Videotape Rental - Background and Development

Background and Development

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.