The Annual Report On The Home Video Market - 1999
New Releases Movies that prove to be hits at the boxoffice often make their debut on video at a retail price meant to encourage consumer purchases, rather than merely rentals. If a film grosses over $100 million at the boxoffice it's assumed that the film appeals to a relatively broad audience and has attracted repeat business in theatres. That ""repeatability"" factor is regarded as evidence that many consumers will want to purchase and own a copy of the movie. Therefore, the movie is issued on video with a list price of $20 to $25. Many retailers will discount the cassettes further, lowering the price to $15 to $17. The strategy carries some risk to the studio. With a wholesale price of only $15 or so, the studio must sell many times the number of copies to achieve the same gross revenue as it would have if it had priced the cassettes at $70 apiece. It also faces higher manufacturing costs, and higher marketing and advertising costs, to make sure consumers know the movie is for sale. As a rule of thumb, the studios estimate they must sell five times as many copies of a movie at a $15 wholesale price to achieve the same net revenue as at $70. Certain genres of film, particularly animated features and live-action family titles, are also typically released for the sale market, whether or not they achieve hit status at the boxoffice. ReIssues And Catalog Major studio films released originally for the rental market are typically reissued four to six months later at a retail price under $20. Sales of reissued titles attract the same broad retail base as new releases. Often, movies will have multiple reissues, stepping down through a series of list price points at roughly two-year intervals, such as from $19.95 to $14.95 to $9.95. Older movies from studio archives are also typically released at sell-through prices, often in collections built around particular stars, directors or genres. Like reissues, archival titles often follow a pattern of successive reissues at progressively lower price points. DVD The digital video disc (DVD) represents the first, significant new prerecorded video format in more than a decade. It was designed to be a worldwide format, doing away with the old three-format world that VHS had inherited from decades-old analog television formats. The size of a music CD, DVD has far higher data-storage capacity and was designed as the first unified system able to carry computer data, music, or digital video. The introduction of DVD was delayed somewhat due to the emergence of two competing systems, but by 1997 the two camps had compromised on a single standard, allowing the format to be launched. Although not all Hollywood studios were equally enthusiastic about launching a new format, industry estimates put the number DVD players in U.S. homes at one million by the end of 1998. Early proponents of DVD-Video advocated positioning the format as a low-cost, sales-driven format, rather than reproducing the rental model familiar to the VHS business. Generally, optical discs cost less to manufacture and ship than prerecorded VHS tapes, permitting high manufacturer margins, at relatively low prices. Many proponents also argued that a low-cost, high -quality digital format represents prerecorded video's best long-term hope in the face of rapidly developing technologies for electronic delivery of movies to the home, such as digital direct broadcast satellite and digital cable systems. Although the first movies to be released in the format were priced under $25, prices have increased over the past two years. According to Videoscan, the average list price for DVD movies has risen from $24.98 in the first quarter of 1997 to $26.53 by the first quarter of 1999. The increase in average list price is due primarily to a higher number of movies being released at list prices of $29.98 to as high as $39.98. As of the end of 1998, there were roughly 2,500 movie titles available on DVD in the U.S. Many studios have taken advantage of the high data storage capacity of DVD to add additional material to movie releases, such as scenes deleted from the theatrical version, interviews with stars and directors and other supplemental material. Generally, titles featuring such extras carry higher list prices. Although the VHS format is still by far the dominant prerecorded video system in the U.S., sales of DVD-Video players are growing rapidly, and it appears that DVD will become the established video format of the future. DVD has also proved a popular format in the emerging world of electronic commerce. According to Video Business Magazine as many as one in four DVD discs sold in 1998 were sold over the Internet. Both general Web merchants, such as Amazon.com and Buy.com as well as DVD specialists, such as DVD Express, DVD Wave and NetFlix have embraced the format. The Internet The most significant new factor in the video sale market over the past two years has been the emergence of the Internet as a retail platform. Although no precise numbers are available, those involved in the business estimate that as much as 10 percent of total 1998 video purchasers were made on-line, rather than in bricks-and mortar storefronts. The new DVD format has been particularly successful for on-line merchants. As a new format still in the ""early-adopter"" phase, the demographics of DVD enthusiasts overlap considerably with Internet enthusiasts, the most likely group to be purchasing on-line. In fact, sales of DVD's over the ""Net - both through on-line video specialists, such as NetFlix, DVD Express and Reel.com, as well as through more general merchandisers, such as Amazon.com and Big Star- accounted for an estimated 25 percent of all DVD consumer purchases. Rare videos are also an increasingly popular item at on-line auction sites, such as Ebay.com and Amazon.com As in other industries, the emergence of on-line retailing of video has had an unsettling impact on traditional retailers. In the scramble to establish themselves in the free-wheeling world of the Web, on-line merchants have generally pursued a strategy of heavily discounting merchandise, often selling video below wholesale cost to attract consumers to their Web sites. While few on-line merchants are profitable at this point, many have secured sufficient financing, either through venture capital or the public equity market, to maintain their discounting strategy for an extended period of time. As more mature businesses, traditional retailers can less easily afford to operate in the red, and therefore find it hard to match the aggressive pricing of their new on-line competitors. Some traditional retailers have chosen to ""fight fire with fire"" and have jumped into the on-line business themselves. Tower Records/Tower Video, for instance, has moved aggressively to establish a presence on the Web, with a site offering music, video and books. Video rental chain Hollywood Entertainment spent $100 million to acquire on-line retailer Reel.com. While many analysts believe that traditional retailers have no choice but to diversify into on-line selling, it remains unclear at this point how well or how awkwardly the bricks-and-mortar and electronic sides of their business will mesh. On the other hand, on-line retailing has had a positive impact on the new DVD format. Its high-tech image appeals to ""Netizens,"" and the aggressive discounting of one-line merchants has helped establish the format in the marketplace. Ultimately, traditional retailers will be able to cash in on the success of DVD, although will have to weather the DVD price wars first. On-line selling has also opened up new markets for traditional video wholesalers, who have been under increasing pressure from the rise in direct-to-retail distribution. Since few on-line retailers maintain their own inventory or fulfillment operations, video wholesalers have an opportunity to move into the vacuum. The top wholesaler, Ingram Entertainment, estimates it will generate revenue of $30 to $50 million in 1999 from direct consumer fulfillment of on-line orders. Publicity traded Valley Media, another wholesaler, reported revenue of $125 million from ""new media,"" including direct consumer fulfillment, for its most recent fiscal year. Source: Video Software Dealers Association (VSDA). For more information phone 818 385 1500 or visit the Web site at www.vsda.org.