Video Economics — Tape sales versus rentals

By Owen McDonald
Updated November 15, 1996 at 05:00 AM EST

What price video?

Independence Day, Mission: Impossible, and The Nutty Professor all hit video this month. Many millions were spent making them. Box office for all three was colossal. And on tape, they’ll set you back only about 20 bucks. But try to buy almost any other movie released for rental at the same time, and you’re talking $100.

What’s up with that? In the beginning, we rented. The idea of buying a movie was far-fetched, except to a small, hardy band of laserdisc aficionados. Then in 1983, Paramount released Star Trek: The Wrath of Khan for $39.95 and sold about 150,000 tapes. It took a few years, but this lowball pricing strategy — called sell-through — caught on.

As movie collecting grew, prices shrank: $24, $19, $14, $10, even as low as $5. Walt Disney courted baby-boomer parents, creating the huge kids’ market. Early experiments in R-rated sell-through were patchy at best. In 1990, Warner’s Lethal Weapon 2 sold 3.1 million copies — somewhat disappointing considering its box office take. But it blasted an opening for big-selling R movies like Speed.

The economics of video are surprisingly basic. It costs about $4 to duplicate a tape. Wholesale, stores usually pay $12 for a major sell-through release but $72 or more for a major rental. Why the spread? Because sell-through means millions of tapes sold; rental, a few hundred thousand. And not all movies are deemed collectible. ”We thought about taking The Nutty Professor out for rental,” says MCA/Universal Home Video marketing VP Craig Relyea. ”But research told us people wanted to own it.” Paramount Home Video sales and marketing exec VP Jack Kanne, whose Mission: Impossible hits stores Nov. 12, adds, ”Once a movie gets past $100 million at the box office, we know people are seeing it twice.” And if people go twice, it’s collectible.

Besides, as Realtors will tell you, renting is good but owning is better. ”Movies have become a common currency,” says Ben Feingold, president of Columbia TriStar Home Video. ”Americans want to own a piece of the experience.” At $20 a chunk, Hollywood real estate is cheaper than you thought.