DVD Pulls Ahead of VHS

The DVD format reached a milestone in mid-June, out-renting VHS videocassettes for the first time.

On June 19, the Video Software Dealers Association (VSDA) reported that during the week ended June 15, 28.2 million DVDs were rented, compared to 27.3 million VHS cassettes. Video dealers had already seen DVD revenue exceed that from VHS early in the spring. VSDA reported that for the week ended March 16, 2003, the weekly revenue from DVD rentals exceeded VHS rental revenue for the first time, with year-to-date DVD rental revenues surpassing those from VHS for the first time in the week ended May 11. The organization's "VidTrac" system tabulates video rentals in both formats.

Since its introduction six years ago, DVD has steadily eroded the market for VHS. According to VSDA statistics, consumers rented a total of 2.8 billion videos in the year 2000, 2.6 billion of them VHS tapes and 168 million DVDs. The three billion 2001 rentals broke down into 2.55 billion VHS tapes and 445 million DVDs. Last year, there were 2.93 billion videos rented, 2.02 billion of them VHS and 915 million DVDs. Note that the number of DVDs rented tripled in 2001 and doubled in 2002.

Video dealers and Hollywood studios have every reason to believe that the trend will continue. VHS isn't going to disappear any time soon, however. Despite the widespread availability of inexpensive DVD players, the Consumer Electronics Association estimates that approximately 50 million American homes have VCRs but no DVD players. "That's a very large market," said VSDA director of research Brad Hackley. "The home video industry will continue to serve those consumers." Approximately 80% of the nation's video dealers are members of VSDA, which encompasses 1500 companies with more than 12,500 retail outlets throughout the US, Canada, and a dozen other countries.

The slight decline in total video rentals from brick-and-mortar outlets from 2001 to 2002 may be partly attributable to the rising popularity of mail-order rental operations such as NetFlix. One of the dominant companies to arise during the dot-com boom, NetFlix succeeds because of its liberal lending policies and deep catalog, featuring thousands of titles, many of them too obscure to be stocked by video stores in strip malls.

The rent-by-mail business is so successful that retail giant Wal-Mart plans to re-launch its own version based on the NetFlix model. On Tuesday, June 17, Wal-Mart announced that it would drop subscription prices, expand its selection to 13,000 titles, and open several new distribution centers in an effort to go head-to-head with NetFlix. The company's new plan is a three-tier affair, in which a $15.54/month fee will let subscribers keep two DVDs at a time, $18.76/month will give them three, and $21.94/month will let them keep four. Subscribers can keep the discs as long as they wish—there are no late fees, and return mailers are included with each title. Netflix charges $20 per month for three DVDs. Wal-Mart opened its mail-order DVD business last October, just a few months after venturing into sales of home theater equipment, including surround-sound systems and flat-panel televisions. NetFlix stock buckled slightly on the news but recovered quickly. Blockbuster's much-hyped rent-by-mail service has yet to have any effect on NetFlix's bottom line.

While the popularity of DVD continues to surge, spin-off formats may not fare so well. Case in point: a recent announcement by Walt Disney Company's Buena Vista Home Entertainment that it would begin marketing "no-return rentals," low-priced DVDs that have been chemically treated so that they turn dark and unplayable within 48 hours of being opened. A survey released June 18 by St. Louis–based 321 Studios revealed that 76% of respondents stated that they "would not be interested in renting a self-destructing DVD."

Of the survey's 5051 respondents, 3839 answered no, while 758 respondents (15%) said they would rent self-destructing discs only if the price were low, and 9% (454 respondents) stated that they would consider renting such discs. The results of the survey were published on June 18 on the VSDA website and on the Music Industry Network News site. 321 Studios makes DVD-copying software and is in litigation with Hollywood studios over potential copyright violations.