DVD sales up but rental issues linger

Stores clearing VHS space for digital deluge

NEW YORK — A few days shy of Christmas, DVD sales in 1999 have nearly tripled sales from all of ’98. But that doesn’t mean all is merry in Hollywood.

With DVD sales exploding faster than many in Hollywood expected, studios are coming up against a question sooner than many thought they would: What to do about the format’s rental business?

According to vid retailers and wholesalers, DVD rentals are starting to crowd VHS rentals, both on store shelves and at checkout counters. With player prices dropping fast, the format quickly is pushing past the early adopter crowd — who tend to buy movies for their own collection — into the video mainstream, where most consumers simply want to rent.

At the 1,400-store Hollywood Video chain, DVDs currently account for about 4% of total rentals. But chain officials said they expect that number to double within the first few months of the new year due to hot player sales through Christmas.

Blockbuster has nearly completed its chainwide roll-out of DVD rentals, ripping out aisles of VHS tapes to make room in its 4,000 U.S. stores.

The problem for the studios is that, for now at least, DVDs are cheaper than VHS cassettes, meaning less revenue per unit for Hollywood. Even with revenue-sharing and copy-depth programs, studios still get $30 to $70 per rental cassette at wholesale, compared with $12 to $15 per DVD.

Since it doesn’t take more DVDs to meet rental demand than VHS cassettes, the studios aren’t making it up in volume.

This isn’t the first time the issue has come up. Even before they hit the market, debate flared in Hollywood over how to price DVDs.

Some early DVD enthusiasts, like Warner Bros. and Sony, pushed for retail prices under $25, arguing that homevideo needs a low-price digital format of its own to compete against video-on-demand.

But others were leery of abandoning the comfort of the rental business, with its high wholesale prices and high profit margins. While they went along with low prices at the beginning, Fox, Universal and Artisan, among others, all said they would have to revisit the issue should DVD rentals take off.

Some studios, particularly Disney, already have begun stretching the price envelope, pricing DVDs at $39.98 retail.

So far, according to vid wholesalers, the studios have not felt a severe pinch from the DVD substitution because of copy-depth programs for VHS. Most of these programs are based on minimum purchase requirements for the retailer, allowing studios to keep VHS unit sales at acceptable levels. But as more vid renters abandon VHS for DVD, those economics are going to shift, and VHS shipments will fall.

That point may be coming sooner than the studios want to acknowledge as prices for the machines drop. Indeed, by the end of 2000, DVD penetration will likely reach 10% of U.S. households: the point at which VHS rentals took off.

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