Video Buyers, Prepare to Rent

Consumers used to buying the latest theatrical blockbusters as soon as they debut on video are in for a rude awakening.

More big movies are being released first to video rental stores, with a retail price topping $100 that discourages those willing to pay the price to own them. It’s a reversal of a five-year industry trend, in which any film that grossed more than $100 million in theaters was virtually assured of being sold directly to consumers at $20 or less.

But there’s a flip side--wait a month and you’ll likely find used, previously rented copies of these very same movies on sale for less than $10 in the bargain bins of Blockbuster Video, Hollywood Video and other video specialty stores.

The video rental industry’s move to revenue sharing--in which video stores and studios split proceeds--over the last year has turned the market of selling videos directly to consumers on its head.

With studios now splitting revenues with large retailers in return for a significantly lower upfront cost, studios are increasingly reluctant to sell videos of their hits directly to consumers.

One prominent recent example is Walt Disney Co.’s “The Waterboy.” The Adam Sandler comedy had a box-office gross of nearly $160 million, which a year ago would have guaranteed that it would be sold directly to consumers.

But with Disney now sharing rental revenue with retailers, “The Waterboy” instead was aimed at video renters.

Mitch Koch, who runs North American operations for Buena Vista Home Entertainment, Disney’s home video distribution arm, said the so-called sell-through business of marketing videos directly to consumers “has become more and more cluttered, so retailers are speaking to studios about being judicious.” He adds that the better economics for the studios of renting videos has made the decision on whether to aim videos at renters or buyers a more difficult one.

John Thrasher, vice president of video for Tower Records/Video, a chain of more than 100 audio-video combo stores headquartered in West Sacramento, Calif., believes that too often, studio executives are making the wrong decision.

“ ‘There’s Something About Mary,’ ‘The Waterboy,’ ‘Rush Hour’--we felt all of those films could have gone direct to sell-through and done real well,” Thrasher said. “I believe this year marks the test for the studio home video executives to determine new models to maximize profits on titles. And next year, if they didn’t make as much money as they thought they would, you’ll see these same types of films come back at sell-through.”

Thrasher added that Tower, which last year racked up video sales of more than $30 million, is also being hit hard by the flood of used, discounted videos that is a byproduct of the rental market’s new business model.

Bargain bins have sprung up in virtually all of the big chain video stores and many independents as an easy way to get rid of surplus tapes once rental demand dies down. Hollywood Video is using its online subsidiary, Reel.com, to dump much of its used rental product. And used-tape brokers can buy so many videos at such low prices that some are setting up their own retail ventures.

One of them is Eric LaRowe of San Diego, who opened Movies to Sell in September 1996. What began as a sideline to his used-tape brokerage, in which he bought used videos and sold them to other retailers, has turned into a $275,000-a-year operation.

Movies to Sell occupies a 2,300-square-foot storefront and carries between 20,000 and 24,000 used videos, most of them priced between $5 and $8. Since the advent of widespread revenue sharing a year ago, LaRowe said, he’s getting high-profile rental titles a lot sooner. “You used to get rental titles in about 120 days after they were released; now, we’re starting to see them at 70 days,” LaRowe said.

Looking ahead, LaRowe sees a “massive opportunity” in the used-video retail business as the flow of previously viewed rental tapes into the marketplace continues to increase. Rental-priced videos are typically reduced in price, to about $20, six months after their release, so that consumers who have rented the videos can buy them if they so choose.

While Thrasher is hoping that the market for selling videos directly to consumers will recover, the outlook isn’t good. Most of the major studios are now involved in revenue sharing, as are a growing number of independents, while at the same time direct sales of videos continue to decline with the emergence of DVD as well as continued fallout from the glut of videos sold to consumers these last two years.

Still, some studios, such as 20th Century Fox, are playing both sides of the game. “There’s Something About Mary,” which grossed more than $175 million in theaters, came to video at a rental price and was also one of the first titles in Fox’s new revenue-sharing deal with Blockbuster.

And yet Fox sold “Ever After” directly to consumers, even though the film only earned $65 million at the box office.

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Thomas K. Arnold is editor in chief of Video Store Magazine, a weekly trade publication serving the home video industry.