Have I got a deal for you! Give me your favorite DVD and $2, and I'll send $20 to wherever you bought it from. Sounds great right? I'll take so many DVD's that you can quit your job and pay for your rent, your food, and your car from the profit on the great volume of product that I buy from you!
What? What do you mean you don't want to do that? Why not? It certainly will make me happy and I'm sure whoever you bought it from could really use the $20 too. After all, everything counts in large enough amounts, right? So what if you basically lose $2 on every sale. You can always show Wall Street your fantastic sales volume and go public and make a killing—those slobbering idiots never look at the bottom line of the companies that go public!
If you think this scenario is ridiculous, then why does everyone complain about the increasing discount from the on-line retailers? Here's a scoop, the standard discount from some of the major suppliers in the industry is 38% off of the suggested retail price for DVD. This means if a company offered a 40% discount on pre-orders, they are eating a 2% loss right from the start. I don't know about you, but I can't work for free, give my customers money, and still expect to pay my rent.
Now, because this is a column and therefore, you are reading this voluntarily, I will gloss over most of the boring details such as profit margins on shipping and advertising and the loss margins from errors, taxes, or employee salary. So let's go right away to the heart of the implications—companies have to raise their discounts or go out of business.
That's right, the end is near, and I'm totally bummed because I haven't bought a DVD player yet so I'm going to miss out on all of the cheap DVD's!

*sigh*

OK, let's cool it with the self-pity and take a good look at the situation. Economics is supposed to be a nice balance of supply and demand. In the anime industry, fans want an entire series on one DVD (with DTS sound and extra features of course), and they would really like it if it cost less than 5 bucks. The suppliers, on the other hand are looking for a profit, so they want to put just the opening and five minutes of a show and then sell it for 100 bucks so they'll have a better profit margin. Meanwhile, the retailers, both on-line and brick and mortar, are caught in the middle and don't care how much is on the DVD or what it costs, as long as the product sells and they make enough money to pay their bills. To have an industry, these forces of supply and demand must meet in the middle.
So how does the on-line discounting muddy the waters? Well, there are good and bad effects.
On the good side, the cheap DVD prices helped to attract many more people over to the DVD format than higher priced product would. Then, the over-all quality and features of the DVD format are addictive and anyone who gets a taste will begin to look down on VHS quality. Therefore, the discounts have created a consumer base that habitually and compulsively needs their anime fix on DVD. This is an increase in demand, but because the prices are at a loss, the demand is essentially artificial since the prices will not sustain the business.
On the bad side, the unprofitable discounts don't pay for expenses such as salary, marketing, rent, or even, potentially, the product itself! Meanwhile, the consumer has gotten used to an unrealistic price and, quickly becomes disgruntled when the price goes up to allow for a real profit. Additionally, since many of the on-line retailers are selling product with artificially low prices, they are taking sales from the brick and mortar retailers with higher prices. Is this unfair? No. Unhealthy? Yes. Since many of the online retailers are selling product at a loss (or at least very close to break-even), they are creating an artificial market that will eventually collapse and are taking sales and resources away from the healthy companies that will survive because of their higher profitability.
In a worst case scenario, the biggest repercussion may impact the anime companies (A.D. Vision, Bandai, Pioneer, etc.). When on-line companies raise their prices, there will be an immediate drop off in demand from the consumers as they protest the increase and reevaluate their budgets. This drop will be difficult to predict and by the time it happens, any forecasting will have just caught up with the demand from three months earlier when the sales were good. This may cause these companies to have too much inventory and to have overspent in anticipation of stronger sales. Also, as the weaker and unstable retailers go out of business, they will leave unpaid bills. If the overall amount of these unpaid bills is significant, it could lead to a financial squeeze on the anime producers. This, in turn will impact their abilities to license product, and will certainly make them more conservative on their DVD release schedule as they refocus on their top titles to ensure profitability.
Will the customers go away because of an increase in price? No, but most people have finite budgets, so as the product becomes more expensive, the quantity purchased will decrease.
Will the on-line retailers go away? Some will, but not every one will. They all have the equal opportunity to piss-off their customer base and adopt more profitable pricing. In fact, several have and are incurring the wrath of the anime fan even now.
Will anime companies go away or abandon DVD? Probably not, but possible. DVD is too strong a format to be abandoned, but if the higher discount creates a lower demand, some titles will be seen as too weak to be concentrated on, and will be indefinitely delayed in favor of some stronger titles. Meanwhile, the health of each individual company is too difficult to determine and too political to guess. For the benefit of our industry and for the safe continuation of our DVD supply, I will simply cross my fingers and switch to another topic.

Show me the Money!

Mr. White and Ms. Honey-Bunny want their anime fixes. Mr. White buys his copy of MASTER OF MY DOMAIN (VHS Dub) online directly from Central Coastal Media (CCM) and Ms. Honey-Bunny goes to her local HighRise Video store and picks up BOO BOO RUBBER PANIC - THE MOVIE on DVD. Let's follow their transactions and see where the money goes!

Example A: MASTER OF MY DOMAIN

Mr. White pays $20 plus shipping from CCM; what happens to that money? Well, CCM's contract with Red Pinenuts states that they owe a 10% royalty on the suggested retail price of the product, which is probably $19.95. However, I hate doing math on those uneven numbers, so for the purposes of this column, let's say the SRP is $20, so the royalty is $2. Therefore, after the duplication cost of $2, CCM has $16.00 profit to pay for the dub ($10-30k), the package design ($1-5k), their rent, their advertising, their employee salaries, and Uncle Sam.
Red Pinenuts takes the $2 and gives a 20% royalty ($.40) to Nonimasu Ani, the manga artist behind MASTER OF MY DOMAIN and another 50% ($1.00) to their financial backers. Their financial backers, William Gates XX and Toubosha, an obscure Yakuza group made up of one-armed men, split their $1.00 into two equal shares and get $0.50 each. Finally, Red Pinenuts takes their remaining $0.60 to pay for the Japanese language production, the animation production, their rent, their advertising, their utilities, their employee salaries, and their local taxman.

Recap: Mr. White paid $20.00 $16.00 goes to CCM $2.00 goes to the duplicator $2.00 (royalty) gets split up as follows:   $0.60 to Red Pinenuts   $0.40 to Ani Nonimasu (Manga Artist)   $0.50 to William Gates XX   $0.50 to Toubosha