Industry Profiles: Video Tape Rental

Overview

As the price of video cassette recorders (VCRs) plummeted and the cost of cinema admission rose, the demand for video rental increased in late 1980s and continued rising into the late 1990s, promising to be a major industry in the next millennium as well. In 1998, movie admission for new releases started at about $7 for general admission, whereas video rental fees ran only $3 at major video rental outlets and even less at in-store video departments such as those of Kroger Company, Wal-Mart, and Safeway.

When the industry began, video rental outlets, including video-only stores and chain grocery store's 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 movies also made an effort to convert video rental customers to its more convenient, although more expensive, way of watching movies at home.

Nonetheless, the industry remained highly profitable. The in-store sector of the industry witnessed modest revenue increases in 1997 with sales of about $2.3 billion. The rest of the industry posted approximately $14.3 billion in revenues. Analysts also predict that demand for rental videos will continue to be strong until at least 2002.

History of the Industry

The video cassette recorder (VCR) appeared in 1975, planting the seeds of the video rental industry. New entertainment services also emerged around this time, including cable television, that complemented the VCR by allowing users to tape television movies and shows. Shortly after the introduction of the VCR, movie studios released video cassettes 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 video cassette 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 video cassettes. 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 Video Software Dealers Association (VSDA).

Significant Events Affecting the Industry

With a dip in sales in 1995 and 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. With such promotional campaigns underway, in-store video shops await the outcome of the sales strategy. Video stores may forge alliances with restaurants on a large scale if these strategies prove to be successful. Blockbuster launched a promotional campaign with Planters nuts, and Hollywood Entertainment teamed up with Domino's Pizza to offer free movies with pizza purchases.

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 4,500 stores participate in VidTrac with nine of the most successful rental chains among them. The VSDA plans to tabulate and circulate the data each week, offering 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 mid- to late 1990s. 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 substantially more and sacrifice features such as the ability to pause and rewind movies. Furthermore, these alternatives offer a much more limited selection than video stores.

Video rental stores, however, embraced a new laser disk format for recording and playback in the mid-1990s: 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. Prices for DVD players started at about $500 in 1997. Video outlets, however, do not plan a full-scale introduction of these disks. By 1996, DVD hardware had reached only about 8 percent of the U.S. population, but analysts predict it will grow to about 32 percent by 2007, according to Bob Geistman in Supermarket News. Recording capabilities, however, for DVD hardware are years away.

Key Competitors

Blockbuster Entertainment Group, a subsidiary of Viacom Inc. since 1994, led the video rental industry in the 1990s. Blockbuster, headquartered in Fort Lauderdale, Florida, has nearly 4,000 stores dispersed throughout 50 states and another 1,600 stores in 27 other countries. According to Video Business, Blockbuster controlled about 27 percent of the market in 1995. In 1997, the company earned $3.9 billion, including revenues from music sales and theme park operation. Blockbuster, however, has faced problems of slumping growth and inconsistent leadership, though the company's performance improved in the late 1990s. Nonetheless, Viacom still plans to sell Blockbuster at some point.

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 1998, Hollywood Entertainment operated 910 Hollywood Video super-stores—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 in that its stores typically contain 7,500 titles and 10,000 units. Part of Hollywood Entertainment's strategy includes providing an upbeat atmosphere complete with neon lights and many television monitors playing movies. Headed by founder Mark J. Wattles, Hollywood Entertainment posted sales of $500.5 million in 1997, up 65 percent from 1996. Moreover, each Hollywood Video outlet brings in an average of $900,000 per year—three times the national average, according to Scott McMurray in U.S News & World Report.

Other leading video rental stores include Movie Gallery, Video Update, and Moovies, Inc. Movie Gallery was the country's third largest video store chain in the late 1990s with 860 stores (and 100 franchised stores) in the United States. Focusing on small suburban towns, Movie Gallery brought in $260.4 million in 1997. Video Update ranked fourth in the United States with 680 outlets across the country. In 1997, Video Update's revenues rose to $91 million. Moovies, a subsidiary of Video Update, operated 270 stores in 15 states primarily on the east coast and posted sales of $85.3 million in 1996.

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. The average video store of the mid-1990s consisted of 3,000 square feet of store space occupied by 5,400 video titles. Superstores, in contrast, consisted of 4,800 square feet of store space and more than 11,000 titles. Overall, the industry rebounded from its first year of declining sales in 1995 with about $16 billion in 1996. Sales edged up the following year to $16.6 billion. Supermarket News reported that sales were forecast to continue rising in 1998, growing by 5.2 percent to $17.4 billion. Video rental revenues account for about 57 percent of the total revenues for a movie, well outweighing theater earnings. Moreover, despite the fear of some industry observers that the industry's sales will decline or remain stagnant, Paul Kagan Associates Inc. contends that video rentals and sales will continue to grow, reaching $19.1 billion by 2000.

Video rental operations have achieved the success they have because of the 87 percent VCR penetration (i.e., 87 percent of all U.S. households have a VCR). In addition, about 65 million U.S. consumers visited a video store once a week, and video stores received 33 billion visits in 1996, making video watching the most popular leisure activity in the United States according to the VSDA. In addition to soaring video rentals, the industry has experienced increasing success with video sales. In 1996, U.S. consumers purchased 580 million sell-through videos, according to Paul Kagan Associates.

Global Presence

The United States leads the world in video rentals and sales. With the majority of the movies domestically produced and with almost 90 percent VCR penetration, the home video industry thrives in the United States. However, Australia, Canada, and Japan also have strong VCR bases, which make 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 138,000 in 1994. By 2005, the U.S. Census Bureau predicts the industry's workforce will reach 165,000. 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.

Bibliography

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, 53.

——. "Harris Teeter Looks to Heat Up Video with HMR Tiein." Supermarket News, 9 June 1997, 44.

——. "Kroger Lifting Curtain on more Video Rental 'Stores'." Supermarket News, 20 November 1995, 43.

——. "Rental Bloom: Seeding the Department with New Releases" Supermarket News, 14 April 1997, 52.

——. "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, 72.

Dean, Peter. "The U.K. and Europe." Billboard, 11 January 1997, 49.

Geistman, Bob. "Time to Take Stock of New Technologies." Supermarket News, 22 April 1996, H18.

Groves, Don. "O'seas Video Takeout Makes Comeback Bid." Variety, 3 March 1997, 9.

Lenius, Pat Natschke. Supermarket News, 3 February 1997, 56.

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

McMurray, Scott. "Time to Hit the Fast-forward Button." U.S. News & World Report, 26 August 1996, 39.

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.