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To have a rental pricing window, or not. That is the question.

by Robert Mandel

"While there are those that never rent (millionaires or hermits?), there are some DVD consumers who either have self-control (I hate you all) or have not yet come to grips with their obsession, who buy only the titles they must have. These people will probably not be affected. The rest of us..."

There was some frantic posting on DVD web forums a while back pertaining to the topic of possible DVD rental pricing looming on the horizon. Rental pricing is the current VHS business model in which studios release home video copies only to rental outlets (such as Hollywood Video and Blockbuster) for a period of time known as the rental window (approximately 3-6 months), then afterward to retail brick and mortar outlets (Best Buy, Costco) or online stores for consumers at sell-through prices. Sell-through prices normally range from $15-$25. The public, usually collectors, might special order during the rental window, but at a pricetag of approximately $100.

Some of the studios, in particular Fox, have let it be known that they have never been happy with the immediate sell-through model with which DVD was established (thus their initial support for DiVX). The studios have just begun making revenue sharing deals with rental outlets, such as Warnerís deal with national rental chain Video City, whereby they sell more copies to the outlet at a cheaper cost in return for a share of the rentals. Because of the sell-through nature of DVD, Fox eyes immediate see-through as lost revenue via rental. The average retail DVD sell-through price is $25. Currently, to make up for lost revenue, Fox streets their new releases (and some high profile catalogue titles) at $35. The theory is that after a period of time (currently unknown) the prices on these titles will be reduced.

Another area the studios are seeing diminishing revenue is VHS and Laserdisc sell-through. Laserdisc is for all intents and purposes dead. The cannibalization of VHS sell-through by DVD is growing as more DVD players are sold (2.2 million already this year), especially in the niche area of widescreen presentation.

So what does this all mean to Joe Average DVD consumer? Well, that is the question, Hamlet.

On the one hand, the rental pricing model is nothing new to us cinemaphiles, who until DVD came along, were always waiting months for new releases at sell-through. The idea that we wonít buy the titles on our wishlist after the rental window closes is ludicrous, and the studios know it. Besides, this shouldnít affect catalogue titles, since they donít follow the same model as new releases. Of course, rental outlets prefer this model, since itís their business getting pillaged by the current DVD sell-through model. Rental means return customers.

While there are those that never rent (millionaires or hermits?), there are some DVD consumers who either have self-control (I hate you all) or have not yet come to grips with their obsession, who buy only the titles they must have. These people will probably not be affected. The rest of us fall into the other hand.

On the other hand, DVD rental is on the increase (DVD accounts for 10% of my local Hollywood Video store rentals,) and—listen up—and that includes for catalogue titles as well. In fact, DVD may be the best thing to happen to rental chains since VHS sell-through became common practice. While DVD is growing beyond the niche market Laserdisc was, it is still prohibitive for the mom-and-pop rental outlets to purchase copies of both VHS and DVD. The selection around my neighborhood is growing, but is still very small per store (20-500). What the studios risk is cutting DVD rental growth at the knees, before it has reached peak capacity. Geez, there have only been 4 million players sold to consumers so far. There are many small stores that have barely dipped their feet into DVD who will drop it like a hot potato with rental window pricing, because the cost of multiple media will be prohibitive. Of course, Hollywood Video and Blockbuster donít mind this at all!

Despite the upswing of DVD rental, there are many DVD owners who buy titles on spec because it is almost easier (and cheaper if you rack up late fees the way I do!) to buy a title online than it is to rent it brick and mortar. I donít think many current DVD consumers will want to or be able to afford to buy at rental window prices. Thatís one of the reasons why DVD has been so successful at the expense of Laserdisc, is that it has breached the wall between the collector niche to the mass consumer market.

DVD buying ranges from fun (because of the special features) to obsessive (if youíre reading this you probably know what I mean). If it turns out you donít like the title, you turn around and sell it (possibly for a profit) on eBay, or at the local CD swap shop. So, what may happen is that these people will end up renting the title first, and the number of DVDs they purchase will decrease as they determine during the rental window that the film is not worth watching over and over.

Now, I donít pretend to know what the revenue sharing amount per rental transaction is, but I dare say any comparison to the revenue lost from these DVD sales will show up in the ďredĒ column of the studioís accounting ledger. Here it will be the peripheral titles that will suffer most. One of the cool things about the current DVD sell-through structure is the fact that new releases hit the shelves day and date, or in laymanís terms, at the same time as the rental window opens. I can tell you right now that I have not rented a VHS tape in almost three years, and have determined many a title not worth purchasing based on my having rented the DVD. The other thing about my DVD purchase habits is that those titles that are not blockbusters or do not street day and date with the rental window tend to fall to the trashbin of my mind. By the time these films make it to DVD, Iím far less interested as I was months earlier when they or their hype were fresh in mind. Iíll let you in on another secret, there are plenty of films I saw theatrically that I enjoyed, only to buy them on DVD and discover I must have been drunk that night! This is one of the reasons I like to watch a movie on DVD twice, before I formulate my opinions for review. If Iím forced to rent, any ďbad movieĒ epiphanies will certainly throw some more ďredĒ at the ledger.

Another thing I think will occur is that rental prices will drive down sell-through prices in the long run. If youíve already rented the DVD, will it still be worth purchasing at a $35 price point? Well, that brings up another point why rental pricing may backfire on the studios. The sell-through market would no longer tolerate studios like Disney putting out:
a) schlock, non-anamorphic titles;
b) schlock, Dolby Surround 2.0 mixes;
c) and titles without extra features—and I donít mean interactive menus or scene access!

If you force people to rent DVDs, then you have to give them a reason to buy it down the road. But now you are adding features without the ability to charge an arm and a leg for the special edition, because the price points will have been lowered. Or, if your rental DVD comes with special features, what more can you do but sell it at low price point to entice consumers to purchase the DVD after theyíve watched the features when they rented it?

So, what do you do, create a featureless disc for rental, and develop another addition with extra features for sell-through? Or do you start dropping special features in lieu of additional pressings? If we consumers buy both copies, then by gosh why wouldnít they keep feeding us two versions? And what of the used DVD sell-through market, which will now be inundated with ďpreviously viewedĒ rental copies. The studios donít see cent one from these sales.

Ugh, I donít know about you, but Iím starting to get a headache. It all makes my head spin, and the reflux slap at my throat. So what do you think: am I talking turkey or am I full of it? Let me know

P.S. Thanks to the members of the many online forums whose thoughts helped me formulate my own.

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