YET EVEN as DVD surges, it is on a different economic path than video, and one that is fraught with dangerous unknowns.
Where video enriched Hollywood through rental fees and sales, the hottest action in DVD right now is in sales. Chains like Wal-Mart Stores Inc., Target Corp. and Best Buy Co. have glommed onto DVDs to lure shoppers into their stores and are doing a booming business with them.
Advertisement
But DVDs are also a huge business for Blockbuster Inc. and other big rental chains, and that leaves the studios in a quandary over how best to balance the interests of their biggest customers.
While at odds about that, the studios are even more at loggerheads over pricing. One studio, Warner Bros., is crusading to drive down the prices of all DVDs, preferably so low they’ll become an impulse purchase like magazines. Most of its rival studios are aghast. They had counted on years of charging premium prices for the small video disks, which offer viewers a better picture than videotape plus features such as the ability to skip around without rewinding or fast-forwarding. “It’s like we’re in a race to the bottom” in DVD pricing, complains the president of Universal Studios Home Video, Craig Kornblau.
• Sign up for a two-week free trial of The Online Journal.
How these struggles play out will go far to determine the ultimate shape of the evolving and fast-growing DVD business. The film studios could leave hundreds of millions of dollars on the table if they choose the wrong path. At stake is nothing less than the long-term value of the studios’ principal asset: their huge libraries of movies.
DISK BREAKS
DVDs are already selling for less than videotapes went for just a couple of years ago — as little as $14.99 for new Warner releases, and $10 for older ones like New Line Cinema’s “Austin Powers: The Spy Who Shagged Me.” Some studios fear that the trend is prematurely draining the life out of videotapes, a business they had hoped to milk for years to come.
The outcome of the DVD tug of war “will determine the future profitability of the film business,” says Ann Daly, who oversees DreamWorks SKG’s home-entertainment operation. The stakes are just as high for chains such as Blockbuster that get the bulk of their revenue from rentals.
Wal-Mart Stores, Inc. (WMT)
price change
59.18 +0.28
Add this stock to your MSNBC homepage
Target Corporation (TGT)
price change
42.52 -0.43
Add this stock to your MSNBC homepage
Best Buy Co., Inc. (BBY)
price change
71.10 -0.21
Add this stock to your MSNBC homepage
Blockbuster Inc. (BBI)
price change
17.96 -1.39
Add this stock to your MSNBC homepage
AOL Time Warner Inc. (AOL)
price change
24.10 -0.14
Add this stock to your MSNBC homepage
Walt Disney Company (DIS)
price change
21.82 +0.14
Add this stock to your MSNBC homepage
News Corporation Limited (NWS)
price change
26.58 +0.03
Add this stock to your MSNBC homepage
Viacom Inc. (VIA)
price change
37.77 +0.84
Add this stock to your MSNBC homepage
Vivendi Universal S.A. (V)
price change
39.88 -1.47
Add this stock to your MSNBC homepage
Data: CNBC on MSN Money and S&P Comstock 20 min.delay.
For a variety of complicated reasons, most of the movie studios don’t get a cut of DVD rentals at Blockbuster, as they do on rented videocassettes. That’s hurting studio profits because Blockbuster is devoting an ever-bigger chunk of shelf space to DVDs. But to get a piece of the DVD rental business, the movie studios would probably have to make changes such as raising prices on DVD titles that they think consumers would prefer to rent. Another option would be giving those titles solely to rental stores for a few weeks before retailers could stock them.
GENIE’S OUT
Those changes would upset the big retailers. Wal-Mart says it would resist any move to create exclusive rental periods for certain DVDs. Moreover, “Wal-Mart will not be happy if the prices start inching up,” says the spokesman, Jay Allen, who says that “our customers want fresh DVD product for under $20.” He adds: “You can’t put the genie back in the bottle.”
Wal-Mart’s stake in DVD was clear at a Houston meeting last summer, where store managers were instructed on the importance of promoting the November release of DreamWorks’ “Shrek.” DreamWorks partner Jeffrey Katzenberg was on hand with a video in which the Shrek characters did the retailer’s “Give me a W” cheer. It went over so well that Wal-Mart later used the promotional video in stores. Result: “Shrek” is the biggest selling DVD yet, nearly eight million so far.
“Wal-Mart or Target want to sell DVDs aggressively, not just to drive their own sales but to take a shopping trip away from a category-specific retailer like Best Buy,” the electronics chain, says Brian Gildenberg of Management Ventures, a retail consultant in Cambridge, Mass.
But the Best Buys of the world are eager to sell DVDs, too, for a slightly different reason. DVDs bring in throngs of shoppers, whom the stores hope to “upsell” to expensive electronics gear. For electronics chains, DVD has become “what soda is to a grocer,” Gildenberg says. Best Buy stocks more than 5,000 DVD titles.
Hollywood has to care what retailers think because their aggressive promotion is helping cement the DVD format in consumers’ minds. Studios are expected to try raising the wholesale price of lesser DVD movies with limited ownership appeal, but they’re fearful of being penalized by big retailers for doing so. Hollywood frets that if it doesn’t listen to the retailers, the result could be a drop in their enthusiasm for the format, possibly followed by a drop in shelf space and orders.
TALE OF THE TAPE
All this is in contrast to the economics that made videotapes a huge revenue source for studios, often the difference between profit and loss on a movie. Complex two-tier pricing maximized the studios’ take. Some titles, such as Disney animated movies, carried relatively low wholesale prices because they were intended to be sold in large numbers to the public via mass-market retailers. Films that people might want to see just once — say, an Adam Sandler comedy — were aimed at the rental market and carried higher wholesale prices. To keep the rental business healthy, the studios made deals with Blockbuster and a number of other big chains to share the rental revenue.
Tools and Toys
• Hollywood studios to sell D-VHS
• AMD unveils new laptop processor
• IBM, Peugeot take car repair online
• Steven Kent on Gaming
In the DVD era, the delicate balance is wobbling. A big reason is the strategy of AOL Time Warner Inc.’s Warner Bros., in which every title is priced for the mass market, with no regard for the rental business Hollywood relied on so long. This is a crusade for Warren Lieberfarb, Warner Home Video’s chief, who helped bring the DVD into existence a decade ago, at times against opposition from other studios. Warner has a greater financial interest in DVD than other studios because it holds several patents for parts of the technology.
The Warner executive takes glee in stirring the pot, describing the DVD situation as “another Lieberfarbian controversy.” Indeed, the DVD endgame he envisions is a shocker: freeing Hollywood from Blockbuster, which controls close to 40 percent of the rental market and has long been a tough negotiating adversary. Blockbuster has “used that share to increase their margins at the expense of the studios,” Lieberfarb complains. Blockbuster Chief Executive John Antioco says the chain uses its market power for the benefit of its customers.
Lieberfarb’s bet is that people can be conditioned to buy just about any movie they want to see if it’s priced low enough. If consumers insist on renting, he wants to cut Blockbuster out of the equation and steer the market toward “video on demand” services: movies delivered to the home by high-speed Internet connection. Warner is a partner with four other studios in such a service, called Movielink, which it hopes to launch later this year. Walt Disney Co. and News Corp.’s Twentieth Century Fox plan a rival service called Movies.com.
Blockbuster, which is majority-owned by Viacom Inc., doesn’t think its core business of renting movies is in danger. Indeed, Blockbuster is currently feasting on DVDs itself, thanks to the low wholesale prices. The chain pays less for disks than for videotapes, in part because its long-term deals to share rental revenue with movie studios don’t apply to DVDs.
As a result, the rental giant usually earns much more on the DVD version of a movie than on the videotape version, and is racing to redesign its stores to emphasize DVD. It’s also forging a new business in selling used DVDs cheaply after they’ve been rented a few times. In a current promotion, it sells used copies of Universal’s “The Fast and the Furious,” released less than five weeks ago, for $9.99, or about half what new versions go for at Wal-Mart. Lieberfarb also sees used-disk sales damping the growth of the DVD sales market.
So far, owners of DVD players show a lusty appetite for buying movies. They buy an average of 16 disks a year, compared with the five or six videotapes that VCR owners have been purchasing, says Adams Media Research of Carmel Valley, Calif. Consumers spent $4.6 billion on DVD purchases last year, which was nearly 2 1/2 times the 2000 level and a windfall for the studios, whose videotape business is mature.
However Blockbuster’s chief negotiator with the studios, Dean Wilson, argues that as DVD players are adopted by less-affluent consumers, a “higher percentage of households [will be] interested in rental versus purchase.”
Blockbuster’s relationship with Warner Bros. appears ready to come unglued, as their deal to share revenue from videotape rentals expires this month and they currently aren’t talking about a new deal.
Generally, Blockbuster’s Antioco says he is content with the DVD status quo, in which he pays low wholesale prices without the complication of sharing the rental proceeds. If the studios keep dropping prices, “my margins would go through the roof, and customers would still rent,” he says.
Still, he implicitly acknowledges the threat Warner’s strategy poses to Blockbuster. The chain offers DVDs for sale but primarily rents them. Consumers are more likely to buy a movie when they’re doing other shopping, Antioco says, while they “go to Blockbuster because [they] want to watch the movie that night and bring [it] back.”
SHARP DIVIDE
For an oligopolistic industry, Hollywood is unusually divided on the DVD issue. Currently helping Warner to push some prices lower is Metro-Goldwyn-Mayer Inc., which has cut prices mostly on older movies. Fighting to hold the line on prices are Disney, Dreamworks, Vivendi Universal SA’s Universal Pictures and Viacom’s Paramount Pictures.
Local business news
• News from your back yard and local angles nationwide
Warner and MGM, as owners of vast film libraries, have an interest in low prices as a way to make those films, many obscure, throw off cash. But to studios with smaller libraries, cheap DVD pricing looks self-defeating, and they see rentals as still the best way to maximize revenue. “Will consumers change their behavior just because there’s a format change?” asks Daly of Dreamworks. “My belief is that it’s not going to happen.”
The studios have all been dragged along with Warner’s strategy to some degree, and they aren’t happy about it. “One guy with a lot of movies can unfortunately seemingly dictate the way the market could go,” complains Robert Chapek, president of Disney’s Buena Vista Home Entertainment.
A few years ago, he says, an older title released on videotape might have initially carried a retail price of $19.99. At intervals of about nine months, the price would have dropped to $14.99, $12.99, and finally $9.99. With DVD, “there’s pressure to get to the lower point much quicker.”
LOST EMPIRE
Disney and others have held their wholesale prices higher than Warner’s, and sales have been so robust that it’s been hard for any of them to complain so far. Retailers now sometimes drop prices below wholesale to draw shoppers. When Disney’s animated “Atlantis: The Lost Empire” was released last week, Best Buy sold the DVD for $16.99 — a dollar below the price for the videotape. That makes studios nervous that consumers will increasingly get used to cheap disks.
Some studios are deeply concerned that declining DVD prices threaten what profits remain in the videotape business, which is still the main format used by the vast majority of U.S. households. Here, too, Warner has rocked the boat.
Whereas DVDs usually become available for sale and rental on the same day, in videotape the conventional approach is that consumers can’t cheaply buy a title aimed at the rental market for several months after rental outlets get it. But last year, with the John Travolta thriller “Swordfish,” Warner released a low-priced videotape simultaneously to retail stores and rental chains. The DVD came out the same day, for both rental and purchase. Warner priced both the DVD and the videotape for mass-market sales.
News from the WSJ
Wall Street Journal
stories on MSNBC
• Click here to bookmark
The DVD sold well, but the consensus in the industry was that Warner missed out on a lot of videotape rental profits. Lieberfarb says the DVD sales made up for “disappointing” tape sales, making it a wash. He is taking the same approach with titles such as “Training Day” and “Heist,” even though Blockbuster’s Antioco estimates that the result will be about 40 percent less revenue for the studio.
Lieberfarb wants to get the retail price of new releases down to about $10, not much more than the cost of a rental and a late fee. Some older titles from Warner like “Private Benjamin” can be found for $5.99.
Last year, Warner failed to clinch a deal to distribute DreamWorks’ videos and DVDs, largely because of their very different views on pricing. Lieberfarb insists his low-price DVD policy is right: “Those people who are not doing this,” he says, “are basically surrendering their business to Blockbuster.”
Where video enriched Hollywood through rental fees and sales, the hottest action in DVD right now is in sales. Chains like Wal-Mart Stores Inc., Target Corp. and Best Buy Co. have glommed onto DVDs to lure shoppers into their stores and are doing a booming business with them.
Advertisement
But DVDs are also a huge business for Blockbuster Inc. and other big rental chains, and that leaves the studios in a quandary over how best to balance the interests of their biggest customers.
While at odds about that, the studios are even more at loggerheads over pricing. One studio, Warner Bros., is crusading to drive down the prices of all DVDs, preferably so low they’ll become an impulse purchase like magazines. Most of its rival studios are aghast. They had counted on years of charging premium prices for the small video disks, which offer viewers a better picture than videotape plus features such as the ability to skip around without rewinding or fast-forwarding. “It’s like we’re in a race to the bottom” in DVD pricing, complains the president of Universal Studios Home Video, Craig Kornblau.
• Sign up for a two-week free trial of The Online Journal.
How these struggles play out will go far to determine the ultimate shape of the evolving and fast-growing DVD business. The film studios could leave hundreds of millions of dollars on the table if they choose the wrong path. At stake is nothing less than the long-term value of the studios’ principal asset: their huge libraries of movies.
DISK BREAKS
DVDs are already selling for less than videotapes went for just a couple of years ago — as little as $14.99 for new Warner releases, and $10 for older ones like New Line Cinema’s “Austin Powers: The Spy Who Shagged Me.” Some studios fear that the trend is prematurely draining the life out of videotapes, a business they had hoped to milk for years to come.
The outcome of the DVD tug of war “will determine the future profitability of the film business,” says Ann Daly, who oversees DreamWorks SKG’s home-entertainment operation. The stakes are just as high for chains such as Blockbuster that get the bulk of their revenue from rentals.
Wal-Mart Stores, Inc. (WMT)
price change
59.18 +0.28
Add this stock to your MSNBC homepage
Target Corporation (TGT)
price change
42.52 -0.43
Add this stock to your MSNBC homepage
Best Buy Co., Inc. (BBY)
price change
71.10 -0.21
Add this stock to your MSNBC homepage
Blockbuster Inc. (BBI)
price change
17.96 -1.39
Add this stock to your MSNBC homepage
AOL Time Warner Inc. (AOL)
price change
24.10 -0.14
Add this stock to your MSNBC homepage
Walt Disney Company (DIS)
price change
21.82 +0.14
Add this stock to your MSNBC homepage
News Corporation Limited (NWS)
price change
26.58 +0.03
Add this stock to your MSNBC homepage
Viacom Inc. (VIA)
price change
37.77 +0.84
Add this stock to your MSNBC homepage
Vivendi Universal S.A. (V)
price change
39.88 -1.47
Add this stock to your MSNBC homepage
Data: CNBC on MSN Money and S&P Comstock 20 min.delay.
For a variety of complicated reasons, most of the movie studios don’t get a cut of DVD rentals at Blockbuster, as they do on rented videocassettes. That’s hurting studio profits because Blockbuster is devoting an ever-bigger chunk of shelf space to DVDs. But to get a piece of the DVD rental business, the movie studios would probably have to make changes such as raising prices on DVD titles that they think consumers would prefer to rent. Another option would be giving those titles solely to rental stores for a few weeks before retailers could stock them.
GENIE’S OUT
Those changes would upset the big retailers. Wal-Mart says it would resist any move to create exclusive rental periods for certain DVDs. Moreover, “Wal-Mart will not be happy if the prices start inching up,” says the spokesman, Jay Allen, who says that “our customers want fresh DVD product for under $20.” He adds: “You can’t put the genie back in the bottle.”
Wal-Mart’s stake in DVD was clear at a Houston meeting last summer, where store managers were instructed on the importance of promoting the November release of DreamWorks’ “Shrek.” DreamWorks partner Jeffrey Katzenberg was on hand with a video in which the Shrek characters did the retailer’s “Give me a W” cheer. It went over so well that Wal-Mart later used the promotional video in stores. Result: “Shrek” is the biggest selling DVD yet, nearly eight million so far.
“Wal-Mart or Target want to sell DVDs aggressively, not just to drive their own sales but to take a shopping trip away from a category-specific retailer like Best Buy,” the electronics chain, says Brian Gildenberg of Management Ventures, a retail consultant in Cambridge, Mass.
But the Best Buys of the world are eager to sell DVDs, too, for a slightly different reason. DVDs bring in throngs of shoppers, whom the stores hope to “upsell” to expensive electronics gear. For electronics chains, DVD has become “what soda is to a grocer,” Gildenberg says. Best Buy stocks more than 5,000 DVD titles.
Hollywood has to care what retailers think because their aggressive promotion is helping cement the DVD format in consumers’ minds. Studios are expected to try raising the wholesale price of lesser DVD movies with limited ownership appeal, but they’re fearful of being penalized by big retailers for doing so. Hollywood frets that if it doesn’t listen to the retailers, the result could be a drop in their enthusiasm for the format, possibly followed by a drop in shelf space and orders.
TALE OF THE TAPE
All this is in contrast to the economics that made videotapes a huge revenue source for studios, often the difference between profit and loss on a movie. Complex two-tier pricing maximized the studios’ take. Some titles, such as Disney animated movies, carried relatively low wholesale prices because they were intended to be sold in large numbers to the public via mass-market retailers. Films that people might want to see just once — say, an Adam Sandler comedy — were aimed at the rental market and carried higher wholesale prices. To keep the rental business healthy, the studios made deals with Blockbuster and a number of other big chains to share the rental revenue.
Tools and Toys
• Hollywood studios to sell D-VHS
• AMD unveils new laptop processor
• IBM, Peugeot take car repair online
• Steven Kent on Gaming
In the DVD era, the delicate balance is wobbling. A big reason is the strategy of AOL Time Warner Inc.’s Warner Bros., in which every title is priced for the mass market, with no regard for the rental business Hollywood relied on so long. This is a crusade for Warren Lieberfarb, Warner Home Video’s chief, who helped bring the DVD into existence a decade ago, at times against opposition from other studios. Warner has a greater financial interest in DVD than other studios because it holds several patents for parts of the technology.
The Warner executive takes glee in stirring the pot, describing the DVD situation as “another Lieberfarbian controversy.” Indeed, the DVD endgame he envisions is a shocker: freeing Hollywood from Blockbuster, which controls close to 40 percent of the rental market and has long been a tough negotiating adversary. Blockbuster has “used that share to increase their margins at the expense of the studios,” Lieberfarb complains. Blockbuster Chief Executive John Antioco says the chain uses its market power for the benefit of its customers.
Lieberfarb’s bet is that people can be conditioned to buy just about any movie they want to see if it’s priced low enough. If consumers insist on renting, he wants to cut Blockbuster out of the equation and steer the market toward “video on demand” services: movies delivered to the home by high-speed Internet connection. Warner is a partner with four other studios in such a service, called Movielink, which it hopes to launch later this year. Walt Disney Co. and News Corp.’s Twentieth Century Fox plan a rival service called Movies.com.
Blockbuster, which is majority-owned by Viacom Inc., doesn’t think its core business of renting movies is in danger. Indeed, Blockbuster is currently feasting on DVDs itself, thanks to the low wholesale prices. The chain pays less for disks than for videotapes, in part because its long-term deals to share rental revenue with movie studios don’t apply to DVDs.
As a result, the rental giant usually earns much more on the DVD version of a movie than on the videotape version, and is racing to redesign its stores to emphasize DVD. It’s also forging a new business in selling used DVDs cheaply after they’ve been rented a few times. In a current promotion, it sells used copies of Universal’s “The Fast and the Furious,” released less than five weeks ago, for $9.99, or about half what new versions go for at Wal-Mart. Lieberfarb also sees used-disk sales damping the growth of the DVD sales market.
So far, owners of DVD players show a lusty appetite for buying movies. They buy an average of 16 disks a year, compared with the five or six videotapes that VCR owners have been purchasing, says Adams Media Research of Carmel Valley, Calif. Consumers spent $4.6 billion on DVD purchases last year, which was nearly 2 1/2 times the 2000 level and a windfall for the studios, whose videotape business is mature.
However Blockbuster’s chief negotiator with the studios, Dean Wilson, argues that as DVD players are adopted by less-affluent consumers, a “higher percentage of households [will be] interested in rental versus purchase.”
Blockbuster’s relationship with Warner Bros. appears ready to come unglued, as their deal to share revenue from videotape rentals expires this month and they currently aren’t talking about a new deal.
Generally, Blockbuster’s Antioco says he is content with the DVD status quo, in which he pays low wholesale prices without the complication of sharing the rental proceeds. If the studios keep dropping prices, “my margins would go through the roof, and customers would still rent,” he says.
Still, he implicitly acknowledges the threat Warner’s strategy poses to Blockbuster. The chain offers DVDs for sale but primarily rents them. Consumers are more likely to buy a movie when they’re doing other shopping, Antioco says, while they “go to Blockbuster because [they] want to watch the movie that night and bring [it] back.”
SHARP DIVIDE
For an oligopolistic industry, Hollywood is unusually divided on the DVD issue. Currently helping Warner to push some prices lower is Metro-Goldwyn-Mayer Inc., which has cut prices mostly on older movies. Fighting to hold the line on prices are Disney, Dreamworks, Vivendi Universal SA’s Universal Pictures and Viacom’s Paramount Pictures.
Local business news
• News from your back yard and local angles nationwide
Warner and MGM, as owners of vast film libraries, have an interest in low prices as a way to make those films, many obscure, throw off cash. But to studios with smaller libraries, cheap DVD pricing looks self-defeating, and they see rentals as still the best way to maximize revenue. “Will consumers change their behavior just because there’s a format change?” asks Daly of Dreamworks. “My belief is that it’s not going to happen.”
The studios have all been dragged along with Warner’s strategy to some degree, and they aren’t happy about it. “One guy with a lot of movies can unfortunately seemingly dictate the way the market could go,” complains Robert Chapek, president of Disney’s Buena Vista Home Entertainment.
A few years ago, he says, an older title released on videotape might have initially carried a retail price of $19.99. At intervals of about nine months, the price would have dropped to $14.99, $12.99, and finally $9.99. With DVD, “there’s pressure to get to the lower point much quicker.”
LOST EMPIRE
Disney and others have held their wholesale prices higher than Warner’s, and sales have been so robust that it’s been hard for any of them to complain so far. Retailers now sometimes drop prices below wholesale to draw shoppers. When Disney’s animated “Atlantis: The Lost Empire” was released last week, Best Buy sold the DVD for $16.99 — a dollar below the price for the videotape. That makes studios nervous that consumers will increasingly get used to cheap disks.
Some studios are deeply concerned that declining DVD prices threaten what profits remain in the videotape business, which is still the main format used by the vast majority of U.S. households. Here, too, Warner has rocked the boat.
Whereas DVDs usually become available for sale and rental on the same day, in videotape the conventional approach is that consumers can’t cheaply buy a title aimed at the rental market for several months after rental outlets get it. But last year, with the John Travolta thriller “Swordfish,” Warner released a low-priced videotape simultaneously to retail stores and rental chains. The DVD came out the same day, for both rental and purchase. Warner priced both the DVD and the videotape for mass-market sales.
News from the WSJ
Wall Street Journal
stories on MSNBC
• Click here to bookmark
The DVD sold well, but the consensus in the industry was that Warner missed out on a lot of videotape rental profits. Lieberfarb says the DVD sales made up for “disappointing” tape sales, making it a wash. He is taking the same approach with titles such as “Training Day” and “Heist,” even though Blockbuster’s Antioco estimates that the result will be about 40 percent less revenue for the studio.
Lieberfarb wants to get the retail price of new releases down to about $10, not much more than the cost of a rental and a late fee. Some older titles from Warner like “Private Benjamin” can be found for $5.99.
Last year, Warner failed to clinch a deal to distribute DreamWorks’ videos and DVDs, largely because of their very different views on pricing. Lieberfarb insists his low-price DVD policy is right: “Those people who are not doing this,” he says, “are basically surrendering their business to Blockbuster.”
Comment