WASHINGTON — Wall Street is suddenly bullish on video-rental stores thanks in large part, to the growth of videogame and DVD titles on their shelves.But the reasons for the vidstore renaissance are cause for growing concern among Hollywood studios: Vidgames and DVDs are reducing space allotted to VHS, still the most profitable format for Hollywood. Vidgames have long been part of most rental stores’ biz, repping anywhere from 5% to 20% of revenue. But with the launch of hot new platforms from Sony, Nintendo and game-newcomer Microsoft, that percentage is likely to grow over the second half of this year and through 2002. The new game platforms are designed to play movie DVDs as well, making them a natural vidstore fit. Vidtailers are already moving to cash in on the synergy by reconfiguring stores to make room for added game inventory. Blockbuster is reportedly seeking a partner to develop mini game stores within its existing locations. To make room, the vidtailer is getting rid of some VHS catalog displays and cutting back on new releases. Hollywood Video has opened some 60 Game Crazy locations inside Hollywood vidstores. DVD movies, meanwhile, are providing a welcome kick to vidtailers’ bottom lines. With lower wholesale prices than they typically pay for VHS cassettes, retailers are making fatter margins from renting DVDs. Even vidtailers who use rev sharing on VHS find DVD rentals more profitable. According to financial data provided by Blockbuster, the retailer’s gross margin from renting DVDs is more than 70%, compared with about 60% for rev-sharing VHS. The more of its business it can shift into DVD, therefore, the better Blockbuster does. In recent comments to analysts, Blockbuster chairman John Antioco said 50% of its shelf space will be filled by DVD next year. Some indie vidtailers have begun to experiment with DVD-only stores. Since the first of the year, Blockbuster’s stock is up more than 200% and is now hovering around $20 a share. Once upon a time, that would have had parent company Viacom thinking spinoff, but recently, Viacom prexy Mel Karmazin made it known he intends to hold onto it. No. 3 vidtailer Movie Gallery is up more than 300%, and is now trading at a 52-week high of over $11. Even No. 2 chain Hollywood Video, which has lately been struggling just to stay solvent, has seen its stock get off the mat and climb back to $5 a share. For the studios, however, more vidgames and DVDs mean less space for VHS. The studios sell DVDs for about $15-$18 apiece. But they typically see $25-$30 apiece from rev-share VHS cassettes. That’s prompted speculation that the studios will soon raise the price of DVDs to bring them more in line with VHS. That would allow them to set up DVD rev sharing with the big chains, preserving studio profits. Some studios, however, particularly Warner and Sony, want to see DVD continue to grow as a sell-through item, and fear that higher prices could choke off that growth. Overall, they argue, the studios are better off selling as many DVDs as possible, even if that means smaller profits from vidstores. Besides, they figure, most DVDs are sold in places like Wal-Mart, where renting isn’t an issue. But the situation is getting critical for the studios. DVD is pushing aside VHS faster than anyone expected, and it’s putting pressure on studio profit margins. Maybe they should think about buying some Blockbuster stock to make up the difference.
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