A slowdown in hit titles stalls video rental business
The rise of competing home entertainment technologies, as well as financial problems at several of the publicly held video rental specialty chains, most notably Blockbuster, have sparked fear about the future of the rental portion of the home video business.
Rental activity declined sharply in April and May when compared with the same months in 1996, according to several published reports.
According to statistics from several sources, sell-through of home video also reached its lowest point of the year just before the Memorial Day weekend.
Some of this fluctuation is seasonal and is to be expected, but some on the rental side of home video fear that shortened windows for pay-per-view movies as well as the popularity of direct broadcast satellite systems are cutting into the video rental business.
But recent studies of the home video business conducted by the New York-based entertainment industry marketing and management consulting firm Alexander & Associates point to a number of factors for the doldrums in the video rental business, primarily a lack of hit titles.
‘For several months during the late winter and early spring of this year, the number of tapes rented has been down,’ said Robert Alexander, president of Alexander & Associates. ‘This downdraft in activity caught many chains, especially Blockbuster, not looking.’
The reaction of stock markets and some in the video industry to Blockbuster’s short-term problems, which include the abrupt departure of former Wal-Mart executive Bill Fields from Blockbuster’s helm after just 13 months, have clouded the picture.
‘Many people erroneously ascribed weakness in home video markets to competing distribution channels such as direct satellite,’ Alexander said ‘Our work clearly shows that the market has been down due to a consistent lack of strong product.’
An Alexander & Associates study of the rental market tabulated the movement of feature films from the theatrical market to home video, focusing on titles that grossed more than $30 million at the box office.
The study compared the first quarter of 1996 to the first quarter of 1997 and found that there were 17 titles released to video in 1996 vs. only eight titles in 1997. The titles released in 1996 had a combined box office total of almost $1.1 billion, while the titles in 1997 had a combined box office of less than $600 million.
The study also tracked the average number of days between theatrical release and home video release for titles grossing more than $30 million at the box office during 1996 and early 1997. There are more than $2.8 billion worth of films back-logged, ready to be released to home video during the second and third quarters of ’97, the study found.
A strong summer release slate should spur the video business overall.
‘We believe that the market rebound has already started, and with the continued flow of strong product, we expect that the market rebound will become substantial,’ said Barbara McNamara, general manager of Alexander & Associates’ Video Flash information service. The back-to-back home video releases of ‘Ransom,’ ‘Daylight’ and the sell-through Oscar winner ‘Jerry McGuire’ during May have been key factors in the turnaround, she noted.
‘I am also anticipating strong rental activity on ‘Michael,’ ‘Scream’ and ‘Beavis and Butt-head Do America’ in June,’ she said.
The rental and sell-through video markets do not necessarily track one another, McNamara said. If the sell-through business is strong, it doesn’t necessarily mean a decline for rentals. But new technologies may have an impact on retail video rentals for the long term.
Alexander & Associates also recently conducted a survey for the investment firm Sanford C. Bernstein & Co. of 1,000 households that own direct-broadcast satellite systems. The study estimated that there are currently about 4.2 million DBS households, the vast majority of which are located in the eastern half of the nation. Other industry studies have indicated that sales of DBS systems have been stronger than expected for longer than expected and that the installed based could grow to 12 million households by the year 2000.
DBS sales are expected to be slow after the turn of the century. The technology’s market penetration could easily reach 10%.
Although the consumers surveyed said that they didn’t buy a DBS system to replace video rental, 59% said that movies were the most-watch type of programming. The study also found that half of the dish owners who were video renters prior to purchasing DBS quit renting, and the remainder slashed their rental by 28%.
The rise of sell-through pricing of home videos could also be a factor in the decline of video rental activity.
Owners of DBS system have libraries of 66 tapes that they have purchased, according to the survey, and 69% of respondents said that they plan to buy about the same or more videos than in the past. Just 14% of those surveyed said that they expected to purchase fewer video in the future.
It should be noted, however, that a majority of households surveyed also said that they did not expect their video rental activity to decline.
The dramatic overall growth in sell-through revenue shows, however, that direct sales to consumers have become the driving force in the home entertainment business. Studio sell-through revenue has more than doubled between 1992 and 1996, reaching $5.7 billion by the end of last year, according to Adams Media Research estimates.
Bernstein and Alexander & Associates, along with other industry observers, say that it’s too soon to bury the video rental business and that numerous predictions of its demise have not come to pass.
Some analysts have focused on the impact of DBS, calling the technology the ‘death star’ for home video, according to Alexander & Associates.
‘We have just finished an in-depth study of direct-to-home satellite households, and we believe that conclusion verges on hysteria,’ Alexander said.
‘In fact, while we can measure the impact of satellite, that impact is small,’ Alexander said. ‘The challenge to video in the first half of ’97 has been the availability of product and studio releasing schedules.’
Studio executives say privately that they have no intention of abandoning the video rental business.
Supplier revenue from rental-priced tapes was $2.5 billion in 1996, up 2% from 1995, according to Adams Media Research.
A number of suppliers have said that they will support rental of digital video disks (DVD), and PolyGram Video recently introduced a slate of rental-priced DVD titles.
Some executives in both the CE and home video sides of the effort to sell DVD to the public say they think that rental will speed the adoption of DVD technology.
At the same time, some studios appear to be hedging their bets on offering some kind of video-on-demand technology. The Walt Disney Co. recently ran advertisements seeking executive for a ‘near video-on-demand’ project.
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