Fast Acceptance of DVD May Position It to Succeed VHS

Joseph Pagano, vice president of movies and music at Best Buy Co., asserts that the digital videodisc, or DVD, “is the most widely accepted new technology in our company’s 32-year history.”

It’s catching on faster than the compact disc or even the videocassette, he maintained, and American consumers are poised for a massive transformation in the way they watch movies at home--from videos to 5-inch discs, just like the ones they slip into their stereos and computers.

Best Buy, Pagano said, is selling more than 100,000 DVDs a week through its national chain of 314 electronics and entertainment software stores--accounting for 30% of its total movie sales. The chain also went from selling 7,500 players in October to 31,000 in November, and Pagano expects the December sales tally to be even higher.

“DVD is one of our star products,” he said. “There’s no question that it will be a mass-market item. It’s already arrived with the early adopters, and I think next year we’ll see the beginning of a ramped-up product life cycle as it moves toward the masses.”

Pagano is not alone in his optimism. Supporters of DVD, buoyed by what they say are stronger-than-expected holiday sales, are increasingly confident that DVD will replace the VHS videocassette as the dominant movie format.

Derek Baine, senior analyst with Paul Kagan Associates, which studies the home entertainment market, said: “All the studios we have talked with really believe this is going to be the successor technology to VHS. The only issue is how long is it going to take, and I think that’s largely a question of time and price points. We’ve already seen prices come down dramatically on the hardware, and once you get down to $299, that becomes pretty attractive to the consumer.”

The DVD Video Group, a trade association of hardware and software manufacturers, says disc sales in 1998 more than doubled the previous year, hitting 10 million units. And VideoScan, which tracks sales figures, says that more than 500,000 were sold in the week before Christmas alone.

Kagan projects that within five years, 17.1 million U.S. homes, or 16.4% of all television households, will have at least one DVD player, while disc sales will generate $4 billion in revenue--just under half what VHS video sales are today.

“Ten years out, we think it’s going to exceed video,” Baine said. “We are projecting a penetration rate of 40%, or 43.5 million homes, and retail revenues of $9.3 billion to $7 billion for VHS.”

A year ago, the prognosis was not as rosy. A national launch in the spring of 1997 was undercut by the failure of three of the six major movie studios--Disney, Paramount and Fox--to support the format.

Then, in the fall of 1997, Circuit City Group announced it was backing a DVD derivative, called Divx, that took aim at the lucrative video rental market. For less than $5, consumers could purchase a disposable disc and watch it as many times as they wanted for 48 hours. They could then buy additional viewings over the phone for around $3.50 through a specially equipped DVD player hooked up by modem to a central computer. (Standard DVD discs sell for about $25 and can be watched over and over again, at no additional charge.)

Though Divx was still a year away from a national launch, the announcement generated a lot of press--as well as a slowdown in regular DVD sales.

“The problem was that before Divx players were even on the shelf, people didn’t want to buy DVD players because they feared that next year they would be obsolete,” analyst Baine said.

Today, all six major movie studios are releasing movies on DVD, as are dozens, if not hundreds, of small independents. There are nearly 2,000 DVD titles now on the market, ranging from big feature films like “Godzilla,” “Lost in Space” and “City of Angels” to eclectic fare like Fox Lorber Home Video’s “Nico Icon,” a documentary on the late Velvet Underground singer, and Shanachie’s “High Lonesome: The Story of Bluegrass Music.”

DVD player sales have just hit the 1-million mark, and prices have tumbled to as low as $300--about the same as a high-end VCR.

Consumers can buy DVD discs and players at thousands of national mass merchandisers, including Wal-Mart Stores Inc., Kmart Corp. and Target Stores Inc.

Several of the country’s leading video chains, including Blockbuster Inc. and Hollywood Video, are renting discs and players alongside their videos.

Musicland Stores Corp. says it sold $5 million worth of DVD titles in the week before Christmas, compared with $1 million before the previous Christmas.

And DVD sales are mushrooming on the Internet, with a handful of dedicated sites as well as giant online bookseller Amazon.com enlarging the market.

“DVD has had a more successful debut than either the CD or the VCR,” said Warren Lieberfarb, president of Warner Home Video.

According to the Consumer Electronics Manufacturers Assn., 1.067 million DVD players were shipped to retailers between March 1997 and the end of November 1998. By comparison, just 89,000 VCRs and 275,000 CD players hit retail in their first two years of availability.

Lieberfarb also notes that computer makers are rapidly switching from CD-ROM drives to DVD-ROM drives, a development that he said will further cement the format in the public’s consciousness.

The only potential stumbling block to DVD, observers say, remains Divx, which is now on the market. (Players are only on sale at three consumer electronics chains--Circuit City, Good Guys and San Diego’s Dow Sound & Video.)

But the fact that some studios are licensing movies to Divx before they release them on DVD, coupled with a whirlwind advertising blitz touting the convenience of “renting” a movie without having to return it to the video store, may have an impact.

“It’s preventing people from buying DVD,” said John Thrasher, vice president of video for Tower Records/Video, a 110-store music and video chain based in West Sacramento. “It hasn’t been that long since there was a format war between VHS and Beta. And it hasn’t been that long since people bought laserdisc players, and that configuration’s going to be gone by the end of 1999.”

Divx supporters, however, contend that Divx is merely an additional option or feature, pointing out that Divx-equipped DVD players also play regular DVDs. They see themselves as part of DVD, not a rival format.

Even Thrasher concedes that Divx hasn’t slowed DVD’s dramatic growth at Tower Records/Video. “We just had our biggest month ever in November, selling twice as many discs as we did a year ago and 35% more units than we ever did with laserdisc, even at its height,” Thrasher said.

DVD now accounts for 25% to 27% of all movie sales at Tower, Thrasher said--a ratio he believes would be much higher if studios would release more movies on disc the same day they come out on video.

“Day-and-date releasing is of No. 1 importance right now,” Thrasher said. “If you have it there on the same day as the video, that’s like telling people, ‘This is going to be around.’ It reinforces, with the consumer, that desire to go out and buy it.”

Best Buy’s Pagano agrees. “You can’t have one format ahead of the other,” he said.

“Consumers have become increasingly aware of release dates, particularly on the big movies, and it would seem odd that the high-tech digital consumer would not be able to view the same piece of product as the conventional VCR owner. In any other business, the premium technology gets things first, not after.”

Studio executives cite various obstacles to day-and-date releasing, including the extra time it takes to develop bonus footage and the director’s commentary that are among DVDs’ selling points. Only Warner Bros. and Columbia TriStar are currently releasing their titles on disc and video the same day.

Still, Thrasher and Pagano are optimistic that DVD sales will continue their sharp climb this year. The No. 1 and No. 2 movies of last year, “Titanic” and “Armageddon,” are both expected to make their belated DVD debuts.

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Thomas K. Arnold is editor in chief and associate publisher of Video Store magazine, a weekly trade publication for the home video industry.