DVD IN '04: FULL SPEED AHEAD 2004-01-12 (1)

AL HELLER

With DVD players priced at $30 to $50 flying off of retail shelves during the holiday season, DVD sell-through will heat up further in 2004 and add to its category share at the expense of VHS videotapes.

Further advancing the shift will be more households with two or more DVD players, and the popularity of DVD players in cars and combination VCR/DVD players at home, said a consensus of industry sources.

Moreover, DVD pricing by major studios may leave retailers and consumers little choice about a preferred format in coming years.

This may be good news for supermarkets interested in building incremental, impulsive movie sales during a grocery trip, through displays of hot theatrical releases on DVD at prices under $25. But Denis Oldani, director of video, Schnuck Markets, St. Louis, most of whose 100 stores in the Midwest include rental and sell-through destination departments, also wants customers to have a choice of format.

"VHS and DVDs can co-exist like audio cassettes and CDs did for years, as long as there is parity in pricing, and consumers can choose the format they want," said Oldani. "This could happen unless studios force them to switch."

Oldani reinforces the viability of the VHS market: "We still sell more in VHS than the average non-grocer. It has to do with our primarily female customer base incorporating their tape purchase into a larger grocery purchase. VHS is still less expensive for consumers to buy when there is a choice."

Bo Andersen, president of the Video Software Dealers Association, Encino, Calif., said, "This is an important case that supermarkets need to make to the studios, that they shouldn't move away too quickly from the American household. Studios know that females skew towards VHS. Certainly, if there is a substantial re-entry by supermarkets into rental and sell-through, that will be a signal to keep VHS alive a little longer."

However, the marketplace indicates that DVD is building a following with each passing month. Dump bins in Wal-Mart contain new product at less than $6. Vast gondolas and aisle displayers at Best Buy have new releases priced at $14.99 to $19.99. CVS promoted a $29.97 DVD player at the start of this holiday season. And a woman seeking just such an item at Wal-Mart was trampled by a crowd of shoppers.

"The single biggest factor affecting the DVD sell-through market this year will be studios' approach to VHS availability and pricing. We speak with the studios directly, and there's no consensus. They're each deciding on their own," said Oldani.

"We don't hear more than rumors that some studios are seeking exit strategies from VHS," added Andersen. "There's nothing definitive. They're making individual company decisions." Studios didn't comment.

Nevertheless, Andersen predicted "substantial shrinkage in the availability of VHS, because consumers will choose it infrequently enough that retailers will move quickly and perhaps exclusively to the DVD format. This doesn't suggest that any part of the consumer market will be left unaddressed because of the rapidly increasing household penetration of DVD players."

Meanwhile, McMaken's Supermarkets McVideo, in Brookville, Ohio, is already feeling the pinch. "We have so many older customers hanging onto VHS. But DVD is taking over and they'll just have to get a player," said Theresa Daniels, video manager at the freestanding 6,000-square-foot video operation that shares a parking lot with its parent food store.

"They can't get the movies they want on VHS anymore. It's a shame the studios aren't making movies on tape anymore."

The lower cost of DVDs could benefit supermarkets in two ways: enable them to inventory rentals more deeply and better satisfy demand, and endcap DVD catalog titles at less than $10 for impulse buys "for customers who want to improve their collections of titles from the 1970s, 1980s and 1990s," said Jan Saxton, vice president-analyst, film entertainment, Adams Media Research, Carmel, Calif.

"These classics can play an important role," added Daniels. "People are selling their videotapes at garage sales, and replacing their collections with DVDs."

Citing her inventory of 8,000 titles, because "that's the assortment we need to compete with Kroger and the Wal-Mart Supercenter nearby," Daniels said her focus has to be on rentals: "I pay more for my DVDs than Best Buy sells them for."

Saxton observed that DVD sell-through is already cannibalizing rentals. "The rental market is virtually flat, up 1.5% in dollars in 2003 to $10.134 billion, and projected to be up another 1.5% in 2004. However, that's actually good news for supermarkets -- the rental market is holding steady in the face of competition from other entertainment sources such as sell-through and video-on-demand."

The key issue for supermarkets is "whether or not the overall market is healthy. It is. The combined rental/ sell-through market in DVD and VHS will be up 17% in 2003," Saxton told SN (interviews for this story took place in late December).

Looking ahead, "the biggest outside influence on DVD over the next year that I can think of today will be widescreen laptops and 55- and 61-inch televisions," adds Oldani. "The more wide-screen monitors out there, the more it favors DVD. Usually when you step up to that, you also have a progressive scan DVD player and a surround sound system to make the viewing experience more enjoyable. In the end we'll sell more DVDs because of it."

According to figures compiled by the Digital Entertainment Group, Los Angeles, based on data from the Consumer Electronics Association, Arlington, Va., U.S. consumers bought nearly 6.5 million DVD players in the third quarter of 2003, a 36.5% surge over the same year-earlier period. This raised the number of DVD playback devices to more than 100 million in at least 55 million American homes, estimated DEG, also noting that approximately 34% of DVD owners now have more than one player. At this rate of growth, DVD will be in 70 million households by 2006, noted Adams Media Research.

Moreover, DVD title shipments also set records in the third quarter. Figures compiled for DEG by Ernst & Young showed nearly 215 million DVD software units shipped to retail, a 40% increase over the same year-ago period. The total number of units shipped in North America has exceeded 2 billion since the launch of the DVD format in 1997.

"The fourth quarter of 2003 looks to be shaping up as one of the strongest in this industry's history. Not only has the hardware penetration grown beyond our expectations, the lineup and diversity of the software titles being offered will prove to make this year-end a phenomenal success," said Bob Chapek, president of DEG and president of Buena Vista Home Entertainment, Burbank, Calif.

"Manufacturers have adopted a strategy of offering consumers a wide array of choices when it comes to purchasing DVD players [DVD recordable, portable and car models, TV/DVD and DVD/Audio/Video players, DVD-ROM computer drives, set-top boxes, and video gaming systems] and this appears to be paying off," noted Joe Stinziano, vice president, DEG and general manager, home audio-video, Sony Electronics. "As DVD recordable products continue to gain momentum, we're also seeing a marked rise in the purchase of second-room units, many of which are either combination or multi-disc/carousel models."