Videotape Rental - Current Conditions

Current Conditions

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.