New Release: An Empirical Analysis of VHS/DVD Rental Success

By Jozefowicz, James J.; Kelley, Jason M. et al. | Atlantic Economic Journal, June 2008 | Go to article overview

New Release: An Empirical Analysis of VHS/DVD Rental Success


Jozefowicz, James J., Kelley, Jason M., Brewer, Stephanie M., Atlantic Economic Journal


Introduction

Prior to the introduction of the video cassette recorder (VCR) in 1980, movie consumers wishing to view a film had no choice but to attend the theater. Movie showings existed in limited quantities within bounded time periods. Consumer decisions had to be made quickly, and a decision to not see a film could not be later amended. Once a movie was pulled from the screens, it was gone forever, in most cases.

According to the Video Software Dealers Association (1996), there was considerable growth in the home video industry during the 1980s, which made it the largest domestic revenue source for movie studios. Specifically, in 1999, the $16 billion home video industry represented 55% of studios' domestic revenues, while box office revenues were 22%, and the remaining 23% came from all other forms of media, including sales of pay-per-view, cable, and broadcast television rights (Video Software Dealers Association 2000).

In 2001, motion pictures grossed a new all-time domestic box office high of $8.4 billion (MPAA 2002), an increase of nearly 10% over the year 2000. While such a figure is impressive, film makers enjoy additional revenues once they release films for rental. In 2001, rental revenues surpassed box office receipts, with Video Home System (VHS) rentals totaling $7.02 billion and Digital Versatile Disc (DVD) rentals grossing over $1.4 billion (Dretzka 2003). During the same year, Americans spent an estimated average of $109.60 and 56 h on home video entertainment per person. Given these numbers, it is clear that the demand for home theater is robust and should not be ignored.

A consumer may view a movie in a theater for a relatively low marginal cost and no associated fixed cost; however, while movie rentals may be purchased at an even lower marginal cost, complementary technological player requirements have, historically, held back the growth of the rental market. Nevertheless, improvements in technology coupled with greater competition in the VCR and, more recently, the DVD player markets have resulted in falling prices of VCRs and DVD players in recent years, making the fixed cost of acquiring this technology much less burdensome to consumers. Data indicates near-total penetration of VCRs into television households was achieved by the end of 2001, since 91.2% of television owners also owned a VCR (MPAA 2002). Consumers subsequently adopted DVD player technology relatively quickly. Bakalis (2003) points out, by 2003, roughly 50 million Americans had purchased a DVD player, since its introduction in 1997; it took a decade for VCR sales to reach the same level. Furthermore, DVD rentals overtook VHS rentals in June 2003 for the first time.

Despite the obvious popularity of this form of entertainment and the fact that the majority of film studios' domestic revenues are generated by home video viewing, a serious dearth of studies analyzing the success of films in the video rental market exists. The present research addresses this gap through the construction of an empirical model analyzing rental revenue for both VHS and DVD media, as measured by gross rental revenue, based on a number of available indicators. In particular, this study includes an explicit measure of word-of-mouth dissemination of information across consumers, proxy variables measuring the impact of movie star popularity, movie critic reviews, and movie awards, control variables for genre, Motion Picture Association of America (MPAA) rating, production budget, and economic variables. Given that research regarding the rental market remains limited, much of the present paper provides comparisons to the comparatively more developed body of literature about the movie industry and box office revenue.

Literature Review

The literature on movies seen in theaters is extensive and identifies several variables important in predicting the box office success of a film. The presence of popular actors in films is examined by Prag and Casavant (1994), Bagella and Becchetti (1999), Simonoff and Sparrow (2000), Kelwick (2002), and De Vany (2004).

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