Video Software Dealers Association 1999 Annual Report

In 1998, the home video industry continued to grow and evolve despite its apparent maturation. Over the past year, most of the principal players in the industry - studios, distributors and retailers - have aggressively altered the way they do business in an effort to stimulate a rental market which had dipped by as much as 4 percent in 1997. These efforts, which have included more widespread use of new release copy-depth programs and aggressive marketing, positively impacted consumer behavior and rental revenue in 1998. According to the Video Software Dealers Associationís VidTrack tracking system, consumer spending on video rentals increased upwards of 9 percent over the past year to a record $8.1 billion.Among video retailers, however, this growth was not experienced uniformly. Driven by the resurgence of VIACOM's Blockbuster Video Chain, the larger, high-volume specialty retailers enjoyed the most significant rental revenue increases. And despite the fact that much of the increase of overall industry revenues is attributable to organic growth - that is, new business from modified consumer behavior - many smaller independent retailers have suffered from some market share shifting. As a result many independent stores have closed their doors over the past year while the larger public chains consolidate and open new locations.In addition to addressing competitive issues in a mature market, the home video industry continues to confront challenges from emerging technologies. Direct broadcast satellite (DBS) systems with their vast number of pay-per-view (PPV) movie channels, not to mention their array of multiplexed pay-TV services, can now be found in close to 10 million households. Most analysts agree that over the next several years the penetration of DBS subscriber homes will increase at a more rapid rate than past years. These projections are based on newly loosened regulations and technological advances that will allow the DBS providers to offer broadcast signals in major markets. In response to the growth of DBS subscriber homes, cable television operators across the country are upgrading and enhancing their systems, posing yet another threat to the home video industry. Like DBS, these cable systems are delivering their broad line up of movie programming in digital audio and video that is noticeably superior to VHS tape.The rapid growth of Internet e-commerce, while potentially stimulating overall industry growth, could ultimately have a negative effect on the traditional home video specialty retailer. The Internet may also eventually become a competing delivery system as technological advances allow broadcast quality images to be sent by the click of a remote button or mouse.Yet, despite a mature market and challenges from competition and new technologies, the outlook for the home video industry remains strikingly positive. The basis for this positive outlook rests on a very strong foundation. Today the VCR is firmly entrenched in U.S. homes. According to Paul Kagan Associates, some 83 million homes - representing 84 percent of U.S. television households - own at least one VCR. It is estimated that over 50 percent of those homes have two or more VCRs. And while overall penetration has slowed, VCR sales in recent years have reached record levels. Additionally, sales of DVD players, the industry's next generation format, reached one million U.S. households by the end of 1998 - making DVD hardware the fastest growing new packaged media format in history.For an overwhelming majority of American's 250 million plus consumers, renting and buying prerecorded videos remains an integral component of their entertainment options. Each week representing nearly 25 percent of all U.S. households rent a video, while over two-thirds rent at least once a month. Additionally, over 60 percent of VCR homes have a video library of some sort while, on average, consumers in VCR households purchased 11 prerecorded videotapes in 1998.The home video industry remains an enormously profitable channel for studios film revenues. Over the past several years, revenue from home video has accounted for over half of the studios, gross domestic film revenue. Additionally, the home video revenue stream allows studios to produce more movies and take greater creative ""risks."" As a result, consumers continue to enjoy an unprecedented breadth of film choices while the studios recoup costs and broaden their film revenues.Source: Video Software Dealers Association (VSDA)For more information, contact 818 385 1500 or Fax 818 385 0567 or visit the VSDA Web site at www.vsda.org.