Classic Media recently put out Underdog only on DVD, a first for the label.

That's certainly true about the licensing business in general and more specifically about the emergence of DVD (digital video disc), the multimedia entertainment platform synonymous with "sexy consumer commodity." An extension of the 20-year-old compact disc (CD), the five-inch digital video disc single-handedly offers licensed properties many opportunities to multi-flex their cross-promotional muscle in ways beyond the reach of comparatively clunky, limited-function videocassettes.

With a household penetration already at 40 percent (by the more aggressive estimates), after five years on the market, DVD buzz is even louder than its statistics suggest. In the 48-month span between calendar years 2000 and 2003, DVD production in the U.S. will quadruple, from 270 million units in 2000 to more than 1 billion units projected to be manufactured for U.S. consumption in 2003, according to video research firm Cambridge Associates in Stamford, CT. Cambridge President Dick Kelly says DVD production was 25 percent of total video units made in 2000. For 2002, it was projected to represent more than 60 percent of prerecorded units made, and this year 72 percent, or three times as many DVDs as VHS cassettes.

However, despite DVD's increasing popularity, VHS is still holding its own, particularly among the preschool set. The question is how long that situation will last. The slower adoption of DVD in the young kids' market is attributed in part to higher prices, the shortage of titles until now, families' sizable libraries of VHS kidvid, and parents' and their toddlers' familiarity and comfort with handling VHS. "It's harder for kids to navigate a DVD remote control," notes Kristin Sands, senior brand manager for Anchor Bay Entertainment. "The younger the consumer, the longer he or she will use VHS."

Extra Features = Extra Cost The myriad charms of DVD-easy handling, storage, and portability; superior picture and sound; and capacity to contain all manner of interactive and computer-connected content-add up to premium price points.

A property on DVD can command anywhere from $2 to $10 more than its VHS version.

Artisan Entertainment's Barbie as Rapunzel, licensed from Mattel, is $19.98 on VHS or DVD, but that price parity is a rare exception. More typical are titles such as Barney's Christmas Star, from HIT Entertainment, $14.95 on VHS, $16.99 on DVD; Columbia TriStar's Maggie and the Ferocious Beast: Adventures in Nowhere Land, $12.95 VHS, $19.95 DVD; and Classic Media's Rudolph the Red-Nosed Reindeer or Frosty the Snowman, each $9.98 VHS, $19.98 DVD.

The differential owes to extra content, in the form of special features; or, for a TV series, more episodes; or, as for Thomas & Friends, for a toy such as a wooden train packaged with the video. Typical extra features on a preschool DVD are a sing-along video, read-along story, interactive coloring and counting activities, and a video-clip scrapbook. All of these are on Salty's Secret & Other Thomas Adventures from Anchor Bay Entertainment, which recently renewed through 2008 its licensing agreement with Gullane Entertainment-now owned by HIT Entertainment, which controls rights to Thomas the Tank Engine and Guinness Book of World Records.

Curiously, such "extras" have become standard on many DVDs-particularly hit Hollywood features-but there's little consensus on the degree to which supplemental material affects a parent's or child's purchasing decision. Ries says HIT's consumer research indicates special features come in "a distant third" as a buying influence. First is the program itself and second is the price. Classic Media's Mayo vouches for his 6-year-old son's indifference to hearing a voiceover commentary on his favorite cartoon show.

There is a flip side to the higher-priced DVD extras' equation. "When it's something store buyers believe they don't have to take," explains Mayo, "they'll pressure the DVD price down closer to VHS, like $12.98. The [retail] buyers are the gatekeepers, and they are making decisions based on price, not title." By this year-end, he says, his company forecasts 55 percent to 60 percent of its unit sales will be VHS, but "revenue is opposite," he adds, with 60 percent coming from DVD and its higher pricing.

The economics of wholesale margins on $10 DVD pricing virtually preclude extras, with their extra production costs, but that's not a concern, say Mayo and others. Mass merchants that demand low-ball pricing, such as Wal-Mart and Target, cater to a clientele-price shoppers and children-that isn't influenced by extras on catalog titles. Besides, notes Anchor Bay's Sands, the cheaper catalog DVDs are "better for library building."

Even on higher-priced DVDs, adding special features also may depend on availability of rights and royalty structures. When Artisan released the first DVD+CD for Blair Witch 2, it intended to include the entire soundtrack CD on the same disc as the DVD. Yet, "the stumbling block became music royalties," says Steve Beeks, president of Artisan Home Entertainment, so Artisan instead settled for selected tracks on the CD portion of the disc.

Beeks projects DVD catalog pricing, already at $14.98 for many titles, will catch up, or down, to the $9.98 point "in the next 18 months." Inevitably, as DVD pricing declines, it will pressure VHS pricing even lower.

For a specialized genre such as anime, adult-themed Japanese animation aimed at teen and college consumers, it's easier to charge upward of $30, says John Parker, president of Tokyopop, as long as you pack in five episodes. He sees DVD pricing paralleling that of CD, with frontline, midline, and catalog tiers.