Video Rentals Bounce Back

Hollywood studios, independent production companies, and video store owners are whistling all the way to the bank, thanks to a resurgence in rentals driven by the increasing popularity of the DVD format. Rental revenue increased 4% during the first six months of 2003, according to figures recently released by the Video Software Dealers Association (VSDA) (VSDA). The upswing is the first for rentals in years. According to research conducted by the Hollywood Reporter, in the first half of the year, the home video industry has exceeded $10 billion in revenue and should top $22 billion by December 31.

DVDs now account for about 60% of rentals, having exceeded the VHS format in both revenue and units rented earlier this year. Hollywood blockbusters are hugely popular, of course, but so are so-called "B" titles, including everything from made-for-TV movies to instructional videos. Although blockbuster titles rent well, the best-renting Hollywood products tend to be those that fared OK but not great in the theaters—films that interested fans, but not enough to pay full pop at the box office. The most profitable rentals are films that racked up box office sales of $50 million-$100 million, according to Bear Stearns analyst James Hurley. Such films have "more video rental appeal" than big hits, which consumers want to purchase after having seen them in the theaters.

DVDs for rent and for sale can now be found everywhere—not only at traditional video outlets, but also at convenience stores, drugstores, and supermarkets. Some industry observers believe that rentals through grocery and drug stores could eventually account for as much as 10% of the total rental business.

That would represent a major change in the more-than-20-year old video rental business, but not one likely to have a damaging impact on the profitability of established rental stores. In mid-June, Hollywood Entertainment, the nation's second-largest video chain, reported a profit of $19.2 million, a significant increase over last year's $17.5 million. Movie Gallery, the third largest rental chain, also predicted higher earnings. Despite a decline in the price of its stock, Blockbuster Entertainment is also well positioned and not threatened by the growing popularity of online rental service Netflix or encroachment from big-box retailers like Wal-Mart and Target Stores, analysts said. CNN recently reported that Blockbuster's profits were up an astounding 47% for the most recent quarter, surging on strong DVD rentals and sales. Blockbuster plans to add 300 to 400 new stores this year, according to CNN.

Hoping to sustain the upbeat feeling in the video rental business these days, the VSDA hosts its annual convention this week at the Venetian Hotel in Las Vegas. Attendance at the affair had fallen off over the past few years, but is expected to rebound this year.