This category covers establishments primarily engaged in renting videotapes and disks to the general public for personal or household use. Establishments primarily engaged in renting video recorders and players are classified in SIC 7359: Equipment Rental and Leasing, Not Elsewhere Classified. Establishments primarily engaged in selling recorded videotapes and disks to the general public are classified in SIC 5735: Record and Prerecorded Tape Stores; those engaged in the wholesale distribution of recorded videotapes and disks are classified in SIC 7822: Motion Picture and Videotape Distribution.
532230 (Videotapes and Disc Rental)
Under assault from alternative entertainment media like pay-per-view television and video-on-demand services, video stores in the early 2000s faced a mixed future. After rapid growth in the 1980s and early 1990s, video rentals in the United States stalled in the mid-1990s as the market grew saturated and as competing modes of entertainment chipped away at home video rental. Sales of videos at mainstream retail outlets like Wal-Mart and drugstore chains also cleaved market share away from video stores. The industry staged a modest recovery in the late 1990s, aided by new revenue-sharing agreements with movie studios, but sales fell more than 4 percent from 2000 to 2001. The strong popularity of DVD boded well for the industry during the early to mid-2000s.
The video rental business is fairly fragmented compared to other industries. In recent years, the top five video chains claimed only 41 percent of the U.S. market. However, large chains continue to edge market share away from smaller, independent video stores. Thousands of independents have been forced out of business as big chains moved in; others have been relegated to niche markets.
Film studios and distributors sell videotapes and DVDs to rental outlets, which then rent the videos to consumers. Under traditional pricing, rental outlets pay $50 to $80 per video, which they then rent to customers for typically $1 to $4 per night. Under this arrangement the video store keeps all the rental revenues for itself. Increasingly, however, video stores have pursued revenue-sharing deals with studios. These contracts dramatically reduce stores' initial cost of buying videos—sometimes eliminating up-front costs altogether—and convert those into variable costs by paying the studio a percentage of rental income each time a movie is borrowed. Revenue sharing, which came into widespread use in 1998, benefits not only video stores' cash flow but also frequently helps boost overall revenue because stores are able to stock—and rent out—more product.
Typically, video stores earn the bulk of their sales (about 70 percent at large chains like Blockbuster) from video rental fees. The rest come from sell-through videos, whereby tapes and discs are sold as new; gaming software rentals (such as for Nintendo and Sony game consoles); snack food sales; and miscellaneous sources like sales of musical recordings and used videos.
Video specialty stores compete directly with super-markets, drugstores, and other mainstream retail outlets that also sell or rent videos. Often mainstream stores sell videos at deep discount, creating pricing pressure on video stores.
The number of video stores has fallen significantly as large chain stores and so-called superstores have expanded. From 31,000 in 1990, the number of video stores had dropped below 25,000 by 1999.
Videos vs. Theaters. Video stores have always had a complex relationship with movie theaters. Early on, conventional wisdom held that video rentals cannibalized theater admissions because a typical consumer, the theory goes, would watch a movie either in a theater or at home, but not both. This pattern seemed to hold in the late 1980s and early 1990s, when box-office receipts began to decline as video rentals surged.
The relation between video rental and movie going grew murkier in the mid-1990s; rentals stagnated while business at the box office swelled. Indeed, Census Bureau statistics reveal that in 1996 theater revenues surpassed video store revenues for the first time since 1993, the year rentals first pulled ahead of theaters. To further complicate matters, by the late 1990s both video stores and theaters posted healthy gains side by side. In sum, analysts believe that video stores and movie theaters do vie for the same audience some of the time—especially when the economy is sluggish—but also that each can create demand for the other.
Video Rights. Owning video rights to films is an important source of revenue for film studios. For example, during the 1990s roughly half of movie revenue in the United States came from home video, according to a study by Veronis, Suhler and Associates and Smith Barney, Inc. By contrast, revenue from theatrical exhibition accounted for 33 percent, and television showings contributed 20 percent.
DVD Format. By the early 2000s, digital video discs (DVDs) quickly became the preferred format for home video viewing, eclipsing videocassettes. Images stored on laser discs are sharper than videotape images, and viewers can move more easily to different places on the recording. Discs can also provide digital stereo audio, which makes them especially attractive for programs involving music.
Although videocassette recorders and players have been available since the mid-1970s, pay-TV services were more popular early on. At the top was the cable network Home Box Office (HBO), which financed films in exchange for pay-TV rights and thus secured exclusive deals on very profitable movies.
By the mid-1980s, pay-TV viewers grew increasingly disenchanted with programming just as home video technology became more affordable and more widely available. Videos offered far more variety and flexibility in viewing for the customer. The cost of VCRs continued to fall—from $300 to $400 in the industry's early days for lower-priced models to $150 to $250 in 1993—further contributing to the rise in popularity. By the late 1990s, 84 percent of U.S. households owned at least one VCR.
Entering the mid-1990s, consumer demand for video rentals began to stabilize somewhat as sales of VCRs began to slow. In 1995 revenues from video rentals and sales actually declined, and rental business was essentially flat for the next two years. Though statistics vary, annual figures compiled by Alexander & Associates, a market research firm for the industry, portrayed video unit rentals falling in all but one year between 1995 and 1999. According to the same research, rental revenues managed to stay afloat largely through price hikes.
On the other hand, sell-through videos performed the best in the mid-1990s. One explanation for this trend was the decreasing cost of buying videos. In 1995, according to Billboard, Disney-owned Buena Vista Home Video began pricing quality features at $9.99. Other studios followed suit with similar programs.
The industry's 1998 shift toward revenue sharing with film studios, allowing video stores to stock more titles at lower up-front costs, helped lift industry-wide revenues out of their mid-1990s doldrums. According to widely cited figures from Paul Kagan Associates, rental revenue in 1998 totaled $8 billion and sell-through sales reached $9 billion, bringing industry revenues to $17 billion for the year. Though estimates vary, this translated into somewhere between three and four billion videos rented and some 676 million sold. The media research firm predicted sales would surpass $20 billion by 2002.
Though lauded by many as a major breakthrough, revenue sharing appeared to further entrench a few large chains at the expense of smaller outfits, according to both statistical and anecdotal evidence. One reason was that the large chains were able to secure more favorable deals with studios, and thus the playing field was far from level. Big chains negotiated with studios directly, whereas small stores usually went intermediaries. Because small stores received worse pricing, they often opted out of revenue sharing. Meanwhile, their large competitors were able to stock more videos and more copies of each (known as copy depth), and saw a rise in revenue as a result.
Besides revenue sharing, another factor contributing to growth was the popularity of DVD-format videos. In 1998 the number of DVD players topped one million units, and the number was estimated near three million in 1999. Indeed, by 2007, more than 40 million units were forecast to be in use. Sales of DVDs were strong during the late 1990s, and this benefited activity within the rental market. In 1999 DVD only accounted for around 4 percent of one leading chain's sales, but that proportion was expected to grow rapidly in the early 2000s.
The conventional video store business competes increasingly with other services that can deliver movies directly to the home, such as pay-per-view and direct-broadcast satellite television. In 1999 pay-per-view was a $1.1 billion business and growing rapidly.
A relatively undeveloped technology during the late 1990s posed perhaps the greatest threat. Video-on-demand services, which allow consumers to receive broadcast movies of their choice at any time, held the potential to lure a large portion of the market away from video rentals and sales. Under testing by various cable systems, movies are served up from the cable provider's digital network at the viewer's discretion. Pricing is similar to pay-per-view—and comparable to rental fees—only the movies can be started at any time and can be paused or fast-forwarded, and the consumer never has to leave home. By some estimates, such services held the potential to garner $3 billion by 2005, mostly at the expense of video rental.
U.S. Census Bureau figures reveal that, on an annual basis, revenue growth for videotape and disc rental stores declined during the early 2000s. While sales increased nearly 10 percent from 1998 to 1999, annual growth was about 3 percent from 1999 to 2000. In 2001, the industry's revenues declined more than 4 percent, falling from approximately $9 billion to $8.6 billion. The rising popularity of DVD hindered rental revenues somewhat, as many consumers opted to purchase attractively priced DVD titles—both classic favorites and newer titles—from discount retailers like Best Buy and Wal-Mart for their home libraries instead of renting them.
By the early 2000s, digital technology was beginning to change how consumers obtained movies for viewing. In late 2002, Warner Brothers forged an agreement with CinemaNow in which, for $3 to $4, consumers could download movies to their personal computer for a period of 30 days. By the spring of 2003, 20th Century Fox had entered into an online distribution with CinemaNow. In November of 2002, a competing online movie service called Movielink—a joint venture between Paramount Pictures, Metro-Goldwyn-Mayer Studios, Warner Bros., Universal, and Sony Pictures Entertainment—began serving customers. According to The Online Reporter , by 2005 feature films delivered via the Internet were expected to result in revenues of $882 million. However, by early 2003 roughly 10 percent of homes were outfitted with the high-speed Internet connectivity required to download films in this way. Therefore, some industry observers argued that discounted DVDs were more of a threat to the rental industry than such video-on-demand services.
Although consumers purchased DVD titles in growing numbers, a great many also were inspired to rent them, which boded well for the industry. This led to a subsequent decline in videocassette rentals. These trends are evident in figures from Alexander & Associates, which show VHS rentals falling from 3.7 million in 2000 to 3.3 million in 2001, and then dropping to 2.6 billion in 2002. Spending on VHS rentals mirrored this decline, dropping from $11.6 billion in 2000 to $10.8 billion in 2001, and then falling sharply to $8.8 billion in 2002. Alexander & Associates reports that while total DVD rentals were a mere 246 million in 2000, they quickly jumped to 616 million in 2001 and then skyrocketed to about 1.2 billion in 2002. Spending on DVD rentals during this timeframe also increased, reaching $781 million in 2000, $2.2 billion in 2001, and $4.3 billion in 2002.
In early 2003, the video rental industry appeared to be recovering. Consumer spending on rentals reached record levels in the first quarter that year, with combined revenues for both DVD and VHS reaching $2.3 billion, according to the Video Software Dealers Association. During the month of March, DVD rental sales surpassed VHS on two occasions. This was an industry milestone and, according to some players, marked a pivotal point for the DVD format, which was expected to eclipse VHS overall in 2003 and subsequent years.
As DVD became a hit with consumers, a variety of companies—including cable operators that were disappointed with consumer response to pay-per-view services—expressed an interest in DVD rental schemes that would generate additional revenues. Although earlier services that offered Internet-based video rental—including Kozmo.com—failed, Netflix was one company that successfully took the DVD rental model to the Web. In April 2003 the company allowed consumers to rent more than 13,500 different titles via the Internet, including the latest blockbusters, as well as documentaries and independent films that were hard to find in traditional rental outlets. For a monthly subscription fee of $19.95, Netflix offered free one to three day shipping both ways and allowed customers to rent up to three titles at a time with no due date, thus eliminating the late fees charged by traditional stores. The company accomplished this via 18 shipping centers, a number that was increasing during 2003. By the end of that year, Netflix indicated that 75 percent of its customers would enjoy overnight movie delivery.
Blockbuster. The undisputed leader of the video store industry is Blockbuster, Inc., owned since 1994 by the media conglomerate Viacom. Despite its dominance, Blockbuster's corporate performance has been spotty. From 1997 to 1999, although its revenue grew significantly, it ran net losses and racked up heavy debt. Block-buster's weakness was also an ongoing source of friction with its parent, Viacom, which was under pressure from investors to spin the video unit off as a separate entity. After long delays, the first steps were taken in 1999 with a public offering of part of Blockbuster's stock. When they finally came, however, the new shares were not warmly received by the market, and in following months Block-buster's shares largely hovered below their offering price. In 2002 Blockbuster pulled in $5.6 billion in worldwide sales, but the company posted a loss of $1.6 billion. The video leader operated 8,500 stores throughout the world, including approximately 5,900 domestic outlets.
Hollywood Video. The second-largest U.S. video store operator during the early 2000s was Oregon-based Hollywood Video. Owned by Hollywood Entertainment Corp., the chain consisted of 1,800 outlets in early 2003. The company operates Game Crazy videogame outlets in six states within select video stores. In 1999 Hollywood and Blockbuster engaged in talks about merging their online offerings to better compete in the emerging electronic film delivery business. Those talks mushroomed into full-blown merger discussions, but the Federal Trade Commission quickly doused any such plans by expressing antitrust concerns. Hollywood Entertainment owns one of the Internet's most popular film sites, Reel.com. In 2002 it forged a partnership with Amazon.com in which Reel.com visitors who wish to purchase movies were linked to the Amazon.com Web site. Hollywood Entertainment achieved sales of $1.5 billion in 2002, at which time it planned to increase its store count to 1,841 locations.
Movie Gallery. With 1,800 stores, Movie Gallery was the third-leading video rental business in the early 2000s. Focusing on smaller cities and rural areas, Movie Gallery recorded sales of $529 million in 2002. That figure was up more than 43 percent from the previous year. In 2002, the company saw its net income increase more than 46 percent, reaching nearly $21 million. The firm purchased BlowOut Entertainment in 1999, and Video Update, Inc. in December 2001. Video Update formerly was the fourth-leading video store business.
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