INTO THE FUTURE WITH HOME ENTERTAINMENT

In the new millennium, packaged home entertainment will face a mighty challenge from electronic delivery technology. The defending formats, VHS and DVD, both look fit for the upcoming 100-meter dash, but it's uncertain if they have legs for the longer 10K.With cable, satellite, the Internet and other new delivery modes emerging, the race has already begun between traditional home entertainment delivery

In the new millennium, packaged home entertainment will face a mighty challenge from electronic delivery technology. The defending formats, VHS and DVD, both look fit for the upcoming 100-meter dash, but it's uncertain if they have legs for the longer 10K.

With cable, satellite, the Internet and other new delivery modes emerging, the race has already begun between traditional home entertainment delivery (VHS and DVD) and that of electronic. While many debate the eventual winners, most industry observers say physical delivery of home entertainment through retail outlets, especially supermarkets that maintain a high and repeat traffic count, will account for a big slice of the entertainment pie for many years to come.

"Theatrical sales, new VCR sales, rental and sell-through are still at high water marks, even though we've got a tremendous influx of Internet in the home," said Bo Andersen, president, Video Software Dealers Association, Encino, Calif. He views electronic delivery as being largely supplemental, adding incremental viewing.

According to the State of Home Video report, produced by Paul Kagan Associates, Carmel, Calif., combined VHS and DVD rental revenue will reach $8.7 billion this year, rising to $9.9 billion in 2002, while sell-through will hit $9 billion and $11.6 billion, respectively. Add to this the deep VCR penetration today, which is nearing the 92% mark with most homes owning two or more players.

For this reason, Bill Bryant, vice president of sales, grocery and drug, Ingram Entertainment, La Vergne, Tenn., believes home video will "boldly" enter the new millennium as VHS combined with DVD. He expects a huge influx of DVD players to enter the market next year due to holiday gift giving. With the lift in players, more DVDs will be sold. The average consumer immediately purchases four or more DVDs after buying or receiving a player, Bryant noted.

He thinks the supermarket class of trade will continue to be a primary destination for feature sell-through and catalog video. "As in the past, parents will continue to purchase family and children's videos as a part of the one-stop shopping concept. It makes perfect sense for parents to purchase family entertainment during their normal grocery shopping cycle," said Bryant. He also sees growth in affordable titles, priced under $10.

Rental is also showing strength, thanks largely to the creation of copy-depth programs. When studios offer price incentives, retailers can afford more copies; when consumers find more copies of popular titles on the shelf, they respond by renting more movies. Andersen, who believes that the studios will get even more aggressive with copy depth, thinks that video rental could even outperform what it has achieved in the past couple of years.

Chris Roberts, vice president of sales, Rentrak Corp., Portland, Ore., noted that some supermarket chains are remodeling and upgrading their rental departments. "They realize that they have the traffic with so many people walking through those doors," said Roberts. "The supermarkets, which are adopting the copy-depth programs, are changing the consumers' perception that they won't find the rental videos they want in a supermarket."

So for now, packaged entertainment looks hard to beat. Dick Kelly, president of Stamford, Conn.-based Cambridge Associates, thinks VHS and DVD combined still has longevity. There still aren't that many households that have the ability to receive programming in an electronic distribution manner, he points out.

But what happens when a household gets into electronic delivery? With those receiving up to 70 channels of PPV movies, and with movies starting every 30 minutes, "we've seen that there has been a shrinkage in rental for homes that are on satellite," said Kelly. He added: "We've seen that these people -- as you might expect -- reduce their rental activity sometimes as much as 50%."

History supports the view that new technology will lure away some users. "In the entertainment delivery business," observes John Jump, vice president of sales, Sight & Sound Distributors, St. Louis, "I find that new systems of delivery have never destroyed old systems of delivery." When TV arrived, he explained, it didn't destroy the theatrical business; when video arrived, it didn't destroy TV or the theatrical business. Based on the past, "What I see is that the entertainment pie gets cut thinner among the different delivery systems, but the pie itself continues to grow larger," said Jump.

Ira Mayer, president of New York-based EPM Communications, has a slightly different spin: each new medium forced the prior one to specialize. "Everyone said when TV came along that radio would die. Today radio has scores of different formats catering to different niches."

Some industry experts project that DVD will reach half of the sell-through business over the next decade. So far there are about 160 million VHS players in the U.S., vs. about 3.5 million DVD players. DVD is far from reaching critical mass, which by some estimates would be 30% of household penetration.

Among supermarket chains, progressive operators have been offering DVD since its inception. Ingram's Bryant reports that several supermarkets had success with DVD rental this year. And Roberts of Rentrak believes that "you have to jump in and get your feet wet in order to build a market. We tell stores 'you have to rent players, put DVD on the shelf, let them test it and take it home -- hopefully they will buy a DVD player."'

Many believe DVD offers an energizing format for the presentation of feature films in the home. Besides features like chapters, languages and director's cuts, said Bob Alexander, president of New York-based Alexander & Associates, "the quality of the film presentation and the quality of the audio are the key things that will become increasingly relevant as people adopt the high-definition standard, the wide-screen format, and include surround sound in their systems."

DVD players are now available for about $200, but as Kelly noted, "it's the disk that keeps on costing." It's easy to spend $2,000 or more on an audio system, Dolby surround sound, and other peripherals like amplifying speakers, and a better quality TV set.

But Kelly is quick to point out that he is not down playing DVD. "I believe that DVD household penetration will continue at a strong clip, such that by the end of 2000 we could easily have 7% or more of U.S. households with a DVD system, and that's pretty significant."

Significant, too, is the fact that DVD adds excitement to the home entertainment category. Both formats have their advantages: The VHS format means low-cost hardware and inexpensive software -- features not to be dismissed lightly. On the other hand, DVD appeals to the digitally savvy younger generation moving into family formation. Its superior audio and video quality, along with its newest-gadget cachet, is what many consumers desire. They like digital; this is it.

Eventually, many experts believe a large number of homes will have both VHS and DVD players -- much like CD players and cassette players are both found in homes, cars and both are used in portable devices. As Rentrak's Roberts pointed out, "I don't think the VHS player is going away. The average consumer has 50 to 100 tapes." In the audio cassette-CD historical model, consumers traded up and replaced some favorite titles, but not others. Ingram's Bryant similarly thinks that catalog DVD is an incremental sale for retailers because, he explained, "many consumers already own a VHS copy of the same title being purchased on DVD."

There are good reasons, many experts agree, why multiple delivery modes might co-exist in home entertainment well into the first decade of the new millennium.

Mayer observed: "Whatever new technology comes down the road, you're still looking at a critical mass for it to operate viably and profitably."

Alexander believes that hyped-up futurist images can lead the industry down the wrong course. "One of the things we have observed is the fervor with which the electronics guys make their case -- that we're all going to be plugged into the Internet, everything is wireless, physical products will disappear. These are articles of faith and vision and belief, but I don't think they are real." In this uncertain market, he advises staying close to what the consumer is actually doing.

In the short run, that means home entertainment as packaged goods. Over the longer term, home video -- VHS and DVD -- might lose the race, but maybe not the purse if total home entertainment revenue expands. Or as Jump sees it: "When I was young, entertainment was a luxury. Now it's a necessity, and it takes up a larger part of people's lives. I don't see that trend changing."