Rental stores play harder

Plans include expanding game sections for PS3 and Xbox 360

By Susanne Ault -- Video Business, 4/28/2006

APRIL 28 | Video rental stores are shooting to become bigger players in the game business in time to profit from the introductions of new videogame consoles and high-definition DVD formats.

As the current-generation game systems have aged, software pricing has dropped to levels favoring sell-through over rental activity. But rentailers are betting that the relatively steep $50 to $60 pricing on new and upcoming Xbox 360 and PlayStation 3 software will encourage heavy sampling through rental.

Chains and indie rental stores also are staking out PS3 and Xbox 360 territory now in order to aid their entry into high-def product. Microsoft anticipates adding an external HD DVD drive for 360 by the end of 2006. Sony’s PlayStation 3, expected this November, will come equipped with Blu-ray capabilities.

“One of the main reasons why we are developing [better game sections] is high-def,” Video Buyers Group president Ted Engen said. “The gamer segment will be extremely important to the success of both formats.”

Videogame revenue makes up an estimated 10% to 15% of rentailers’ business now. VBG members and wholesaler WaxWorks VideoWorks, among others, anticipate that could double by the end of 2007.

“I think the SRP on next-generation [titles] certainly lends itself to a more vibrant rental category,” said Robert Oram, director of interactive gaming at Hastings Entertainment. “Early on, there won’t be a lot of [inexpensive] used product, so kids are going to be more inclined to test than buy.”

Hastings began to fatten up its game areas in late 2004, wanting to be prepared to exploit demand for advanced consoles. The 150-store chain rents and sells videogames.

Citing studio research, VBG’s Engen believes that by the end of 2006, there will be 400,000 HD DVD players in households. If Microsoft adds its external drive to 360 in that frame, that number will likely near 1 million.

By year’s end, there should be 200,000 to 300,000 Blu-ray players in homes. That could soar to more than 3 million, if PlayStation 3 does bow in 2006.

“I think there definitely is a relation between the videogame consumer and the HD DVD or Blu-ray consumer—they are both early adopters,” added Hastings’ Oram. “PlayStation 2 helped penetration for DVD, and we expect to see the same with Xbox for HD DVD and PlayStation 3 for Blu-ray.”

Foreseeing spiked game renting, VBG in March launched a monthly magazine dubbed Game Bits. Produced out of VBG’s marketing budget, the 20-page Game Bits is distributed free to customers and promotes new release games through a 90-day period. Each of VBG’s 1,600 members will carry about 100 copies of each issue.

“To the best of our knowledge, this is the only handout designed specifically for video rentailers,” Engen said.

Following a pilot phase, WaxWorks is formally rolling out a game leasing program in May. The new initiative aims to help customers order 50% more game inventory than they had previously with the same amount of money.

“There is a big upside with video stores and games, where these are not items people are initially buying,” WaxWorks president Kirk Kirkpatrick said. The WaxWorks lease option “allows stores to offer a wider depth of product. This might be one of the few growth areas right now as DVD is flattening.”

Since signing onto the lease plan, each of WaxWorks’ four test stores have reported 20% increases in game profit. WaxWorks game leasing customers include Kentucky’s 10-store Blockbuster franchisee Lex Entertainment, Tennessee’s Pro-Video stores and South Carolina’s Energy Video stores.

“With the additional units out there, it helps drive people into our stores,” said Kurt Welsh, district manager for Lex’s Blockbusters. “We didn’t give much thought to games when we had to buy them. But since leasing is costing us less, we can order a lot more copies.”