Cheaper videocassette movies push sales to the edge of a boom

By just about any standard, the growth of the videocassette rental industry has been phenomenal. But now cassettes are cheap enough to buy -- and they're showing up everywhere. Within the past six months a free fall in videocassette prices has seen major videocassette distributors develop new links through mass merchandisers -- book, record, department, and discount stores -- to sell cassettes directly to the public.

As videocassette recorders (VCRs) flood into US homes, the business has accelerated further with thousands of new movie titles, self-instruction programs, and cartoons and video books for children becoming available.

Videocassette prices have begun to drop from $79.95 for hits to around $29.95. At that price, direct sales are beginning to compete with video boutique-type rental business. The trend toward direct sales will increase as VCR penetration in the US reaches a ``critical mass,'' analysts say.

There are currently 25 million homes with videocassette recorders busily playing back everything from ``Mary Poppins'' and ``The Exterminator'' to ``The Poky Little Puppy.''

Will your home get a VCR this year? Next year?

Videocassette industry analysts say almost one-third of the 88 million US television households have VCRs and expect 9 million or 10 million American homes to get VCRs this year.

In tandem with such increases, videocassette rentals will, of course, continue to increase. But sales of cassettes are also expected to increase dramatically. By next year, cassette sales are expected to roughly equal rentals as the cost to buy continues downward.

One facet of the industry, the video rental business, has in the past three or four years seen stores spring up like dandelions along almost every city block and suburban shopping mall. There were roughly 19,000 such stores at the beginning of last year and 22,000 by its end.

But with geographical saturation approaching, the expansion of small mom-and-pop stores with fewer than 1,000 titles may be all but over, say industry analysts. They say the future lies with expansion of current stores and with the superstores that have 6,000 or more titles.

``We're seeing the disappearance of the store with less than 1,000 titles,'' says Tim Baskerville, publisher of Video Marketing Newsletter.

``Three or four years ago you could start a shop with 100 square feet and 400 titles. Now the absolute minimum is 1,500 cassettes in your inventory. The trend is to grow your store or fail.''

Arthur Morowitz has been in the videocassette rental business almost from day one. It was seven years ago that he opened his first Video Shack in New York City.

Today Mr. Morowitz has 16 stores. Each has at least 6,000 cassettes -- one is a video supermarket with 30,000 cassettes. In June, his 17th store with 11,000 square feet and tens of thousands of cassettes will open.

``We're watching our expansion very carefully,'' says Morowitz. ``We don't want to overdo it.''

There is some concern in the rental industry as Hollywood's moviemakers are leading the charge to skirt the need to rent cassettes by lowering cassette prices and selling direct to the public.

``We've gone from the boutique store to the mass merchandiser, where moving mass quantities in a short amount of time has become the name of the game,'' says Baskerville.

Indeed, cassettes under $15 have begun to be sold at 7-11 stores and grocery stores.

Waldenbooks, B. Dalton Bookseller, Target, and other mass merchandisers are getting a piece of the action, too, as the cost to the customer has dropped to $39.95 to $29.95 for popular films and $19.95 to $11 or $12 for public-domain films such as ``Little Lord Fauntleroy.''

``Suddenly what's happening is that these other stores are getting into the fray with the specialty stores as the price gets below $30,'' says Richard Kelly of Cambridge Associates, a Stamford, Conn., consulting firm.

Total revenue from rental and sales of cassettes was about $4.2 billion last year and is expected to rise to around $6 billion this year. Though Hollywood made more money by selling cassettes to the specialty stores than it did from its portion of box office returns, the whole idea of renting a movie has been a burr under Hollywood's saddle, Mr. Kelly says.

Moviemakers have had to make their money on cassettes by distributing their movies to rental stores. The movie industry has been frustrated at not being legally allowed to collect royalties on cassette rentals.

But direct sales of cassettes to the public last year, which accounted for a bit less than 15 percent of industry revenues, could easily go to 25 percent this year and as high as 40 percent in 1987.

As the influx of VCRs creates a mass market, new economies of scale enable Hollywood to lower prices to below $30. Rand Bleimeister, vice-president of Embassy Home Video, says a cassette costing $24.95 is not too expensive anymore, being about the price of a coffeetable book.

``Rental was a business necessity. But when you develop a mass market, you're going to want to sell direct,'' says Art Murphy, an industry analyst. The mass market creates low prices -- low prices synergistically help create a mass market.''

Walt Disney Productions says that its Christmas ``Make Your Dreams Come True'' promotion, in which it sold such Disney favorites as ``Old Yeller'' and ``Pinocchio'' for $29.95 was highly successful.

``What it demonstrates to us and to retail outlets is that if the consumer is offered the right and affordable price, he will enjoy owning a movie,'' says Ben Tenn, vice-president of Walt Disney Productions Home Video.

``The customers are saying $30 is not outside the realm of what they'll buy for themselves if it's a quality product like `Snow White' or `Pinocchio.' ''

Unlike some fads, most analysts say video software (as the cassette industry refers to its product) is not going to dry up as did the trendy but short-lived market for video games.

``The VCR and the software that plays in it give the individual the most possible control over their own existence,'' says Baskerville.

``It gives them what they want to watch, when they want to watch it. That is the essential reason for its explosive growth -- it is a social phenomenon in that sense.''