DIGITAL VIDEO DISC EXPECTED TO EXPAND VIDEO INDUSTRY

DAN ALAIMO

DALLAS -- The new digital video disc technology will add incremental revenues to the video industry, helping create a $21 billion total business by the year 2000, said a speaker at the Video Software Dealers Association convention held here, May 21-24.

"As long as the current 60-plus-day delay in the pay-per-view window stays intact, we think home video remains a dominant and growing business, at least over the next five years," said Larry Gerbrandt, senior vice president of research at Paul Kagan Associates, Carmel, Calif. Gerbrandt spoke during the "New Technology Supersession" at the VSDA show which included presentations by Jack Valente, president of Motion Picture Association of America, Washington; two top-level proponents of the competing DVD formats and demonstrations of the new video game systems. With DVD technology, movies and other video products will be available on 5-inch compact discs. The first machines are expected to hit the market next year. There are now two competing and incompatible DVD formats, one backed by Sony and Philips, the other supported by Toshiba and Warner. Participants in the VSDA program said once the format battle is resolved, small plastic discs will eventually supplant VHS videocassettes and give retailers a potent weapon against electronic in-home delivery systems. But if the format dispute is not resolved -- and it may not be -- DVD could become just another niche entertainment delivery concept like laser discs. Kagan sees DVD contributing over $264 million to the video trade in 1996, with an estimated one million hardware units sold, said Gerbrandt. By 2000, assuming that 12 million hardware units will be in use, DVD software sales will rise to $3.2 billion, he said. The Kagan numbers assume that the industry will quickly resolve the format dispute, that hardware units are introduced in the $500 price range and drop soon to around $300, that software is priced under $20, and that there is pent-up consumer demand for such a new technology, said Gerbrandt. Some $84 million of 1996 DVD sales will come at the expense of videocassettes. "The net overall effect on the entire sell-through category will be to expand it from today's $5 billion to nearly $6.8 billion," he said. Over the next five years, this will represent a 29% increase for the sell-through business. The combined sell-through and rental business, including DVDs and videocassettes, will increase 42% by 2000 to a total of $21 billion. But he cautioned, "the home video business will increasingly face a series of new technologies and well-funded competitors who see the $10 billion rental business as fair game." Valente, the long-time head of MPAA, said retailers have little to fear from the new technologies. "Your retail stores have quadrupled the amount of movie viewing in this country. Home video is on an ascending revenue curve all over this globe." In 1994, 40.6% of revenues for the major studios was from home video, he said. "It is not the strategic aim of the Motion Picture Association companies to shrink or stunt or exile any of its marketplaces," said Valente. "History teaches that Hollywood is a shrewd judge of revenue flow," said Warren Lieberfarb, president, Warner Home Video, Burbank, Calif. "Right now Hollywood respects your rightful place in the distribution channel."

Lieberfarb, who was on the program to represent the Toshiba-Warner format, amplified the Kagan projections of DVD expanding the video market. "We estimate that in the first 12 months of this business, this market segment alone will add $1 billion to your coffers," he said. Lieberfarb also referred to statistics from a digital satellite services company which showed that out of one million new buyers of the new systems, 70% are renting less videos than before, while 40% are buying less. "It's too early to panic, but this information commands all of our attention," he said. "We've got the resources, the creativity, the retail infrastructure, the marketing savvy to stay on top of the game. But to stay ahead of the game, we must continue to think strategically," said Lieberfarb. "We have to realize we're not just not in the videocassette rental business, we are in the filmed entertainment business." Lieberfarb predicted that a common standard for DVD will be established shortly. "The DVD format battle will be short-lived. Rational thinking will prevail and a single format will ultimately be established. Our mission is quite simple: one format in the market as soon as possible, the best for everyone," he said. DVD will give retailers a powerful weapon to compete with new delivery technologies, he said. "Your competition is not a packaged digital video disc. DVD is your ally. The competition is digital satellite services, wireless cable and all businesses that think they can provide filmed entertainment better than you can," he said. He added, "In one regard, DVD is an extension of the videocassette. But more significantly, DVD is a whole new concept and must be recognized as a new product with profit potential incremental to that earned from videocassette rentals." Lieberfarb listed some of the advantages of DVD:

DVD will have superior quality. "Perfect digital video quality equalling the original studio master, and crisp digital sound, rather than CD audio, and the same multi-channel surround sound as in state-of-the-art movie theaters," he said.

DVD will have high collectible value. "DVD quality and styling will inspire many home collections," he said.

DVD's capacity will enable many value-added features. These might include: annotated versions, multiple languages, multiple aspect ratios, parental lock out, director's commentary, historical data, screen texts and outtakes.

DVD will have a cost superiority over videocassettes. "DVD will stimulate the purchase of prerecorded video without jeopardizing the existing rental business," he said. "Dealers increasingly need to differentiate what they sell from what is on television, and DVD is the solution," said Lieberfarb. Initial research suggests that DVD will expand the video software business, he said. For example, he noted, 30% of VCR households today are inactive in terms of renting and buying. "We've discovered that these very same households are prime candidates for DVD hardware and software. In fact, about one-third of them said they would buy DVD right away," he said. Mel Harris, president of Sony Television Entertainment, Culver City, Calif., had been the keynote speaker at the first VSDA convention in 1982. Since that time, he noted, the video industry worldwide has grown from 10 million VCRs and $2 billion in software sales to 300 million VCRs and $300 billion in software sales. During the same time, the number of CD players in the U.S. has grown from 35,000 to 400 million, while the number of CDs in the U.S. has gone from 800,000 to six billion. "The growth of home video and the growth of compact disc results from technology that allows consumers to shop in their neighborhood retail stores, choose what they want, take it home, enjoy it when they want and how they want. That consumer friendliness is what has made packaged media such a strong industry. People like packaged media," he said. The development of DVD marks the convergence of the home video and audio CD industries, said Harris. "That means your business can benefit from a good-looking, well-built, better-featured product that keeps your advantage in the race for the consumer in the information age," said Harris. "In the race to provide the video consumer with what they want when they want it, everybody else is still at the starting gate. You members of the home video retail family are $30 billion out in front because people like packaged media," he said. If DVD is introduced with the expected high-quality, initial low pricing and widespread availability of software, "we are looking at a massive new hardware industry and a major growth period for the video software industry," said John O'Donnell, president of Venture Group International and managing director of Central Park Media Corp., both in New York. O'Donnell's presentation was based on research he conducted for an electronics manufacturer. "Under these criteria, there is no question to us that the consumer will love DVD. Hardware penetration rates will skyrocket quickly, faster than audio CD and almost as fast as with VCRs," he said. "We see no reason why a 35% penetration rate is not possible in the first 10 years, and this takes into account the potential competition from on-line distribution of programming via cable, satellite or telephone," said O'Donnell. While this happens, there still will be a strong market for videocassettes. "We believe that videocassettes and the digital video disc can comfortably coexist for many years," he said. The first format to lose out to DVD is likely to be the laser disc, he said. "Indeed, the very first purchasers of DVD hardware are likely to be today's video disc owners," he said. "DVD represents a great opportunity to all of us in the video industry. Let's try to make the most of it," said O'Donnell.