 |
|
 |
|
|
DVD PRICING: A SHORT PRIMER by Peter M. Bracke Few topics surrounding the DVD format garner as much discussion, debate and passionate opinion as that of price. Just how much consumers should have to pay for their favorite title on DVD is not as simple of a matter as we'd like it to think it is, and is often far from the insidious, monolithic plot on the behalf of studios to rip everyone off as it is often ascribed to be. The Basics Although this topic could fill a book, there are a few basics that can help clear up some of the confusion surround the hotly-debated issue of DVD pricing. Let's take a brief look at some terms central to home video distribution and pricing, followed by more detailed explanations thereafter.
It is important to note that it is illegal to price fix, which is forcing a retailer to sell any product at a set price. As we are a capitalist state, any retailer is free to sell any product at any price they choose. MSRP and MAP are all simply suggestions given out by distributors as guides they'd like retailers to follow. Why, you may be asking, should retailers care at all about a MSRP or MAP? For a number of reasons. Perhaps most importantly, there is something called dealer cost, which is the price the retailer actually has to pay for a DVD. This is not negotiable. If a retailer sells a DVD for less than the dealer cost, they are not going to be in business very long, are they? Conversely, if retailer X tries to sell Godzilla for $99.95, and the retailer next store is selling it at the MSRP, they are not going to stay in business with that approach, either. However, as we know, there is plenty of variance in DVD prices despite the fact that everyone pays the same dealer cost. Some have wondered how Reel.com can sell Titanic at $9.95 when it obviously must cost them more than that in dealer cost. Well, there is a relatively new paradigm in retail sales called the loss leader. Some credit Best Buy with really perfecting this, but that is up for debate. Anyway, a loss leader is when a retailer deliberately sells a product below dealer cost, thereby losing money on the deal, just in hopes the customer will also buy something else, and then return to the store in the future. It is really like a big giveaway to create consumer awareness about the retailer. This is the strategy Reel.com is using, and it actually does work. Ask yourselves...how many of you had heard of Reel.com before their big Titanic promotion? How many of you actually clicked over to take a look after hearing about it? And then how many of you actually bought something? While not always successful, and perhaps unfair to other retailers who can't afford to take such losses, the loss leader can drum up considerable business, and the strategy certainly won't be going away anytime soon. Volume Another important factor in the variance in DVD pricing is volume. This may seem simple enough, but it actually is more important than one may think. There has been a quiet war being raged for years between the "independents" and the big retail chains. When a retailer has a huge infrastructure behind it, it can afford to order mass quantities of titles, and sell them in a large of number of outlets, either via traditional storefronts or now online. Distributors often give volume discounts for large orders, which allows the large chains to keep prices lower than a small independent store, which can't or doesn't have the customer base to support large volume orders. There are other, more complex factors on why volume can afford lower prices that are a bit too lengthy to examine here. But suffice to say, a retailer like DVD Express can afford to sell DVDs cheaper because that is all they sell, and they deal in large quantities. Your local VHS renter who sells a few DVDs usually has to sell them at MSRP...they just can't afford to order and stock a few copes or a single copy of a title and still discount it. Lastly, a brief mention should be made about overstocks. Many times, a retailer will order too many copies of a particular title for whatever reason, and they want to get rid of them. Or, a studio will produce too many copies of a title that bombs (Michael Jackson's HIStory, anyone?), and they need to dump them as fast. So, occasionally, you will see specific titles price reduced or a specific retailer will have a sale on a group of titles. This is often a random occurrence due to overstocking, and it pays to shop around sometimes in hopes of finding a treasure trove of "cut outs" lying in the bargain bins (laserdisc collectors, take note!). Studio Pricing Policies Well, that briefly covers retailers, but how do studios come up with their prices in the first place? For that, a brief history lesson is in order. When DVD was first introduced and strategies put into place, it is very important to note that the format was initially intended as a sell-through format, i.e., that consumers would buy them exclusively, and not rent them. As we know with VHS, which has, until somewhat recently, mainly a rental format, titles "priced for rental" cost considerably more than a title "priced for sell through." Many consumers have been taken aback when they inquire about purchasing a new VHS title only to find it is priced at $89.95 or higher. Why are some obscure titles, which seem like stuff no on would want, priced for rental at $90+, while popular titles tha seem like studios could charge big bucks for and still get away with (Jurassic Park, etc.), still priced cheaply at $19.95 or less? The answer is twofold. Let's face it, most movies you don't want to own. Think about all the movies you've seen and the ones you would actually buy. And distributors and studios know that video stores have to order at least one copy of a every new release, no matter how crappy it is. And, rental pattern tracking at video stores have conclusively proven that there is an initial "rental phase" for new titles within the first 1-3 months, when the title rents like crazy, and then suddenly it sits on the shelf collecting dust after the intial blitz of interest fades away. We all know perfectly well that the first thing we do when we go to the video store is head for the new release aisle (I think it is genetic). Anyway, over the years, the video business matured and created a initial 6-month period that that was earmarked for rental titles. They knew video stores had to order all the new films, so they charge high prices for the initial rental period, thereby ensuring a good return even on crap movies, and then after the rental rush cools off, they reduce the price for "sell-through" to encourage sales to consumers who still are interested enough in the film to own it. We've all see the posters at Suncoast or wherever proclaiming a title "Now Priced To Own!." Blockbuster has also made a killing on all those previously-viewed titles, where the sell off the tons of extra copies of "Scream 11' or whatever that aren't renting anymore. Conversely, bigger titles, like Jurassic Park, have such a high level of consumer interest for purchase (as do Disney animated titles, which children can watch over and over and over) that it makes more sense for the studios to skip the rental period and price directly for sell-through at the beginning. And a look at the sales charts bear this out...the recent VHS release of Titanic proved it was a monster in sales, racking up millions of units, but failed to reach the number one spot in rentals. Clearly, some titles are more suited to be priced for sell-through initially than rental, and vice versa. It is also an important side note that one of the prime reasons for the rental/sell-through market are the laws of this country in regards to the rental concept. The studios initially hated the idea of the videocassette, and hated even more the idea that retailers could rent their films over and over and the studios didn't get a cut of all those profits. So why didn't they sue? Well, they did, and they lost (so did video game manufacturers). To help get some of that revenue back was a further incentive for the rental pricing structure, so at least the studios would get some additional revenue return during the initial rental phase of a title's life span, which was better than nothing. It is definitely arguable that the consumer loses out in this. I know I have been frustrated in the past when I wanted to buy a VHS title, but had to settle for renting it because it cost $100. But, we do love the ability to rent without having to own, and the studios do have a valid point...why shouldn't they get a cut of the profits from the products they shed blood to produce? Breaking The Paradigms But, what does this have to do with DVD today? Well, when DVD was first introduced, it did not, big surprise, have across-the-board support from all the studios. In fact, Warner and Sony (and some strong independents like Artisan, New Line, etc.) were the only promoters of the format. They were the big believers in poising DVD as a VHS replacement, believing that if you offered a high-quality, competitively priced product, consumers would then buy everything instead of renting. It was also a chance for them to resell their back catalog of titles, and sidestep the whole rental concept, including having to hand over profits to video stores. But, as we now know, that didn't quite work. It is obvious now (and to many of us even back then), that of course consumers would also want to rent DVDs, not just own them. The crappy movie rule still applies. There are some movies I wouldn't want even if they were free. Whether it is VHS, DVD, Video-On-Demand, or, pray tell, DIVX, the concept of video rental is here to stay. So, some of our other studio friends are now justifiably concerned that if DVD does take off, suddenly there will be a giant rental market where video stores can buy copies of the latest titles, big or small, and only have to pay peanuts for them. No more $99.95 rental pricing structure. Since DVD is gaining acceptance now at a $29.95 or less price point (on average), if the format becomes cemented, it will be nearly impossible to suddenly switch back overnight to the VHS-like rental and sell-through pricing scheme, and expect consumers to accept it. So, our friends at certain studios are trying to see just how introducing some products priced for rental, DVD-style, will fly in the market place. The introduction of Home Alone 3 and Hope Floats at $34.95, and Disney's first animated title at $39.95, are no accident. Of course, these companies are not going to say this publicly, and I'm sure I'm going to be hated for printing this. But, I feel the truth must be told. They know if a rental pricing element is going to be introduced into the marketplace, it has to be done now. Although production costs do figure into pricing, DVD authoring and manufacturing across the board are coming down, not going up. So, make no mistake, these higher-priced, movie-only titles are experiments to test the marketplace for the acceptance of a rental-like price point for DVD. (Editor's Note: It is important to stress that a rental approach is not necessarily the reason why special editions and product from independents are higher-priced . Title licensing, extensive supplement production and new 16x9 and 5.1 remasters are all very expensive and certainly can affect MSRP. Look for another report dealing with these issues and how they affect pricing in the future.) The Future? The question is, given the failure of DIVX (and don't think some studios aren't upset at the loss of the potential revenue and change in business paradigms that the success of a pay-per-view video system could have brought them), can a rental pricing system still fly in the DVD world, even though the format is still so young? Although many have forgotten, Polygram and a few others tried introducing a few priced-for-rental titles (at around $89.95) way back in 1997. It was met with a resounding chorus of boos. And the market seems to be moving in the other direction, as we have seen Warner receive great success very fast with their new three-tier pricing structure. Even Columbia has seen their first price reduction for Godzilla. The opinion of this writer, if you read this site, is obviously pretty clear. I believe DVD works as a sell-through product, and that Video On Demand is the future for rental or "pay-per-view" viewing. I think this combination is the natural and best digital successor to VHS that we have, in combination with over-the-air and cable DTV broadcasts. It certainly isn't DIVX, and I don't feel that DVD consumers will accept a new rental pricing structure this late into the game. But, this is a battle that will be decided in the trenches of the shopping mall, online, and of course on the message boards. Although this quick pricing primer is certainly not the end-all, be-all analysis of DVD economics, and there are certainly many other factors that go into pricing decisions, hopefully it has been illuminating. Look for a more detailed story in the future...thanks for reading. |
|