DVD LEADS VIDEO RENTALS INTO '04

DAN ALAIMO

PORTLAND, Ore. -- Flat revenues were good news for video rentals in 2003.

With DVD sell-through exploding, retailers and other industry experts expected a significant downturn in rentals. However, the overall rental business was only down 1.2% in 2003, according to Home Video Essentials, a product of Rentrak Corp., based here.

VHS rental revenues were down 29.8% for the year, while DVD rental revenues were up 52.5%, said Marty Graham, senior vice president, studio relations, Rentrak. While DVD was up significantly, it did not overtake VHS in the rental market until midyear, and it was not enough to push the overall trend into positive territory.

Yet for 2004, with the continued growth of DVD and sell-through customers possibly migrating back to rental on secondary titles, video rental is expected to remain healthy.

"Our rentals for the year were strong, and I project they are going to continue that way on DVD and VHS," said Ray Wolsieffer, video specialist, Bashas' Markets, Chandler, Ariz. "I know there is more of a push on DVD, but we are still seeing a strong following for the VHS copies, and the rentals on them are at least 45% to 50% of our rentals."

"As the format shifts from rental-priced VHS to sell-through-priced DVD, the cost associated with replenishing rental inventory drops," said Leslie Baker, vice president, sales, grocery and drug, Ingram Entertainment, La Vergne, Tenn. "This strengthens the rental model in a supermarket environment. Supermarkets have the natural walk-in traffic that consistently drives rental, and promotes the one-stop shopping concept."

"I am shocked that we have seen the sell-through business grow dramatically and the rental business not deteriorate, and essentially remain flat," said Rentrak's Graham. "So going forward into the new year, we will continue to see the conversion from VHS to DVD and an overall flat rental market."

"Considering the strength of the DVD sell-through market and the competition from other delivery channels, video rental has shown amazing resilience," said Sean Bersell, spokesman, Video Software Dealers Association, Encino, Calif.

"We anticipate that rental will remain the American public's most popular way to view movies. And since DVD has lowered the cost of goods for video rental stores, the rental sector is more profitable than it has been in many years. We expect that 2004 will see the continued resiliency of the rental sector and attractive profit margins," Bersell said.

So far, new DVD hardware owners have shown an unquenchable thirst for new DVD movies of all kinds. Yet, many industry observers wonder if this trend will hold up when it comes to lesser box-office titles that consumers may want to watch, but not necessarily own. They speculate that this may be enough to keep rental on an even keel.

"What we saw on the VHS side was the propensity to purchase declined over time, and I think we've seen that already on the DVD side, and I would anticipate that we will continue to see that," Graham said. "The question is, will it stabilize and at what level will it stabilize? That's difficult to predict."

However, for supermarket retailers who rent and sell DVDs, the result can only be positive, regardless of which way the trend goes, he said. "I think supermarkets that are both renting and selling will see a net increase in their overall video business," he said.

Meanwhile, many retailers are gaining volume, profits and competitive advantage by selling previously viewed DVDs, Graham said. "We are seeing the previously viewed sales business increase as an overall percentage of revenues for rental outlets, and I would assume that supermarkets with rental operations are experiencing the same thing. It's just another angle they can use to compete against the big-box guys," he said.