Contact: Bill Douglass

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P & F Communications

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New York, New York --- January 11, 2005 --- Fast on the heels of last week’s Consumer Electronics Show in Las Vegas, Alexander & Associates, Inc., a New York City-based entertainment market analyst and consulting firm, today announced the results of its tracking of home entertainment rentals and purchases.

"Consumer spending on DVD purchases was up 31 percent this year," said Robert Alexander, President of the firm. "And consumer spending on rentals of DVDs was up more than 33 percent," he added. "More important than these numbers, though, is the effect these changes in consumer behavior are having on the rest of the entertainment industry."

The table below summarizes the year-over-year gain in DVD activity:

Since 1999, when DVD activity first became meaningful in national consumer surveys, the growth of consumer activity and consumer spending has been stellar. According to data published by Alexander & Associates on its web site, rapidly growing consumer activity (DVD units purchased and rented) and spending has built this industry into a major consumer market phenomenon. "The DVD format as a means for enjoying pre-recorded entertainment at home is extraordinarily popular," Alexander said. "And consumers are changing their behavior to accommodate it."

"This kind of growth can’t happen without breaking some things and building up others," Alexander said. He pointed out that:

• The VHS market that launched the home entertainment industry in the late 70’s and which totaled
  nearly $20 billion in 1999, now captures less than $6.9 billion in consumer spending.
  Consumer spending on VHS products will be half or less in 2005.
• Even more drastically, consumer spending on rentals of VHS tapes has plummeted from
  nearly $12 billion to less than $3.4 billion in the last year
• The ubiquitous "video rental stores" – including such major brands as Blockbuster and
  Hollywood Video – have suffered from the dramatic fall in VHS rental spending. But new companies
  focused only on DVD rentals – such as NetFlix – have enjoyed strong growth.
• Tickets sold for movies in theaters are down nearly 6 percent since 2002. Part of this decline
  is due to moviegoers deciding to pass on some films and wait for the DVD. As the cost
  of theater tickets climbs (the national average is over $6 today, but ticket prices in some markets
  are $10 or more), and the cost of buying a new DVD falls below $15, that trade-off can be a good
  decision for more and more people.
• The television industry has been startled to find that consumer spending on TV programs
  on DVD can reach $5mm per episode. With television network programming costs
  skyrocketing, this unexpected revenue will change program development and ownership patterns.
  "We may even get better shows," Alexander said.

"The big winners in this fundamental change in the marketplace are the Hollywood studios," Alexander pointed out. Their "home video" business is now "home entertainment," and since 2002 has largely been focused on the DVD format. While the formerly important sector of VHS tapes is declining sharply in consumer spending, most studios are seeing their home entertainment business rise on the tide of rising DVD spending. "The studio customer today is basically a DVD customer – whether it is CostCo or Target, NetFlix or Best Buy," Alexander pointed out. "Those buyers either never were VHS buyers or have renounced the older format over the last couple of years."

The DVD continues to grow in popularity with existing owners. In 2005, on average, it will convert more than 15,000 new households to its format every day. And new owners will bring new shopping behavior and entertainment preferences, favoring some and disadvantaging others.

This year will see the long awaited introduction of high definition DVDs. "Being able to see sports events on high definition has convinced a lot of people that it’s worth it for them to have it in 2005; they are ready for high definition programming to be delivered on DVD."

The programming that is already popular on DVD will be even more compelling in high definition. "Imagine how much more satisfying it will be to watch a new movie at home in high definition, the way the filmmaker intended it to be seen, with your own quality sound system! The appeal of this experience will accelerate and intensify the forces of change in home entertainment that are already at work," Alexander said.

But one feature of this market is likely to remain consistent. "There are many good things about the video rental store and the video rental system – not the least of which is that it is a great value," Alexander commented. "And the managers of these stores have demonstrated extraordinary resilience in adapting to changing consumer preferences. Just look at how strongly DVD rentals are up! For all the good things about these stores, we expect consumers to continue to patronize them for the foreseeable future. The video rental store will be with us for some time to come."

More information on the history and development of the home entertainment markets, including both VHS and DVD formats, is available on the Alexander & Associates web site at www.alexassoc.com. Select the link on the lower right for Historical Trends.

Video Flash is the consumer survey-based home entertainment market information system. The consumer reports are title specific and encompass a wide range of retailers including video specialty stores, grocery stores, drug stores, libraries, bookstores, electronics stores, military post exchanges, and internet transactions – among others. More information on the Video Flash reporting system and services is available at www.alexassoc.com.

Alexander & Associates is an entertainment industry marketing consultancy. Its work is based on extensive weekly consumer interviews conducted nationally according to strict sampling and interview guidelines. Its core product is Video Flash, the longest running and only consistent consumer tracking instrument in the home entertainment market today.

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