DIGITAL DISC NOT EXPECTED TO MAR VHS PICTURE

CAROL ANGRISANI

NEW YORK -- Next year's debut of the digital video disc is certain to have wide implications for the video industry, but it will not erode the VHS format in the short term, according to a video consultant.

"VHS is alive and well, and will continue," Dick Kelly said at the annual meeting of the Special Interest Video Association, held here Nov. 1 to 3. Kelly is president of Cambridge Associates, a Stamford, Conn.-based video consulting firm.

Despite the advent of the DVD, Kelly believes VHS will grow, not shrink, over the next 10 to 15 years. In 1998, Kelly predicts, special interest video suppliers could generate nearly $800 million from VHS programming. In the same year, they could generate about $15 million from laser discs, $50 million from DVDs, $10 million from Digital VHS (machinery that allows data-stream recording) and $15 million from compact disc-read only memory with full-motion video.

"DVD, although a nice sounding product, may not be 'the-all' that people are trying to project," he said. "New formats will not cannibalize the VHS equation, at least not in the short term."

Along with DVD's price point (about $500 when it's first launched) and its initial inability to record, other factors could inhibit its growth, Kelly said.

"When the average consumer has relatively better television receiver quality, such as higher resolution and a larger screen, than the real advantages of DVD become apparent.

"We don't think, however, that an explosion of higher quality television receivers is likely to happen until the end of the decade," he said.

New formats like DVD also take time to gain consumer acceptance, he pointed out. Video cassette recorders and compact discs had penetrated only about one-third of U.S. households 10 years after they were introduced, Kelly said.

By 1996, about 80 million households will have one or more VHS machines, while only 2 million will have laser discs. He also predicts that once DVDs hit the street, laser discs will "stop dead." As for DVD, which is expected to be introduced at Christmas, 1996, about 250,000 to 350,000 units could be sold by the end of 1996, he said. By the end of 1997, 1.6 million homes may have a DVD; and in 1998, possibly 3.7 million.

Kelly told suppliers at the SIVA convention to continue focusing on VHS. Although he said they should encourage new formats, they shouldn't get involved in long-term licensing deals.

"The shorter [the deal] the better," he said. "You don't know what's going to happen, so you don't want to get stuck with a five- or 10-year deal."

In addition to DVD, Kelly discussed the state of the video industry, focusing attention on special interest titles. Following are several statistics given:

Of $16 billion that consumers spent on home video last year, about $900 million was spent on special interest video programs. Though this is much less than other areas -- such as the box office, which generated $5.1 billion in consumer dollars, and direct broadcast satellite and pay-per-view, which brought in a combined $1 billion -- it shows that the industry is holding its own.

"We, at $900 million, are not doing too badly," he said.

Special interest generates the least amount of consumer dollars in relation to the entire U.S. market. In 1995, $12.5 billion was spent on entertainment videos, while $2.6 billion was spent on children's non-theatrical.

In individual special interest categories, consumer spending went down almost 20% in exercise/fitness, from $248 million in 1994 to $198 million in 1995. However, other categories went up. In sports, consumer spending went from $177 million in 1994 to $180 million in 1995; documentaries, $152 million to $184 million; travel, $51 million to $64 million; "other" -- which includes how-to's, fine arts and classic television shows -- $195 million to $275 million.

As for revenues to program suppliers, about $4 billion went to entertainment video suppliers, $1.5 billion to children's non-theatrical and $700 million to special interest.

In 1995, about 42 million units of rental products were manufactured, down about five million from 1994. Sell-through, however, went up to 570 million units.

Overall, 41% of all special interest revenues came from retail and 59% from direct response (television or direct mail).

In the exercise and fitness category, more than 90% of volume came from retail stores and 10% from direct response; and in sports, 79% came from retail, 21% from direct response.

However, the numbers are almost completely reversed in other areas. Documentaries, for example, generated 9% of their volume at retail and 91% from direct response; travel, 21% retail, 79% direct, and other, 6% retail, 94% direct.