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Cutting the huge pie can be piteous.

Home video, the sale and rental of pre-recorded video cassettes, reached close to $12 billion in the U.S. in 1992 and all indications point to a continued increase.

Executives in the home video field note the upward curve in U.S. home video income in 1992 and they say that the same curve applies abroad though to a lesser degree.

The share from pre-recorded cassettes, both domestic and international, today represents 44.1 per cent of American distribution total revenues, compared with 32 per cent from theatrical exhibition and close to 23 per cent from television. Home video is definitely not an "ancillary" market any longer.

However, talk to any home video company and you'll hear a sob story on how the market has "dropped off" or "bottomed out." Commented Hearst's Tom Devlin about the home video business: "I don't see easy money any more. We must go out and hunt it, and collect it. Cash flow is a big problem in this business."

One of the problems is that, despite the great revenues, today the home video pie is being shared by thousands of companies, instead of hundreds as in the early years.

Today, cassette sales and rentals vary. An average made-for-TV movie can run up a total of 10,000 cassettes in the U.S. A big box office hit, can shoot up to 14 million cassettes. Beauty and the Beast reportedly hit the 18 million mark.

The Video Software Dealers Association reported that 1992 cassette rental income stood at $8.2 billion while outright sales amounted to $s3.7 billion. In 1991, rental and sales amounted to $10.9 billion.

But, there is real concern about the future, particularly with the steady expansion of cable and the expected introduction of movies-on-demand over the phone lines. "That could hurt us," acknowledged a home video sales executive.

Income from home video has become a fixed consideration in terms of picture financing, In fact, a number of low-budget movies are now made specifically for the video market. What stands in the way is the unpredictability of the foreign market in terms of subject acceptance.

"Home video is still very much an ancillary business for us," noted Tom Devlin who handles home video worldwide for The Hearst Entertainment Corp. Domestic distribution is licensed out. The international deals are made by Devlin himself. "You can't assume everything is automatically releasable on video," he said. "Of course, the big box office movies tend to do well."

"It's expensive to release a cassette," Devlin noted. "If it's a marginal TV picture, one has to figure out very carefully how many cassettes are needed to break even. We've had some bad experiences, so we tend to get shy. People don't much go for heavy dramas on home video. They want to be entertained. Comedy tends to sell well. So does action-adventure."

In the U.S., the producer licenses the product through a "supplier" or agent for a minimum guarantee against a 10 per cent to 30 per cent royalty, depending if it is a rental or sell-through deal. The supplier, in turn, makes a deal with the distributor (also called the manufacturer) who also pays for duplication and catalog promotion, which is referred to as "blackmailers." At this point, the distributor goes to the wholesaler who, in turn, contracts all possible retail stores and prints and distributes catalogs. At the store level, orders are conditioned on assumed public demand based on the box office and the supporting home video advertising campaign.

The royalty game gets a bit complicated. As explained by Susan Margolin of The New Video Group, for rentals a producer/ supplier gets royalties from the manufacturer, ranging from 20 per cent to 30 per cent of the gross wholesale price level. The wholesaler pays the manufacturer anything from 37.5 per cent to 40 per cent of an arbitrarily-set and manufacturer-suggested retail price. For example, if a manufacturer-suggested retail price of a rental is set at $90 the store will pay $63 for it. The wholesaler's cut is $9. Out of the remaining $54, the manufacturer pays up to $16 in royalties to the producer/ supplier but only after the advanced minimum guarantee has been recouped. In the case of sell-through, the producer/supplier collects between 10 per cent and 15 per cent of the gross wholesale price. Manufacturers get anything from 50 per cent to 55 per cent of the retail price from wholesalers.

In Europe the situation is similar. In Italy, for example. according to Mariano Volani of Hitton, the rights holder licenses to what they call a "publisher" in exchange of a minimum guarantee against a 20 per cent royalty for rentals and 10 per cent for sell-through. Minimum guarantee can vary from $13,000 to $190,000 per title.

Subsequently, the publisher, who duplicates the cassettes and pays for consumer advertising, either engages a sales agent company or goes to a larger, more service-oriented distributor who contacts retailers and pays for point-of-sales promotion. Sales agents retain 10 per cent of sales to retailers while distributors keep 25 per cent. Often these large distributors also use and pay an outside sales agent, in these cases the distributors' retained share would be reduced to 15 per cent. Retail stores acquire cassettes between $32 and $63 each for rentals and $14 for sell-through (which represents 80 per cent of all home video business).

Volani also indicated five levels of home video sales: rentals, sell-through, newsstands (magazine packages), direct marketing and door-to-door. Italian home video companies are also crying the blues. Reportedly, Walt Disney had a great sell-in with Fantasia, but a terrible sell-out, leaving retailers owing Disney an estimated $20 million.

Of course, unsold cassettes cannot be returned. In the U.S., stores dispose of old or unsalable inventory by selling to large discount warehouses that literally buy the tapes for a few cents a piece and sell back to consumers for anywhere from $1 to $4,

The Veronis Suhlerra Associates 1992 forecast put the average cost of a U.S. home video rental at $2.30. That's up 15 cents from 1987. Veronis Suhler called home video "one of the fastest growing segments of the communications industry." Consumers in the U.S. rented close to 50 tapes per VCR household during the year.

The sell-through market in the U.S. shared the following pie: 45.1 per cent for theatrical movies, 36 per cent for children's entertainment, 4.1 per cent sports and 2.5 per cent for exercise tapes. The leading U.S. sell-through title in 1991 was Fantasia, which broke the 10 million market in unit sales.

Veronis Suhler warns that the projected increase in home video rentals "will occur only if the pace of price increases remains modest. By keeping rental prices under $3, the video store will make it difficult for payper-view to compete." Total revenue from rentals should hit better than $11 billion by 1997, Veronis Suhler predicts. Growth. compounded annually, should reach 6.1 percent, down from the 94 per cent annual increase between 1987 and 1992.
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Title Annotation:home video sales and rentals
Publication:Video Age International
Date:Oct 1, 1993
Words:1183
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