable VHS business and lead to greater piracy of movies. But with consumers apparently responding enthusiastically to the format, all major studios now release product on DVD. As of the end of 1998, there were over 2,500 titles available on DVD. The Internet Although so-called E-commerce has become a bigger factor in the video sales market than in the rental market, some retailers have experimented with taking rental orders over the World Wide Web and shipping videos through the mail. The largest of these is NetFlix, based in Los Gatos, California. All of NetFlix's business is in DVD, rather than VHS cassettes. A growing number of retailers, however, have found effective ways to use the Internet for both promotional and operating purposes. Electronic mail is an effective and low-cost way to keep customers informed of the arrival of new movie releases, as well as promotional activities by the store, such as contests, sweepstakes or special promotions. Some retailers have set up web sites to allow customers to check on a movie's availability and reserve movies before going to the store. E-commerce is also becoming an important factor in business transactions between the retailer and wholesalers, or between retailers and the studios. Increasingly, wholesale distributors let retailers place orders on-line, check the status of their account and search the distributor's inventory for specific titles. The Sale Market According to some estimates, as many as 50,000 to 60,000 storefronts in the U.S. offer prerecorded video for sale as part of their regular merchandise offerings. During peak selling season, such as the year-end holiday period, that number may exceed 75,000. Most significant among the retailers involved in the video sale market are the discount department store chains such as WAL-MART, K-MART and Target. Other important retailers include warehouse clubs, such as Samís and COSTCO, and electronics chains, such as Best Buy and Circuit City. During the 1998 holiday period, WAL-MART alone claimed nearly 30 percent of all videos sold in the U.S. Discount department store chains and warehouse clubs together claimed over 50 percent. Among video rental specialists, only Blockbuster Video claims significant national market share in the video sale market. However, sale-priced videos make highly profitable rental items for video specialists, because of the low wholesale prices involved. The Basis From the industry's perspective, there are three distinct components of the video sale business. For movies, there is the new release sale market, where popular films are released for the first time with retail list prices under $25. However, all movies, even titles originally released for rental, are ultimately reissued at a lower price after the rental demand fades, to encourage consumer purchases. The two markets (new release and reissues/catalog) together generated nearly $5.6 billion in wholesale revenue for the studios in 1998, representing over 36 percent of their total revenue from prerecorded video. There is also the non-movie, or special interest business, consisting primarily of programming created specifically for the video market, such as exercise tapes, how-to programs, sports, and music videos. The vast majority of such programs are released at relatively low retail prices to encourage sales. Like the video rental market, the sell-through market overall has reached a level of maturity. According to Adams Media Research, video sales experienced a second consecutive year of single-digit percentage growth, increasing by 9 percent in 1998 to $8.7 billion. Source: Video Software Dealers Association 818 385 1500, www.vsda.org.