How Movies Grew Up to Become Videos

Oscar winner “Schindler’s List” tells you that a good story will always have value, no matter what develops on the overwrought subjects of information highways and multimedia.

The film, which won the best film and best director awards for Steven Spielberg, can also be a guide to understanding many other things in the entertainment business today. For example, “Schindler’s List,” which has taken in $60 million at the box office to date, may do even better in home video rentals--for the very human reason that it is a searing, three-hour movie that many people might find easier to watch in their homes.

But then, more films are seen on home video than on movie screens these days--by a margin that may surprise you. In 1993, video rentals totaled $8.8 billion and home video sales added another $5.9 billion, according to a major study by analyst Jeffrey Logsdon of Seidler Cos., a Los Angeles investment firm.

That’s almost $15 billion from the U.S. video market, compared to $5.2 billion at the theatrical box office.

Moreover, video can be more profitable than theatrical distribution for the studios, because they get a higher share of every deal, says analyst David Davis of Paul Kagan & Associates, a Carmel, Calif., research firm. Thanks to the growth of video, movie studio revenues have more than doubled in the last eight years.

The irony is that the studios didn’t see the bonanza coming. In the late 1970s and early 1980s, the video rental business got started in stores owned by record distributors, who first had the idea of selling movies on tape to new owners of videocassette recorders. Later they moved to renting the films.

But the whole idea made studios uneasy. Warner Bros. and others threatened to withhold films from the storefront merchants. Then the studios sought to have Congress pass a law limiting the merchants’ business. Fortunately for all involved, Congress listened to local small-business people more than it did big companies.

No action was taken on the matter, and videos became a great and stable source of film industry revenue, contributing importantly to making studios more valuable--witness the recent bidding in which Viacom paid more than $10 billion for Paramount.

How could studio heads a decade ago have missed the promise of such a business? Simple: They yielded to what is called the displacement fallacy--the idea that a new technology displaces a previous one. It doesn’t. Radio continues alongside television, the movie business has adapted and grown with each new wrinkle in distribution--from theaters to television to growing international markets.

The surging business of videocassette sales grew 28% last year, spurred by the runaway success of family films, especially by Walt Disney Co. Disney’s “Aladdin” took in $286 million in video sales, compared to $217 million at the box office; “Pinocchio” had $174 million in video sales, compared to $19 million (worth more than $100 million in today’s dollars) in box office receipts more than 50 years ago.

A successful film doesn’t have to be a Disney classic. “Free Willy,” a 20th Century Fox story about a boy and a whale, took in $94 million in video sales after earning $78 million at the box office.

And a film doesn’t have to be for children, nor even a box office hit, to score in video rentals. “Sliver,” a steamy thriller panned by critics that took in only $37 million in theaters, added another $29 million in rentals, possibly turning a loss into a profit for Paramount.

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The lesson should be clear for all in Hollywood and investors around the world who are now trying to predict developments in new media: The more advances and varieties there are in film distribution, the more valuable the movie business becomes.

The latest news is that Pacific Bell is going to test a system for beaming movies digitally over telephone lines directly to theaters, eliminating the costs of duplicating films and delivering canisters.

PacBell will be testing machinery that one day could be used to send movies directly into homes in response to signals from interactive television sets--the much-touted movies on demand. Such wonders will come to pass, no doubt, but not soon and not cheaply.

Technological breakthroughs and major investments will be needed to bring interactive television over fiber-optic cables to homes and neighborhoods. Analyst Logsdon believes that important thresholds, such as 1 million homes capable of conducting interactive experiments, may be crossed by 1998 or so.

Meanwhile, movies, one of the identifying technologies of the 20th Century, will continue to attract growing audiences in the 21st Century simply because they reflect an ancient art. They tell stories, as in “Schindler’s List,” a true story of decency and good surviving and ultimately prevailing against incredible evil.

It’s a very powerful business.

Fast Forward

The growth of movies on home video has been surprisingly rapid--video rentals have quadrupled in a decade--and video sales surged past box office revenue last year.

Rentals: $8.8 billion

Sales: $5.9 billion

Box office: $5.2 billion

Sources: Commerce Department; Seilder Cos.; industry estimates