27 November 2009

Blu-ray, Hot Prices, and Demand for Movie Rentals

This Thanksgiving weekend, film studios and major retailers are hoping that unprecedented pricing will increase household penetration of Blu-ray players and jump start consumer demand for purchases of movies in the Blu-ray format.

With Blu-ray players available for as little as $99.99, there is little doubt that the hardware will sell. Amazon, Best Buy, Walmart, and other retailers are all using the hot prices as a lure to customers. Consumers will benefit from the aggressive competition, paying $100 this year for a Blu-ray player which cost $300 only a year ago.

The hot pricing is not limited to the Blu-ray players, though. Films are being hawked at loss-leader prices, too. Recent hit films like "The Dark Knight" can be found on DVD for $3.99, with a new Blu-ray only $9.99. Older titles can be found for as little at $6.99 in the Blu-ray format.

How will these prices impact demand for movie rentals? In the near term, there will be a negative impact, though the scale of it is still to be determined. It all depends on how many people buy films and how many they buy. Consumers who take advantage of available discounts to buy DVDs for the same price as a rental at Blockbuster will curtail rentals for a period of time. They will watch their newly acquired films before returning to rental activity.

With the holidays a peak period for DVD rentals, this substitution of purchases for rentals should worry Blockbuster leadership. Unlike redbox or Netflix, which can still postulate a value advantage versus the hot DVD prices, Blockbuster now faces this new challenge in its efforts to bring customers back to its remaining stores.

The outlook for movie rentals in 2010 should be brighter as a result of the aggressive Blu-ray player pricing this holiday season. Yes, consumers will stock up on titles, increasing purchases for the moment. Yet, with the return of "normal" pricing after the holidays, many of these same consumers will once again face the realities of a macro-economic environment which rewards cash-flow conscious decisions on discretionary expenses.

With studio executives saying things like, "Consumers expecting $7.99 Blu-ray titles over the long term is not part of any business model we've been privy to," a return higher prices on Blu-ray movies is a certainty. The higher purchase prices will leave those millions of newly acquired Blu-ray players begging for films to play at a price that is comfortable to the proud owners of said devices. The solution? Rentals.

Blockbuster will continue to face the challenges from competing rental offerings, but overall the movie rental market in 2010 looks like a strong growth segment. Studio execs will continue to struggle with weak sell-through performance unless they learn the lesson from this holiday season: "normal" sell-through product pricing exceeds what the market will bear. Hot promotions will move more product, but also train consumers to value the product at the discounted prices. In their effort to boost purchases near-term, the studios themselves may be spurring even more rental behavior in 2010.

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