Industry Profiles: Video Tape Rental

Overview

As the price of videocassette recorders (VCRs) plummeted and the cost of cinema admission rose, the demand for video rental increased in late 1980s and continued rising into the early 2000s. By 2001, rental revenues slightly eclipsed box office earnings. In 2002 movie admission for new releases started at about $7 for general admission, whereas video rental fees averaged only $3 at major video rental outlets and even less at in-store video departments at leading supermarkets and discount stores.

When the industry began, video rental outlets, including video-only stores and chain grocery stores' video rental departments, could reap modest profits simply by stocking the leading new releases and some all-time favorites. In the late 1990s, however, the market grew much more competitive with a glut of shops and slower industry growth. Consequently, those companies that could not change with the times wound up exiting the video rental scene. The most significant companies to quit the business included retail and grocery chains that did not want to invest additional effort and money into expanding and promoting their video rental services. Besides the increasing internal competition, the industry also faced external competition from cable movie channels, which began to offer an abundance of newly released movies to cut into the video rental market. Furthermore, new satellite services providing direct-to-home, on-demand movies also made an effort to convert video rental customers to a more convenient, although more expensive, way of watching movies at home.

Nonetheless, the industry remained highly profitable. According to the Video Software Dealers Association (VSDA), the industry witnessed modest revenue increases in 2001 with sales of about $8.4 billion. Approximately 83 percent of sales were from VHS rentals, while the remaining were attributed to digital video disc (DVD) rentals. The latter category achieved explosive growth in 2001, climbing 164 percent over the previous year's levels. This was largely due to the rapidly falling price of DVD players. With growing DVD adoption rates, most leading rental chains were increasing inventories of DVDs in the early 2000s. At that time, more supermarket chains were finding it difficult to compete with leading chains like Blockbuster, on-demand movies from cable and satellite providers, and a retail operations environment that was increasingly more complex. While this caused a growing number of supermarkets to close their video rental operations, some continued to add rental service.

History of the Industry

The videocassette recorder (VCR) appeared in 1975, planting the seeds of the video rental industry. New entertainment services also emerged around this time, including cable television, which complemented the VCR by allowing users to tape television movies and shows. Shortly after the introduction of the VCR, movie studios released videocassettes of classic movies to add to their revenues. The advent of the VCR/video cassette combination presented consumers with more entertainment options. No longer did they have to rely on the schedules of movie theaters or premium cable channels to see movies. Instead, they could see them any time they wanted by purchasing movies on videocassette or sell-through videos. However, sell-through videos (those purchased outright, not rented) carry a financial burden in that few consumers can afford to pay $10 to $25 every time they want to see a movie.

Video rental shops emerged to serve the market of people who wanted the convenience of home video without the expense of sell-through videocassettes. Video rental caught on quickly because, after an initial $150 to $500 investment for a VCR, people could rent a cassette for a lower price than they could go to the theater. Video rental especially filled the family entertainment niche where families paid $20 to $30 for a movie in contrast to a $3 expenditure to rent a video. By 1985, the industry posted revenues of $3.5 billion, and by 1990 revenues were $9.8 billion, according to the VSDA.

Significant Events Affecting the Industry

With the emergence of competitive alternatives to video rentals and sales, video rental stores have been seeking ways of maintaining and increasing their customer base. Supermarkets have tried to offer "grub and movie" specials to keeping their video departments thriving, according to Dan Alaimo in Supermarket News. Stores have provided promotions giving customers movie rental discounts with the purchase of deli items and prepared entrees. By 2001, national franchises like Figaro's Italian Pizza Inc. were operating within video stores in an effort to capitalize on the pizza-movie connection. Video stores also rely on different promotional strategies. For example, in late 2000 Blockbuster began selling DIRECTV equipment in some of its U.S. stores. The following year, Blockbuster went a step further when it partnered with DIRECTV to co-brand the satellite provider's movie service, thereby entering the pay-per-view market. The retailer also relied on partnerships with companies like Coca-Cola, as well as various sweepstakes and promotions. In 2002 Blockbuster planned to test a new subscription service that allowed customers to have up to three titles out at any given time without incurring a late fee.

In order to track industry performance and consumer habits, the VSDA introduced VidTrac in January 1996. The point-of-sale service collects data from a large sample of video rental operations throughout the country. More than 12,000 stores participate in VidTrac with many of the most successful rental chains among them. With VidTrac, VSDA is able to offer rich and accurate statistics and projections for the video rental community.

Other modes of entertainment also continued to compete with the video rental industry. Alternative forms of in-home entertainment such as digital television, payper-view, and direct-broadcast satellite remained a challenging force for video stores in the early 2000s. Although these alternatives provide some advantages over video rental—namely, higher resolution for digital television and some greater conveniences such as not having to return videos for pay-per-view and direct broadcast movies—they also cost more. By the early 2000s, video-on-demand services allowed subscribers to rent movies in digital formats for 24-hour periods and take advantage of the ability to pause, fast-forward and rewind in a manner similar to VCRs. Selections of on-demand movies included new releases, as well as a limited but growing selection of older titles.

Video rental stores embraced a new laser disc format for recording and playback in the early 2000s: the Digital Video Disc (DVD). DVDs can store between 4.5 and 17 gigabytes of data, which translates to between 135 and 540 minutes of playing time. Besides offering more disk space and better audio and video qualities, DVDs also have interactive capabilities, allowing users to witness multiple angle shots of a single scene, to read sets of multiple subtitles, and to move to favorite parts of movies by the press of a button. Additionally, unlike videotape releases, selections often include various special features such as the ability to view movies in full-or wide-screen, as well as bonus material including theatrical trailers, documentaries, and movie versions with actor/director commentary. According to the DVD Entertainment Group, based on industry data from the Consumer Electronics Association and other sources, consumer sales of DVDs reached 16.7 million units in 2001. This total was almost double the sales rate achieved in 2000. Boding well for video and DVD rental stores, the association revealed that approximately 25 percent of U.S. homes had a DVD player. Although they were still expensive, DVD players with the ability to record also were being marketed by the early 2000s, making DVD players more appealing to consumers.

Key Competitors

Blockbuster Inc. led the video rental industry in the early 2000s. Headquartered in Dallas, Texas, Block-buster, in 2002, had nearly 8,000 stores dispersed throughout the Americas, Asia, Europe, and Australia, making it the world industry leader. More than 50 percent of the company's locations were in the United States. As of 2002, Viacom Inc. owned most of Blockbuster, which lost $240 million on 2001 revenues of $5.2 billion. Blockbuster has faced problems of slumping growth and inconsistent leadership, though the company's performance improved in the late 1990s. With growing sales and an estimated 40-percent stake of the DVD rental market in 2002, the company was in a strong position to benefit from the increasingly popular rental format.

Based in Wilsonville, Oregon, Hollywood Entertainment Corp. grew quickly in the mid-1990s to become the second largest national video rental chain. With a series of acquisitions and expansions, Hollywood has marched across the country to secure its hold on the number two video chain position. In 2001 Hollywood Entertainment operated 1,800 Hollywood Video superstores—a dramatic increase over its 25 stores in 1994. Hollywood has successfully competed with small video stores as well as with in-store departments for selection. Part of the company's strategy includes providing an upbeat atmosphere complete with neon lights and many television monitors playing movies. Hollywood Entertainment experienced financial difficulties in the late 1990s, partially because of an unsuccessful e-commerce operation called Reel.com. However, by 2002 the company had improved its financial situation and was preparing to expand by opening up some 250 stores by 2003. Headed by founder Mark J. Wattles, Hollywood Entertainment posted sales of $1.4 billion in 2001, up 6.4 percent from 2000.

Movie Gallery Inc. (and its subsidiary Video Update Inc.) rounds out the number-three slot, behind Hollywood and Blockbuster. In 2001, Movie Gallery operated approximately 1,400 stores, some of which were franchised, in the United States and Canada. Focusing on small suburban towns, Movie Gallery brought in $369 million in 2001, an increase of almost 16 percent over 2000 levels. The company's earnings, which amounted to $14 million, mushroomed almost 51 percent during the same time period.

Industry Projections

The Video Software Dealers Association reports that about 27,000 video rental outlets operated in 1996, down from 31,000 in 1990, which the VSDA attributes to consolidation and the rise of the video megashops. By the early 2000s, consolidation continued to occur within the industry, and many smaller independent video rental operations had been acquired by larger chains or had closed their doors due to stiff competition. By 2002 the top three video chains alone accounted for approximately 7,250 stores in the United States. According to Alexander & Associates, consumer spending on home video rental increased steadily in the early 2000s, reaching $12.4 billion in 2000 and $12.9 billion in 2001, after hovering around $11.0 billion for most of the 1990s. While these annual figures are somewhat higher than those of the VSDA, they illustrate the growing value of the rental market.

U.S. video rental operations have achieved great success because of high VCR penetration levels (approximately 94 percent of all U.S. households have a VCR). In addition, with the explosion in DVD player sales that was taking place in the early 2000s, rental firms were in a strong position to profit from this segment into the early years of the decade. In 2001 Blockbuster announced that it would scale back its VHS inventory by approximately 25 percent to make room for more DVDs, which were expected to account for a growing percentage of all titles into the early 2000s. By 2006 there is a strong possibility that DVDs will account for the lion's share of all movie rentals. Video-on-demand services were expected to take some market share away from rental chains in the short-term. However, because of technological limitations like the need for significantly higher broadband connections, these services were not expected to have a major impact on industry sales for some time.

Global Presence

The United States leads the world in video rentals and sales. With the majority of the movies domestically produced and with approximately 94 percent VCR penetration, the home video industry thrives in the United States. However, Australia, Canada, and Japan also have strong VCR bases, which makes their home video markets strong and key target areas of U.S. video store chains and U.S. video cassette distributors.

U.S. movie studios did well abroad in the mid-1990s in terms of video rentals and sell-throughs. In 1996, they posted revenues of more than $3.4 billion from video rental and sales, according to Don Groves in Variety. International customers showed heightened interest in video rentals and purchases after ebbing in 1995. In addition, VCR penetration has increased throughout the world and video piracy has decreased. Peter Dean reported in Billboard, for example, that VCR penetration hit 64 percent in the European Union, while video piracy dropped by as much as 28 percent in the United Kingdom.

Employment in the Industry

The number of employees in the industry rose from 54,000 in 1983 to 167,800 in 2000. By 2010 the Bureau of Labor Statistics predicts the industry's workforce will reach 172,800. Typically, positions at video stores pay minimum wage for general full-time and part-time employees. Managerial positions, on the other hand, can pay a few dollars an hour over minimum wage.

Sources for Further Study

alaimo, dan. "keeping pace in the race: the competition in home video is tough, but supermarkets are still doing well." supermarket news, 13 april 1998.

———. "harris teeter looks to heat up video with hmr tiein." supermarket news, 9 june 1997.

———. "kroger lifting curtain on more video rental 'stores'." supermarket news, 20 november 1995.

———. "rental bloom: seeding the department with new releases" supermarket news, 14 april 1997.

——. "Rental Properties: Supplies Say Chains in Video Rental for the Long Haul Need to Apply More Sophisticated Approaches to Inventory." Supermarket News, 20 January 1997.

Chezzi, Derek. "The Death of the VCR: From DVDs to Video On Demand, New Digital Offerings are Squeezing Out Tape." Maclean's, 15 April 2002.

Dean, Peter. "The U.K. and Europe." Billboard, 11 January 1997.

Desjardins, Doug. "Video Chains Experience Fast-Forward Growth." DSN Retailing Today, 17 September 2001.

Digital America 2001, the U.S. Consumer Electronics Industry Today. Arlington, VA: Consumer Electronics Association, 2001. Available at http://www.ce.org.

"DVDs Fueled 2001 Video Rental Growth." United Press International, 7 January 2002.

"Fourth Quarter 2001 Banner Finish for Home Video Industry." Alexander & Associates, 7 January 2002. Available at http://www.alexassoc.com.

Geistman, Bob. "Time to Take Stock of New Technologies." Supermarket News, 22 April 1996.

Groves, Don. "O'seas Video Takeout Makes Comeback Bid." Variety, 3 March 1997.

Hamstra, Mark. "Hanging By a Thread; More and More Supermarkets Seem to be Abandoning Video Rental, But Some See Encouraging Signs Ahead for the Category." Supermarket News, 7 January 2002.

——. "More Supermarkets Eliminate Video Rental." Supermarket News, 12 November 2001.

Lenius, Pat Natschke. Supermarket News, 3 February 1997.

McClellan, Stephen. "Viacom Hit by Lackluster Blockbuster." Broadcasting and Cable, 28 April 1997.

McMurray, Scott. "Time to Hit the Fast-forward Button." U.S. News & World Report, 26 August 1996.

Video Software Dealer Association. "A White Paper on the Future of the Home Video Industry." Video Software Dealer Association, 1998. Available at http://206.71.226.123/whitepaper/WHITPAPR.HTM.