Videotape Industry Schism--Sell or Rent

“What I don’t understand,” said a woman buying a children’s movie at a video store, “is why one movie is $79.95 and another is only $15.”

The pricing seems odd because there’s a schism in this business. The movie industry is selling to two different markets--videotape rental and videotape sale, distinct from each other, but tied together, like movies and videotape. Indeed, the industry is getting so complicated that each new business added is in some danger of killing the one from which it sprang. “There’s a kind of ecology here,” says a movie executive, “a delicate ecosystem that must stay in equilibrium.”

In the beginning, there were just movies. Then came the VCR, which allowed consumers to tape movies that appeared on TV and to play cassettes rented from the new video stores. By the late 1980s, when VCRs were in two-thirds of American homes, the big movie studios were discovering they could even sell videos directly to consumers if they priced them low enough ($39.95 at first, now between $15 and $25).

By decade’s end, videotape generated more revenue for big movie studios than theater sales, and videotape sales--as distinct from rental--were about a fifth of the $11-billion video business--and growing. Indeed, some movies sold spectacularly, led by “E. T.” and “Batman”--which both passed 13 million copies.

Movie studios still promoted theatrical releases (“Theater isn’t passe, “ one studio wag says. “We need it to advertise the videotape.”) And they still promoted the rental market. But the big decision was whether to go for rental or sale (“sell-through”) to “maximize the profitability of any given title,” says Eric Doctorow, executive vice president of Paramount Home Video.

Basically, “it’s a question of arithmetic,” Doctorow says. A videotape generally costs $5 or $6 to make, another $5 to $10 to market. When it’s marked for rental, it sells to video retailers for about $60. The studio makes about $45. The video store recoups its investment by rentals but offers such tapes to consumers for $70 or $80, not expecting many sales.

A movie marked for “sell-through” bears a suggested retail price of perhaps $25 and makes only $5 or $6 for the studio but should sell in greater volume. Video stores, for example, bought 500,000 copies of Twentieth Century Fox Film’s “Die Hard 2” at the higher price. Fox would have had to sell 4.5 million at the low price to make the same money. Generally, “if you can’t sell more than eight or nine times as many,” says Jim Griffiths, Fox’s senior vice president for pay TV and home video, sell-through isn’t worth it.

Sell-through films have to have “repeatability,” meaning people want to see it many times. These qualities are somehow indicated by box office sales, public “awareness” of the movie and “our gut feeling,” Disney video spokesman Tania Steele says.

The sell-through market is naturally heavy on children’s fare. “Not too many adults like to watch things over and over,” says Wally Knief, spokesman for Blockbuster Entertainment Corp. in Ft. Lauderdale, Fla. Even “Pretty Woman,” cited as proof that sell-through is also for adults, is particularly popular with 13-year-old girls.

Studios add strong incentive to natural demand. “Pretty Woman” was also very cheap, retailing for as low as $16. Disney often offers rebates on its films, usually a tie-in with some packaged food consumers must also buy (a fact obscured in some video store advertising), although “The Little Mermaid” was sold (9 million) with a $3 rebate offer just for buying the movie.

Studios have even found a way to have their cake and eat it too, releasing a film for both rental and sale at the same time. “Ghost,” for example, was a dilemma for Paramount because its appeal as a sell-through was weighed against its release during both recession and war. So “Ghost” is being advertised, with studio help, for rental, with sign-ups taken for a used tape, retailing for $15 to $25, available about June when rentals have slowed.

Actually, video stores have always sold off “previously viewed” tapes, without fanfare. Studio-sponsored campaigns just “formalized” the practice, Steele says, “with materials to back it up.” It’s a way of “enticing retailers to take a large number for rental,” says Mark Siegel, chairman of Show Industries, which owns Music Plus stores.

There’s some danger here to the rental business, which provides the base for video store operations. The question, Siegel says, is whether “the ‘previously viewed’ purchasers of ‘Ghost’ are buying it before or after they rent it.”

The whole enthusiasm for sell-through presents some dangers. “Of the 100 tapes released by major studios, only 10 to 15 have any possibilities as sell-throughs,” Siegel says. “If they turn it into a sell-through business, 85 tapes have no market”--a matter of concern, one would think, to studios, to surviving video retailers and to consumers.