Popularity, Price of DVD May Alter Rental Biz

The upswell in the popularity of DVD, and its low cost per disc, would seem to be a good thing for all concerned—movie fans, video stores, and film studios. But the very aspects of the new format that are making it grow so huge so fast may cause permanent changes in the business of video rentals and sales, especially for the studios.

Most video outlets are beginning to devote considerable display space to DVD, notes Paul Sweeting of Variety, and that fact means that revenue from more expensive VHS movies may begin to drop off. The studios will be most affected, Sweeting claims, because the wholesale cost of DVDs is less than half that of VHS tapes. Stores pay the studios $30 to $70 per rental cassette, but only $12 to $15 per DVD. (Factory-original VHS tapes have traditionally been priced at about $100 retail, but films on DVD hit the market at a low price—typically below $25 each, and often at around $20.)

The relatively low price of DVDs means that they are attractive to early adopters and home-theater enthusiasts as purchases to be added to home libraries. For rentals, however, approximately the same number of DVD copies of any given movie will be needed to fill the market—resulting in much lower revenues to the studios. One solution the industry is looking at is increasing the price of DVDs to overcome the deficit. Disney priced its DVDs high to begin with—closer to $40 each—but most studios went along with lower prices to help jump-start the format and overcome threats from the now-defunct pay-per-view Divx format.

The studios may begin to try to adjust prices late next year, as DVD begins to approach 10% market penetration. Whether movie fans will accommodate them is not clear at this point. The studios need to support the rental industry as a way of combating encroachment from pay-per-view via cable, satellite, and the Internet.