This category covers establishments primarily engaged in renting videotapes and disks to the general public for personal or household use. Establishments primarily engaged in renting video recorders and players are classified in SIC 7359: Equipment Rental and Leasing, Not Elsewhere Classified. Establishments primarily engaged in selling recorded videotapes and disks to the general public are classified in SIC 5735: Record and Prerecorded Tape Stores; those engaged in the wholesale distribution of recorded videotapes and disks are classified in SIC 7822: Motion Picture and Videotape Distribution.
Videotapes and Disk Rental
After rapid growth in the 1980s and early 1990s, video rentals in the United States stalled in the mid-1990s as the market became saturated and as competing modes of entertainment chipped away at home video rental. Then, after the rental market peaked in 2001, video rental stores faced a renewed onslaught of stiff competition from a range of media delivery systems, including pay-per-view television, video-on-demand, and Internet-based video rental subscription services, as well as the increasingly lower prices of videotapes and disks, especially those offered by large retail outlets like Wal-Mart. In addition, as more homes become equipped with broadband Internet access, rental stores face an additional threat from Internet services that offer customers the ability to download movies onto their computers.
To meet these challenges, the large video chain stores diversified into other areas such as selling used video tapes and disks, offering trade-ins, selling new and used video games, and establishing Internet-based video rental subscription services, while many of the remaining independent stores survived by catering to a niche market. Despite these moves, the outlook for the traditional neighborhood video rental store was not good as technological advances in media delivery continued.
The video rental business remained fairly fragmented compared to other industries. In recent years, the top three video chains claimed 51 percent of the U.S. market, and with the merger of two chains in 2005, the chains continued to take market share away from smaller, independent video stores. In 2006, the 20,800 rental establishments earned a combined $11.9 billion in revenue.
Film studios and distributors sell videotapes and DVDs to rental outlets, which then rent the videos to consumers. Under traditional pricing, rental outlets pay $50 to $80 per video, which they then rent to customers for $1 to $4 per night. Under this arrangement the video store retains all the rental revenues. Increasingly, however, video stores have pursued revenue-sharing deals with studios. These contracts dramatically reduce the stores' initial cost of buying videos, sometimes eliminating up-front costs altogether, and converting them into variable costs by paying the studio a percentage of rental income. Revenue sharing, which came into widespread use in 1998, benefited not only the cash flow of video stores but also frequently boosted overall revenue because stores are able to stock and rent more products.
Typically, the bulk of video store sales were from video rental fees. At large chains like Blockbuster, this can be about 70 percent. The rest came from sell-through videos, whereby new tapes and discs were sold; gaming software rentals for Nintendo and Sony game consoles; snack food sales; and miscellaneous sources such as sales of musical recordings and used videos.
Video specialty stores compete directly with supermarkets, drugstores, and other mainstream retail outlets that also sell or rent videos. Often mainstream stores sell videos at deep discount, creating pricing pressure on video stores.
The number of video stores fell significantly as large chain stores and so-called superstores expanded. The number of video stores dropped from 31,000 in 1990 to below 25,000 by 1999.
Video stores have always had a complex relationship with movie theaters. Early on, conventional wisdom held that video rentals cannibalized theater admissions because a typical consumer theoretically would watch a movie either in a theater or at home, but not both. This pattern seemed to hold in the late 1980s and early 1990s, when box-office receipts began to decline as video rentals surged.
The relationship between video rentals and movie-going grew murkier in the mid-1990s as rentals stagnated but business at the box office swelled. Indeed, U.S. government Census Bureau statistics reveal that in 1996 theater revenues surpassed video store revenues for the first time since 1993, the year rentals first pulled ahead of theaters. To further complicate matters, by the late 1990s both video stores and movie theaters posted healthy gains. In sum, analysts believed that video stores and movie theaters vied for the same audience some of the time, especially when the economy was sluggish, but each could create demand for the other.
Owning video rights to films was an important source of revenue for film...