THE DVD PICTURE

DAN ALAIMO / Additional reporting: ED LIEBER

LAS VEGAS -- It's time for video retailers, including supermarkets, to start pushing DVD rentals.

That message was delivered at four separate events during the Video Software Dealers Association convention here last month: a press luncheon sponsored by the DVD Video Group, Los Angeles; the state-of-the-industry speech by VSDA's president Jeffrey P. Eves; a DVD seminar; and the Supermarket Video Issues Breakfast.

Hardware penetration will reach 700,000 units by the end of the year, with 1 million units shipped to retailers, said Michael R. Fidler, vice president of the DVD Marketing department at Sony Electronics, Park Ridge, N.J. Speaking during the press luncheon, he noted that mass merchants Target and Wal-Mart are putting in DVD. "That adds an incredible level of awareness for the format."

Warren Lieberfarb, president of Warner Home Video, Burbank, Calif., predicted continued growth for DVD hardware. Not including DVD-ROM drives for computers, "there is a very high probability of getting to 10% penetration [10 million households] by the end of the year 2002," he said.

"This is largely an incremental business without any erosion of our VHS rental or sell-through business," Lieberfarb said.

He used the press event to announce a new tiered pricing policy for Warner DVDs, including a $14.98 suggested retail price, which will have a minimum advertised price of $9.95. Others are a $19.98 SRP with a $14.95 MAP and a $24.98 SRP with a $19.95 MAP.

Retailers at the press event reported strong success with DVD. For example, electronics chain Best Buy, Eden Prairie, Minn., is selling 28 pieces of software for every hardware unit sold, said Joe Pagano, video and DVD buyer. Best Buy is now doubling the space it devotes to DVD, going from 28 to 56 linear feet. "DVD is the fastest-growing new technology in the history of our 32-year-old company," he said.

But Pagano believes rental availability of DVD products is crucial to the format's success. "We need rental participation," he said.

Hollywood Video, Portland, Ore., is rolling out a rental program "in prime real estate," said Jeff Yapp, president. The video specialty chain is offering both hardware and software for rent. "We've found the DVD business to be very effective in driving new members into our stores," he said.

In the DVD seminar, Pagano and John Thrasher, vice president of video buying for Tower Records, Sacramento, Calif., urged the studios not releasing products on DVD to join in. "It is ludicrous that Fox and DreamWorks are not here 15 months into DVD," said Thrasher. "Greed is stopping the format from achieving greater success."

"It is time for all the players to come on board in full strength," Pagano said.

"Divx studios [Fox and DreamWorks] owe all retailers a level playing field in rental and sell-through," said Lieberbarb. He characterized the limited-play Divx format as a "cloud" hanging over DVD.

"We are maintaining our focus on our core businesses," a Fox official told SN.

The DVD Video Group and the VSDA used the press event to launch a "Catch the Wave" rental kit to give retailers information necessary to get started in the DVD business.

"Now is the time to look at the opportunities for rental," said Emiel Petrone, chairman of the DVD Video Group and executive vice president of Philips Electronics, Atlanta. "As DVD video continues to appeal to a greater number of home-entertainment fans, expansion in the rental market is the natural next step," he said.

"The time is right for supermarkets to begin to make the investment in DVD," VSDA's Eves told SN. "The evidence has shown that it has produced very good returns for those who have."

Warner will launch a national advertising campaign in the late summer to tell consumers that DVD is available for rent, Mark Horak, Warner's vice president of marketing, told the supermarket breakfast. "It is important now, that as more and more titles come out, for the consumer who is considering buying a DVD player to also have the opportunity to potentially see a movie on DVD for rent," he said.

In his state-of-the-industry speech, Eves cited research by Yankelovich Partners, Norwalk, Conn., commissioned by the VSDA, that showed consumer awareness of DVD has doubled over the past six months. "Consumers regard the ability to rent DVD as critical to the format's appeal. Among consumers who said they were likely to purchase a DVD player, fully two-thirds said that being able to rent the discs at their local video store would be extremely or very important in their decision of whether to buy one," he said.

The research also showed an overwhelming majority of consumers were uninterested in the Divx format, even after it was explained to them, said Eves.