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2004: A Year of Consolidation

13 Jan, 2005 By: Judith M., Melinda S.

Shrek 2 was the top-selling video of 2004.

The year 2004 will go down as a year of consolidation, maturation and perhaps saturation for the home entertainment market.

Consumers spent $25.99 billion buying and renting new and previously viewed titles (PVT) in 2004. Sales and rental transactions overwhelmingly favored the disc, with just shy of 90 percent of the dollars generated coming from DVD.

The consumer DVD buy rate is holding its own, with consumers showing a healthy appetite for owning discs. Consumers spent $15.99 billion buying new videos last year, and the purchases were almost exclusively in the DVD format. On average for the year, 93 percent of the revenue generated at retail came from discs, a number that barely budged from the beginning of the year and that marked the beginning of the sales maturation cycle. At the end of the first quarter, 90 percent of the revenue generated at retail came from disc sales. By year's end, it had nudged up to 93 percent as the last two laggard VHS markets, kidvid and fitness, abandoned the cassette format.

Sales of new DVDs climbed to $14.92 billion, up 26.4 percent from the $11.8 billion consumers spent in 2003, according to Video Store Magazine Market Research estimates. Cassette sales plummeted throughout the year. By year's end, VHS transactions had registered a paltry $1.07 billion, down 51.5 percent from the $2.2 billion spent in 2003.

The maturation of the DVD market began to take hold seven years after the introduction of the disc, as DVD playback penetration exceeded 70 percent of U.S. households, according to VSM Market Research estimates. Year-over-year growth in DVD sales, while still double-digit, showed signs of slowing as the last transitions occurred.

By year's end, overall sales of the top 10 2004 releases were softer compared to their 2003 counterparts. Some industry insiders point to the strength of the release cycle; others point to the competition for shelf space. The top 10 overall sellers sold an estimated 115 million units, compared to 128 million for the top 10 basket in 2003, a 10 percent decline. Growth came from other segments ranging from the strength and depth of catalog releases to new channels.

Real growth came from the exploitation of niche markets, such as TV DVD. According to VSM Market Research, growth in 2004 for TV DVD was 53 percent. Receipts climbed to an estimated $2.3 billion by year's end, according to Merrill Lynch analyst Jessica Reif Cohen.

Sequels were big. Five of the top 10 sellers were sequels to earlier video releases, and all scored well with consumers. Shrek 2 was the overall best- seller for 2004. According to DreamWorks Home Entertainment, Shrek 2 sold more than 24 million units in North America. VSM Market Research estimates place U.S sales at 22.22 million units. The ogre was the best-selling DVD of the year and is on track to become the top-selling DVD of all time. Shrek 2 sold 20 million units on DVD in 2004, breaking Finding Nemo's record of 19.7 million DVD units sold in 2003 (both were released at about the same time of year).

In yet another sign of market maturation, the video rental market showed sharp declines in core transactional rental revenue. The growth in disc rentals has slowed, failing to offset the demise of VHS. Explosive growth, however, in PVT sales helped offset the revenue impact for rentailers.

Consumer spending on video rentals generated $7.7 billion in 2004.

Consumers spent more than twice as much buying DVDs ($14.92 billion) as they did renting them ($5.67 billion). Disc rentals accounted for 74 percent of all rental spending in 2004, up from 58 percent in 2003. While consumer spending on DVD rentals was up 8.5 percent for the year, it wasn't enough to offset the 50 percent decline in VHS rentals.

With the majority of rentals occurring in the first four weeks of a title's release (72.3 percent), the hottest releases found their way to the sell-off bin much earlier in the game this year. Despite the shortened rental legs, rentailers have kept their inventories stocked deep, buying just as many if not more copies of the hottest new releases than last year — knowing they have a viable and profitable market in PVT. The sellthrough pricing for DVD has meant cheap buy-ins on the front end and healthy gains on the back end as rentailers sell off their excess rental inventories.

In 2004, PVT sales were up 76 percent, putting an additional $2.3 billion into the hands of retailers. PVT sales surpassed VHS rentals for the first time ever, making PVT the No. 2 source of revenue in many rentail stores.When PVT sales are added to the rental revenue mix, the decline in year-over-year rental spending narrows to a 5.7 percent decline from comparable spending in 2003.

Warner Home Video, which includes New Line Home Entertainment and HBO, was the clear market share leader for 2004. The Warner family capitalized on the strength of its franchises and its depth of catalog sales as well as its breadth of TV DVD product. New Line's The Lord of the Rings: The Return of the King and Warner's Harry Potter and the Prisoner of Azkaban both were among the top five sellers for the year. The supplier claimed an estimated $4.79 billion of the $23.72 billion rental and sellthrough market, exclusive of PVT sales.

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