Warner Driving Down DVD Prices

Warren Lieberfarb, head of Warner Home Video, thinks Hollywood just doesn't get it when it comes to DVD. In his view, the film industry is making a big mistake by continuing to support the rental market when the real bucks are in sales.

The outspoken Lieberfarb, who helped bring the DVD format to fruition, and who later gleefully helped drive a stake in the heart of the ill-conceived DivX format, believes the film studios are missing out by adhering to the rental model. As a major supplier to mass-market stores like Wal-Mart and Target, he has aggressively pushed for lower prices on Warner video titles, with a goal of getting the retail price below $10, and eventually lower. He hopes to get the price of DVDs down to a point where they will be "impulse buys" like magazines, according to an in-depth front page story on the issue in the February 5 edition of the Wall Street Journal.

The goal of all this price slashing is to increase sales—and to take business away from big rental chains like Blockbuster. Other studios question his wisdom, but Lieberfarb points out that the video rental business was built upon a different technology with a vastly different pricing structure. Those who continue to set their prices according to the rental model "are basically surrendering their business to Blockbuster," he told Journal reporters.

From the beginning, DVD movies were priced far lower than their VHS counterparts, a continuing phenomenon that has helped make DVD the most successful format in the history of consumer electronics. Movies on disc hit the market at an average price of about $25, a level that quickly fell by about 20% thanks to massive discounting by retailers and movie clubs. The availability of unlimited rentals through deep-catalog Internet operations like NetFlix didn't help support high DVD prices, either.

Many movies now sell for about the same price as new CDs, approximately $17. Enterprising movie fans can find them online for less, and many video rental stores sell used copies for well under $10. The march of progress is undeniable. During the early days of videotape, VHS titles retailed for as much as $90, a reality that helped fuel widespread copying.

Some studios, such as DreamWorks, have tried to gradually raise prices for some of their more popular DVDs, inching them up toward the $30 mark. This move hasn't worked as well as Lieberfarb's cut-to-the-bone strategy. "Chains like Wal-Mart Stores, Inc., Target Corp., and Best Buy Co. have seized upon DVDs to lure shoppers into their stores and are doing a booming business with them," the Journal noted. The same could be said for suppliers like Warner Home Video.

The ultimate question for the studios is whether they want to be in rentals or sales. Higher prices reinforce the rental market; lower ones encourage sales. Videotape's relatively low fidelity and durability, and much higher price, made rental the appropriate distribution modality. The opposite could be said for DVD. For those wishing to build a low-cost film library, DVD is a dream come true. Lieberfarb's vision is probably the right one—where DVD is concerned, he hasn't been wrong yet.