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North America's biggest video rental chain is ending the 20-year dominance of the video tape as it ejects 12.6 million VHS movies to make way for the crisper sounds and images of digital-video discs.

Blockbuster Inc. said Monday that it will scrap a quarter of its inventory of videotapes to make way for films recorded onto DVDs, the five-year-old technology for high-definition video and sound.

Over the next year, Blockbuster will double the number of DVD titles its stores offer, including its 350 outlets in Canada, to 2,000 from the current 1,000. The Dallas-based chain is aiming to get half of its revenue from DVDs by the end of next year, up from about 20 per cent right now.

About one in five North Americans already own a DVD player, which surpasses the playback quality of traditional videocassette recorders, but cannot record programs. Sales this year are projected to accelerate dramatically, with purchases by U.S. consumers in 2001 equalling nearly those made in the previous five years.

"I think you're reaching critical mass here," said Michael Antecol, an analyst with the technology research firm Forrester Research Inc., adding that a video store in his San Francisco neighbourhood stocks only DVDs.

Already, sales of VCRs are stagnating, compared to the booming demand for DVD players. In the United States, consumers bought 2.3 million machines in the first three months of year, nearly double the number from the first quarter of 2000. Sales of all video products, however, increased an anemic 2 per cent.

On the rental front, DVD revenue more than tripled in the first quarter of 2001, rising to $296.6-million (U.S.) from $91.2-million. While accounting for the bulk of the market, VHS rentals declined $200-million, falling to $1.8-billion from $2-billion.

Mr. Antecol said the familiar VHS tape, king of the rental market since besting the Betamax format in the 1980s, isn't about to die off immediately. The VCR's ability to record television programming, along with the existence of the straight-to-video market for children's titles, will ensure that videotapes don't go the way of eight-track audio tapes, which lost to the cassette format in the 1970s, Mr. Antecol said.

Blockbuster said newly released films will continue to be stocked in both DVD and VHS formats, leaving the majority of movie renters able to find titles, no matter what machine they own. But the chain will be eliminating at least 2,000 VHS-format titles from each of its stores, meaning that some film buffs may have to choose between shelling out for a $300 DVD player or not viewing less popular movies.

Mr. Antecol said many households will have both VHS and DVD machines, with the older technology migrating to cheaper, older TV sets from higher-end entertainment systems.

For consumers without that extra television, however, the arrival of a DVD player could add to the tangle of wires at the back of the set, joining the jumble created by VCRs, digital set-top boxes and the gear for sound systems.

David Stuart, president of Blockbuster Canada Co., said this is a "takeoff year" for DVD sales, and that the Canadian arm of the company should reach the 50-per-cent goal a little ahead of outlets in the United States. But he said VHS rentals will remain an important part of his company's business.

In the United States, Blockbuster will be launching aggressive marketing promotions to reach its 50-per-cent goal, including offering free DVD players to customers who buy prepaid DVD rental cards. Mr. Stewart said Blockbuster is developing promotional programs for Canada, which may not be identical to those the parent corporation is introducing.

Blockbuster, whose shares fell $1.64 (U.S.) to $18.35 Monday on the New York Stock Exchange, said the changes to its inventory mean it will take a $450-million accounting writedown, almost all of which is a non-cash charge. The accounting charges reflect the decreasing importance of VHS sales to Blockbuster, said spokesman Randy Hargrove.

Rogers Video chain, part of Rogers Communications Inc., said it is not planning any dramatic reduction in VHS inventory. But spokeswoman Katie Rebak said DVDs account for 18 per cent of total rentals. That proportion is expected to rise to about 25 per cent next year, she said.

Steve Mossop, senior vice-president of Ipsos-Reid, said a recent survey showed that 17 per cent of Canadian households owned a DVD player in the first quarter of 2001, the sixth-highest penetration rate among the 30 countries surveyed. DVD players are most popular in Hong Kong, where 38 per cent of households own one of the machines.

VCRs, appearing in 93 per cent of Canadian households according to Ipsos-Reid, overshadow their digital competitors for now. But Mr. Mossop said he believes that DVDs will ultimately become more commonplace than VCRs.

According to Reuters, research from NPD Group in the United States estimates that DVD players will reach a 90-per-cent penetration level in 10 years, far faster than the 25 years it took VCRs to reach that level.

The digital-video format is among the fastest-growing consumer-electronics segments in the United States, with shipments of players rising 70 per cent to 5.2 million in the first half, or 20.4 million total, an industry-funded trade group said in July. The number of DVDs shipped to U.S. retailers may reach 30 million by the end of this year, DVD Entertainment Group said.

With reports from Reuters and Bloomberg

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