The Annual Report On The Home Video Market, 1999
The Rental Market Under the standard distribution model for mainstream movies, films are typically released on video four to six months after their theatrical debut. The theater-to-video ""window"" has been growing smaller for the last several years, much to the dismay of theater operators, but is ultimately determined by the movie's box office appeal. Successful films tend to stay in theatres longer, while weaker films, which often find themselves bumped off theatre screens, are released more quickly on video. For most movies, ""released on video"" means released to the video rental market. As of the end of 1998, there were 25,000 to 30,000 video rental specialty stores in the U.S. These stores include the major public chains such as Blockbuster, Hollywood Video, Video Update and West Coast Video, and a significant number of independent retailers. Another 10,000 to 15,000 non-specialists, primarily supermarkets and drugstores, also rent video as a regular part of their business. In Canada there are an estimated 5,000 specialty retailers, along with another 10,000 stores that rent videos as an ancillary business. Major Canadian chains include Blockbuster, Rogers Video and Videotron. The total number of video rental stores in the U.S. has declined slightly over the past two years as a result of heightened competition and consolidation among retailers themselves. According to an estimate by the National Association of Video Distributors, roughly 2,200 video stores closed their doors in 1998. At the same time, the large national video chains collectively opened at least 1,000 new storefronts, resulting in a slight net decline. Dun & Bradstreet estimates there were 24,590 independent video stores in the U.S. (excluding chain stores) as of the first quarter of 1999, compared to 26,960 as of the first quarter of 1998. It's estimated that 49% of video specialty stores currently are single-store operations. The Basics Traditionally, the movie studios have sold prerecorded cassettes out-right to rental retailers, generally through a network of independent wholesalers. Wholesalers typically pay about $65 per cassette; retailers typically pay about $70. The retailers rent the cassettes to their customers at an average of $2.75 for new releases, and keep 100 percent of the rental revenue themselves. That system arose as a result of U.S. copyright law. Under the federal copyright statutes, once a copyright owner sells a copy of work - such as a cassette of a movie - they relinquish all control over the disposition of that copy. Therefore, the studios receive no ongoing royalty payments as a result of cassette rentals. Total wholesale revenue to the studios from the rental market in 1998 was around $2.4 billion according to Adams Media Research. Revenue from the video rental market comprised over 15 percent of total studio movie revenue in 1998. Together with the video sales market, the home video business accounts for roughly half of total studio movie revenues. Copy-Depth As the video rental market has matured and competition from other forms of movie delivery - such as pay-per-view - have increased, the home video industry has focused on the question of copy-depth. For many years, the high wholesale price of cassettes forced retailers to limit the number of copies they stocked of any given movie. That left consumers often confronting the ""stock-out"" problem, in which all copies of the popular movie they were seeking were out when they went to the video store hoping to find it. Many industry observers have long maintained that increasing the availability of movies in the rental market, by increasing the number of copies retailers stock, would produce higher overall rentals and growth in the business. New data appears to bear that out. According to a Mars & Co. analysis commissioned by the Video Software Dealers Association (VSDA), among stores of similar size and characteristics, those that increased copy-depth over traditional levels by at least two times, saw an average increase of 8 percent in total store-wide transactions over a six month period. Larger stores generally showed bigger transaction boosts from the same increase in copy-depth compared to smaller stores, but no group of stores studied failed to show at least some boost. Greater increases in copy-depth produced greater transaction gains, although in diminishing proportion to the increase in depth. Midsize stores, for instance, saw an 8 percent increase in transactions overall from doubling copy-depth over traditional levels. Tripling copy-depth in those stores produced a 14 percent increase overall. Quadrupling copy-depth produced an 18 percent increase. The effect is also seen on the level of individual titles. In a comparison of titles with a box-office gross of at least $40 million, in mid-size video stores, Mars & Co. found that doubling copy-depth over traditional levels produced an average increase in rentals of those titles of 19 percent. Again, larger stores saw larger increases in rentals from the same marginal increase in copy-depth, but all stores showed at least some increase. The relative increase in transactions per title is also influenced by box office performance. The greater the box office, the greater the increase in transactions for the same marginal increase in copy-depth. According to the Mars & Co. analysis, an optimal mechanism for increasing copy-depth across all video stores without an additional ""marketing boost"" accompanying the adoption of such copy-depth, would add $800 million in annual gross revenue to the video rental business. Revenue Sharing Beginning in 1997, a number of prominent retail chains most notably Blockbuster Video, dramatically altered how they obtain rental cassettes from the studios. Rather than purchasing the cassettes out-right for $70 apiece, under a system referred to as revenue sharing the retailer leases cassettes from the studio, typically paying only $5 to $8 per cassette upfront. The retailer then agrees to share a percentage of the rental revenue each cassette produces with the studio. The percentage of the revenue kept by the retailer - the so-called ""split"" - varies from title to title, and from studio to studio, but typically falls in the range of roughly 45 percent to as much as 60 percent. Although precise data are not available, it's estimated that about 40 percent of consumer rental transactions now occur in stores that use revenue sharing as their primary means of obtaining rental cassettes. The advantage of revenue sharing to the retailer is that it allows a store to stock many times the number of copies of a given movie than would be economically viable under the traditional system, because the cost of goods is spread out over time. All major studios now offer their titles on a revenue sharing basis through one means or another. Large retail chains with sophisticated internal information systems - which are necessary to keep track of total rentals from each individual title - typically obtain revenue sharing cassettes directly from the studios. Smaller retailers, or those without the necessary information systems, rely on a network of middleman agents, who install and maintain their own inventory tracking systems in the retailer's stores. The agents then take a percentage of the revenue from each rental themselves, typically around 5 percent. Source: Video Software Dealers Association, 818 385 1500, www.vsda.org.