Hollywood vs. Blockbuster, Now on DVD

As consumers catch on to the disks' superior digital format, studios are trying to keep as much of the new revenue as possible

By Ron Grover

On Aug. 31, Sony's Columbia Pictures studio hits the theaters with -- drum roll, please -- Funny Girl, starring Barbra Streisand. Don't worry, Babs and co-star Omar Sharif won't be crowding out whatever new flick you'll be headed down to the multiplex to see. The 1968 musical will show up only in a single theater in each of three cities -- New York, Los Angeles, and San Francisco -- and will likely stick around for just a week or so.

Why bother? To generate hype for the release of the DVD version that will follow soon afterward. DVDs have grown into a bonanza for Hollywood, showering studios and video-rental chains alike with some badly needed cash. As prices for DVD players have sunk below $200 apiece, the business has exploded. By the end of 2001, an estimated 14 million consumers will have a DVD player in their homes, according to a recently published forecast by investment bankers Veronis Suhler, nearly seven times the number in 1999.

This year, American consumers are expected to spend $7.2 billion on buying or renting DVDs, according to Veronis Suhler. That's roughly what they'll spend to buy tickets to theaters. So if Columbia can generate a little Funny Girl buzz with its big-screen release, maybe it can boost DVD sales, the thinking goes.


  The studios have made a nice little business trotting out old movies in new formats for years now. But they're especially juiced over digital. The hope is DVDs could do for them what CDs did for the music industry, which was virtually reborn in the early '90s when most of us replaced our tapes and LPs with CDs. Hollywood has plenty of reasons for excitement: DVDs give new life to studios' libraries of older films, they're cheaper to make -- and therefore more profitable -- than videocassettes, and their quality is considered superior.

Also, they generally offer additional material that you can't get on a cassette: Interviews with actors and directors, deleted scenes, foreign-language versions, and commentary that accompanies the film. DVD owners tend to be real movie lovers, according to Blake Thomas, marketing executive vice-president for MGM's home-video unit. They're more likely to buy movies, as opposed to renting them, than folks with VCRs. That's especially appealing because the price points tend to be $5 to $10 higher than with VHS.

Best of all for the studios, however, may be the extra leverage that DVDs give them in the very lively tug of war between them and the video chains over who'll take the biggest chunk of the upside. The two sides have been fighting for years, ever since Blockbuster browbeat Hollywood into agreements to drive down the prices the video chain would have to pay for new releases.


  Typically, new video releases are priced pretty steep -- often over $100 -- for the first few months, so the studios can maximize their profit from sales to rental outlets. After that market has been milked, prices usually drop to around $20 within six months. But Blockbuster pays only about $30 for new releases. In return for the lower prices, the mega-chain shares some of its rental revenues with the studios.

Until recently, Blockbuster got what studios consider a free ride on DVDs, paying around $15 for each disk but not cutting Hollywood in on the rentals. That was great for the video chains, which get much higher margins on DVDs because they can rent the comparatively cheap disks for the same amount as they do cassettes. With so many folks buying DVDs to build libraries of old Disney animated films or Rocky flicks, the margins are hefty for every DVD sale that Blockbuster racks up.

And they're getting to be a big business: Blockbuster Chairman John Antioco says by yearend DVD sales and rentals will likely account for 30% of his company's overall revenues, up from 16% now.


  Hollywood clearly wants some of that upside and thinks it has Blockbuster over a barrel. The studios are pricing some new videocassette releases low enough to encourage people to buy them immediately rather than rent them while waiting for the price to drop. And DVD new releases often go for around $30 from the start. This strategy deprives Blockbuster of rental revenues and allows major retailers like Kmart to cut into Blockbuster's business. In Hollywood, this trend is seen as a reaction to claims by Antioco that Blockbuster would soon phase out its rental-sharing agreements with the studios.

It's also a veiled threat, with the implication being that the next battleground will be over DVDs. Hollywood is already showing that it can -- and will -- sell them cheap, bypassing Blockbuster's rental route with movies like MGM's grisly Hannibal, which sells on DVD for $30, compared to an initial price of $70 for the tape.

The studios want their piece of the DVD rental business, and they insist that Blockbuster give it to them, or they'll sell even more bargain-priced movies at the local Kmart. So far, Blockbuster refuses to sign. The only revenue-sharing deal to get done so far is between MGM and Blockbuster competitor Hollywood Entertainment, and it's believed to be far less generous than the cassette revenue-sharing arrangement that Blockbuster has in place.


  The amazing thing, at least to me, is that videocassette sales aren't falling off a cliff in the face of DVDs' healthy growth. That's because VCRs can record TV shows, while DVD players still cannot. So VCRs continue to outsell their digital rivals by five to one.

By 2005, according to Veronis Suhler, consumers will be buying or renting $13 billion worth of DVDs. And revenues from videocassettes, although dropping each year, will still be a very robust $15.8 billion. That's $28.8 billion in total revenues, compared to $24.9 billion five years earlier. Even Babs could sing up a storm about those kinds of numbers.

Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BW Online

Edited by Patricia O'Connell

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