Internet DVD Sales Dominance But What About Profits?
The home theatre landscape is seeing the growing impact of Internet DVD sales dominance by major video e-taliers who are duking it out in what has become a competitive and crowded industry, which thus far has not seen profits. With Divxís demise, DVD is expected to become the universal digital video format standard, but there are still tremendous challenges ahead as studios will have to address pricing issues and continue to deliver DVD in a way that protects everyoneís revenue. Amazon.com, Reel.com and DVD Express currently dominate the online video market with BigStar.com, CDNow.com Borders.com, DVD Empire.com and rental service NetFlix.com all competing to become the market leader. While there has been tremendous growth of the DVD format analysts agree that thus far the early adopters of the technology still generate much of the sales. To broaden the market expect major video rental chains such as Blockbuster and Hollywood Entertainment, who owns Reel.com, to begin allowing customers to choose specific titles through a Web site and have it either delivered to the home or reserved for pick up at their local chain store. A new breed of Internet e-tailer is expected to deliver video-on-demand once high-speed broadband Internet services are in place. That will mean that DVD and packaged movie media must be plentiful, affordable and high quality to compete against video-on-demand and steaming video on the Internet. But can DVD be profitable? At the moment, DVD revenues have been incremental and a replacement for LaserDisc, but studios are beginning to see the first signs of cannibalization of VHS revenues. Continuing to deliver DVD using the present model of low price sell-through is certain to be challenged as there is expected to be a move to raise DVD pricing to stem the decline in VHS revenue to the studios. In this regard, Walt Disney Home Video is on record as recognizing a digital future in next generation digital video tape and digital VCRs that can play regular VHS tapes. With a new digital VCR format the studio can continue to sell cassettes at high rental pricing, reserving sure hit titles for sell-through. Warner Home Video, however, wants the VHS revenue sharing model applied to DVD, in which the studio receives from video stores a large part of each rental transaction in return for a very low upfront investment in DVDs. The studio does not want to loose rental revenue because renters are frustrated they canít get the movies they want when they want. Until revenue sharing, video stores could only afford to stock a limited quantity of higher-priced hit titles on VHS, which were priced at $60 to $70 wholesale. Even with revenue sharing, smaller dealers have found it challenging to compete with the selection stocked by publicly owned video-rental chains embracing this model. But as Disney points out, revenue sharing only works if more people rent because substantially less revenue returns to the studio on a per cassette basis. If the revenue sharing model is applied to DVD, which already is much lower in sell-through pricing, the question is how will it impact the restructuring of the home video industry? Thus, two extremes in business models are emerging for the DVD format, to sell discs at $19 (or lower) with the revenue coming back to the studio of about $12 each, or to sell DVDs for rental at $60 with about $53 dollars in revenue per disc to the studio. Once again the question is what model will generate the greatest revenue stream to the studios? How will this impact the major video e-tailers, who have yet to make a profit on DVD because they are selling at or below wholesale cost in order to establish market share which is becoming increasingly more difficult with low price expectations on the part of the consumer?