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2004: The Year in Review

28 Dec, 2004 By: Stephanie Prange

Is the party winding down? As 2004 draws to a close, everyone from studio executives to mom-and-pop retailers are asking themselves that question, as the DVD juggernaut that had revived a stagnant home video business in the late 1990s at last showed signs of slowing in the face of its own advancing maturity.

Trouble signs could be seen as early as the first quarter of 2004, when rental, which for several years held flat despite steady and significant gains in DVD sellthrough, at last took a dramatic tumble. By midyear, the rental business was down as much as 16 percent, according to some estimates. Before long reports came in that the big rental chains were in serious trouble, culminating in the year-end quest by two of the top three rental chains — Blockbuster and Movie Gallery — to try to buy the third, Hollywood Entertainment Corp. “When Dinosaurs Mate,” read the headline in a Los Angeles Times editorial.

Meanwhile, the fourth quarter offered a sobering wake-up call to those who had accustomed themselves to rapid DVD sellthrough growth. The big hit titles weren't selling as well as had been expected, and the consensus now is that household buy rates, which have held remarkably steady over the past few years, may be in for a slide in 2005.

On this note, we present our annual recap of the year in home entertainment, as presented in the pages of Video Store Magazine.


The year begins with word that a format war may be brewing over a high-definition successor to DVD. Even though the DVD Forum has given a preliminary nod to Toshiba's HD-DVD format, a consortium that includes other Forum members vows to proceed with plans to bring out the rival Blu-ray Disc format.

Consumers spent a record $22.5 billion on buying and renting home videos in 2003, 18 percent more than they did in 2002, according to DEG: The Digital Entertainment Group's annual state-of-the-industry report.

Unveiled at the Consumer Electronics Show in Las Vegas, the report found that consumers spent $11.6 billion buying DVDs and another $4.5 billion on disc rentals, giving DVD a 71 percent share of the market.

Stung by flat rentals, Blockbuster chief John Antioco tells investors the No. 1 video rental chain will roll out a new in-store DVD trading model sometime in the second half of this year. Customers will be able to exchange their used DVDs for store credit that applies to anything in Blockbuster stores.

Hollywood Entertainment, the No. 2 rental chain, reports a 2 percent decline in same-store rentals for the fourth quarter of 2003, while Movie Gallery, the third-biggest rental chain, says rental revenue in stores open at least one year was up 5.5 percent. Overall, the rental market has remained relatively flat, despite steady and significant gains in DVD sellthrough, although the Hollywood numbers have observers wondering whether the bubble is finally going to burst.

Paramount Home Entertainment snags a five-year distribution deal with PBS Home Video, ending the supplier's 10-year deal with Warner Home Video.

Members of the Writers Guild of America have approved a list of issues, including demands for a bigger piece of the DVD pie, which they intend to address during upcoming contract negotiations with the major studios and networks. The writers' contract expires May 2.

Studios are mining gold in January from DVD sales, fueled by the millions of new DVD players sold over the holidays. Estimates are that 5 million new DVD households came on board in the fourth quarter of 2003, and their hunger for DVDs was evident by such sales success stories as Universal Studios Home Entertainment's American Wedding, which sold 3 million discs within three days of its Jan. 2 release.


Viacom Inc. says it wants to get rid of Blockbuster, which recorded substantial fourth-quarter and full-year 2003 losses. A Viacom statement says its board authorized the sale “based on the conclusion that Blockbuster would be better positioned as a company independent of Viacom.” The story was broken by The New York Times; the same day, Blockbuster stock fell 8 percent.

Twentieth Century Fox Home Entertainment announces that the original Star Wars and its two sequels will finally arrive on DVD in the late summer, in a special-edition boxed set. A Lucasfilm executive promises the DVD will be “an awesome experience.”Beleaguered music chain Tower Records and Video files for Chapter 11 bankruptcy protection in a prepackaged deal expected to last little more than a month. The company's CEO vows to significantly boost Tower's DVD offerings and rely less on CD sales in the hopes of bettering its financial situation.

Traditional rental just isn't cutting it anymore. Blockbuster, which last month announced a move into the used-DVD market, now plans to offer a rental subscription plan as well, in addition to bringing a sales component to its fledgling online rental operation.

“We're transforming from a place where you rent movies to a place where you rent or buy new or used movies or games,” VP and CFO Larry Zine tells analysts. Movie Gallery, too, says it is exploring movie “delivery alternatives,” including a crack at the used-DVD business as well as digital delivery of content into the home.

Is classic TV the next big thing in the booming TV DVD market? Some industry experts think so, as suppliers begin releasing “complete season” packages of such vintage series as “The Dick Van Dyke Show,” “I Love Lucy” and “Gilligan's Island.” Warner Home Video's Mike Saksa says the baby boomers who grew up watching these shows in the 1960s “are the heavy DVD consumers of today.”


DVD is playing a growing role in the annual Oscar race. In what insiders call an industry first, Lost In Translation came out on DVD shortly after it was nominated for an Academy Award. The release was accompanied by a gala launch party that generated gobs of press and may have helped the film snag a best original screenplay Oscar.

States and cities are increasingly looking to regulate when and what motorists can watch in their cars, as the mobile DVD trend accelerates. Concerns range from inappropriate material that may be seen by passing motorists as well as safety. In Alaska, a man is on trial for murder after his car hit another head-on, killing two. Authorities allege he was watching Road Trip on an in-dash DVD system.

Proponents of the two competing next-generation optical-disc formats trek to the desert for a duel at the International Recording Media Association (IRMA) conference. Attendees see a familiar face touting one of the rivals, HD-DVD: Warren Lieberfarb, the “father of DVD” who was ousted as president of Warner Home Video in December 2002. Lieberfarb says DVD is “reaching maturity” and the home entertainment business needs to come up with a high-definition successor.

Hollywood Entertainment may go private, with chairman and CEO Mark Wattles proposing to buy out shareholders for $14 a share, or $890 million, against a backdrop of projected flat 2004 same-store rental comps and soft earnings. Like his peers at the top of the other big rental chains, Wattles sees an urgent need to diversify beyond traditional video rental, although he's casting his lot with video games. Wattles vows to significantly expand the Game Crazy store-within-a-store concept in the hopes of stimulating growth.


Hit by charges that it has forsaken its core membership, the Video Software Dealers Association (VSDA) says it will organize an autonomous branch devoted entirely to independent video retailers. “In many respects, the VSDA is returning to its roots,” trade group president Bo Andersen says.

The National Association of Video Distributors (NAVD), its ranks thinned by consolidation and DVD sellthrough, returns to Santa Monica, Calif., for an annual conference that has been distilled to a series of one-on-one business meetings between the five remaining distributors and suppliers.

Eric Doctorow, former president of Paramount Home Entertainment, resurfaces as COO of leading video game maker THQ. The move is seen as evidence of the growing synergy between Hollywood and the gaming community.

Wal-Mart begins selling RCA DVD players capable of filtering out DVD content the owner flags as objectionable.

The ClearPlay technology electronically reads the disc and can mute or fast-forward past graphic violence, sexual content and foul or impious language, depending on what the viewer doesn't want to see or hear.

Blockbuster provides details on its new DVD trading program, saying customers will be able to trade their used DVDs for store credit in 2,000 of its U.S. stores by the end of this year. In the two markets where the program has been tested, Blockbuster chief John Antioco tells investors on a first-quarter financial call, “we have seen an increase in customer visits, active membership and new membership.”

Wal-Mart for the first time ever is the country's biggest video retailer, according to Video Store Magazine's annual Top 100. The magazine's market research department estimates the giant discount chain generated $4.3 billion in video revenue in 2003, handily beating Blockbuster's $3.6 billion.


Blockbuster reports a staggering 10.7 percent decline in same-store video rental revenue for the first quarter of the year. The chain's latest financials also reveal VHS is down to 20.6 percent of the mix. Movie Gallery, meanwhile, reports a 2.5 percent increase in same-store rentals, underscoring the widely held perception that rural areas are the last to abandon traditional rental.

The Electronic Entertainment Expo celebrates its 10th anniversary in Los Angeles, and sequels and movie tie-ins hog the spotlight. Expected hits with a Hollywood connection include The Lord of the Rings Trilogy, from Electronic Arts, and The Incredibles, from THQ. Also generating lots of buzz: Nintendo's new DS hand-held system and a new wave of wireless games.

A growing number of video rentailers are picking up their new DVDs at mass merchants, where price wars have driven down new theatrical releases to less than $15 their first week out. Nolan Anaya, owner of Captain Video in Amherst, Mass., tells Video Store Magazine he found “tons” of copies of Master and Commander at the local Wal-Mart for $13.88, $5.16 less than what his distributor was charging.

Target Stores announces aggressive remerchandising plans that include expanding home entertainment sections in new stores and retrofitting existing stores with beefed-up video departments as well. The redo has been tested in an unspecified number of prototype stores since last October, the same time Target tapped Fox as “category captain” for its video product.

The 13 consumer electronics companies backing the Blu-ray Disc next-generation optical-disc format create the Blu-ray Disc Association to help establish the format's standards and promote it as the format of choice for packaged media.

A big membership drive seeks to attract representatives from the entertainment, computer, consumer electronics and IT communities.

McDonald's, which toyed with videos as premiums in the early 1990s, is getting back into the business, this time with DVD vending machines. The company plans to put hit-stocked machines in all 105 of its Denver stores this summer and expand the program nationally if the test yields good results.


As of June 13, year-to-date video rental spending is down an alarming 10 percent from the previous year, and retailers are clearly worried that after years of remaining flat in the face of steady and significant DVD sellthrough growth, the rental business is in for a continued downturn. A survey of more than 200 independent retailers by Video Store Magazine Market Research finds a clear majority expecting rental revenue to remain flat or even decline in the second half of the year, when business has traditionally picked up.

Tempers flared during the Next-Generation Supersession at Video Store Magazine's Third Annual Home Entertainment Summit. Proponents of the rival Blu-ray Disc and HD-DVD formats had a verbal shootout, with HD-DVD cheerleader Warren Lieberfarb blasting the competition as “vaporware” and Blu-ray booster Richard Doherty insisting greater capacity made his format “a better value.” Studio presidents, meanwhile, refused to take sides, and urged the rivals to resolve differences and come up with a compromise. “We cannot go to market with two formats,” said MGM president David Bishop. “It will be the death knell for this technology.”

The Video Software Dealers Association (VSDA) and the National Association of Recording Merchandisers (NARM) are in merger talks, with VSDA president Bo Andersen saying a union makes sense because of so much DVD crossover into music stores.

Video Store Magazine celebrates its 25th birthday. The magazine was launched in 1979 by Stuart Karl, the home video pioneer who birthed the fitness genre with his line of Jane Fonda exercise videos, and today ranks as the leading home entertainment weekly, with its charts and editors regularly appearing in The Hollywood Reporter, USA Today, the Los Angeles Times and other national media.

The record companies' test earlier this year of the DualDisc, a hybrid with a DVD on one side and a CD on the other, went so well and product should be on its way in earnest later this year, industry watchers say. It's the latest scheme by the music industry, hit by sagging CD sales, to add value to their product.


Will Fahrenheit 9/11 become the first video to impact a presidential election? Director Michael Moore is reportedly pushing for a major studio to release the DVD of his controversial President Bush-bashing documentary before the November elections. Industry scuttlebutt says the film, released theatrically by Lions Gate Home Entertainment after Walt Disney Co. brass wouldn't let Miramax Films put it out, may wind up with Sony Pictures Home Entertainment.

Bowing to consumer pressure, Warner Home Video is quietly phasing out the Snapper, the flimsy cardboard DVD package cursed by collectors, and switching to the all-plastic Amaray-style “keep case” used by virtually all other DVD suppliers. New releases were the first to make the switch, with catalog next. Only select children's video product will remain with the Snapper for the foreseeable future, Warner executives tell Video Store Magazine.

The slide in rental revenue continues. New figures from Video Store Magazine market research peg the decline at 13.2 percent for the first six months of this year, compared to the first half of 2003, with consumer spending on video rentals reaching a seven-year low of $4.16 billion. Analysts attribute the drop to not just new DVD sellthrough at mass merchants, but also the burgeoning used-DVD business at specialty stores.

The VSDA returns to Las Vegas for Home Entertainment 2004, and once again attendees applaud the businesslike atmosphere the show has taken on since its restructuring two years ago. “I think the energy is really back,” says A&E's Kate Winn. Final attendance figures aren't in, but insiders expect the total to surpass last year's 4,000 attendees, thanks to a decided uptick in last-minute registrations. At the convention, the VSDA elects a new board chairman, distributor Bob Geistman of Ingram Entertainment, who replaces longtime incumbent Tom Warren, an independent retailer from North Carolina.

Blockbuster announces yet another diversification, this time to an online subscription service modeled after Netflix. Blockbuster says it will charge $19.99 a month for the service, midway between Netflix and Walmart.com, when it launches next month. The news prompts a leading analyst to downgrade Netflix, which in turn leads to a precipitous drop in the company's stock price, from $32.25 on July 15 to $20.24 at the end of trading July 22. That same day, Blockbuster stock was trading at $13.20 a share, more than $1 less than its 52-week low.

Toshiba Corp. and NEC Corp., the two principal backers of the HD-DVD next-generation optical-disc format, promise compatible hardware products will be available in stores by the end of next year.


Rental revenue in July took another big hit, with consumer spending of $568 million down a whopping 28 percent from the July 2003 total. Sales of previously viewed DVDs, meanwhile, continue to soar, bringing in an additional $121 million for rentailers — a healthy chunk of coin, but not nearly enough to offset losses on the rental side.

Movie Gallery, so far, has managed to elude the maladies of the rental market, but that isn't stopping the Alabama-based chain from tinkering with its business. The chain is testing in-store subscriptions, extending its rental period to five nights in another 500 stores and making plans to double its Game Zone stores-within-stores to 30 by year's end.

The summer's only half over, but already studios are jockeying for prime DVD release dates to take advantage of the holiday shopping season. And with nearly three dozen theatrical blockbusters coming to DVD in the last three months of this year, studio executives say picking the right date has become a balancing act almost as tricky as it is in the theatrical world.

The annual National Association of Recording Merchandisers (NARM) convention touches down in San Diego amid continued merger talks between NARM and the VSDA. Plans include a “collocated” trade show in 2005, based on the growing demand for DVD by music retailers. The talk of this year's show is the DualDisc, a hybrid DVD-CD combo disc that finally gives the music industry the “added value” component observers have long felt was needed to reverse slumping CD sales — which, NARM attendees are told, are starting to pick up again after a flurry of lawsuits against illegal file-swappers.

With Netflix firmly in its crosshairs, Blockbuster launches its online rental service with a special promotion: subscribers to the monthly three-out plan get two free in-store movie rental coupons per month. “We plan to quickly establish ourselves in this arena by aggressively marketing, pricing and combining our online program and in-store capabilities,” Blockbuster VP Shane Evangelist says.

True to director Michael Moore's wishes, his controversial documentary Fahrenheit 9/11 will be released on DVD by Sony Pictures Home Entertainment Oct. 5, a month before the presidential elections. The release will be loaded with politically charged bonus materials, including three deleted scenes, among them “Outside Abu Ghraib Prison.”

CD and DVD pioneer Emiel Petrone dies at the age of 61, after a brief illness. His funeral attracts a veritable who's who of home entertainment industry leaders. Petrone had been founding chairman of DEG: The Digital Entertainment Group as well as a longtime executive with Philips Electronics, helping pave the way for the launch of the CD in the early 1980s and, more than a decade later, DVD.


Consumers scarf up more than 4.1 million copies of The Passion of the Christ its first day in stores, getting the fourth-quarter holiday selling season off to a good — albeit early — start.

Following the lead set by Blockbuster, Hollywood Entertainment Corp. begins offering 30-day in-store subscriptions in select stores. Like the Blockbuster program, Hollywood's Movie Value Pass lets subscribers check out up to three movies at any one time.

Studio executives bemoan the worsening shelf-space crunch at retail and brace themselves for the most competitive fourth quarter in home entertainment history. Speaking at the Entertainment Media Expo in Hollywood, executives say that while DVDs are coming to market at a record clip, most of the big retailers have yet to appreciably grow their home entertainment departments.

As a result, retailers are becoming increasingly picky about what they bring in and how long they keep titles out. “That's probably the biggest problem everyone faces right now — how do you get your titles noticed?” says analyst Tom Adams.

Sony inks an “agreement in principle” to buy MGM for nearly $5 billion. Analysts say Sony wants MGM's rich catalog of classic movies for several reasons, including giving its Blu-ray Disc platform a leg up on the competition. Adams notes that in DVD's first year, catalog sales amounted to more than two-thirds of total sales, underscoring the importance of library titles in the early stages of a format launch.

Blockbuster and Hollywood Entertainment Corp., still smarting over a downturn in their core video rental business, are quietly testing 99-cent rentals.

Sony gives its Blu-ray Disc another boost when it announces in Tokyo that its next-generation video game console, known as Playstation 3, will support the high-definition optical disc, just as PS2 plays DVDs.


The exploding TV DVD business isn't just a boon for big retail sellers of DVD. Rental operations also are sharing in the spoils, with Netflix reporting TV DVD rentals account for 12 percent of its revenue and is the fastest-growing component of its business.

The continuing rental slump is taking a toll on Hollywood Entertainment's perceived value. A group of investors, led by chain founder and CEO Mark Wattles, is now offering shareholders $10.25 per share to take the chain private, down from the $14 share price they offered in March.

A price war's brewing in subscription rental land. Netflix says it will drop its three-out subscription price by $4, to $17.99 a month, amid fears that giant cyber-seller Amazon.com will enter the business. Blockbuster the very next day announces it will slash monthly subscription fees to $17.49 in its nascent three-out program.

Carl Reiner gets the first-ever TV DVD Lifetime Achievement Award, and Tony Orlando hosts the inaugural TV DVD Awards at Video Store Magazine's second annual TV DVD Conference. Big winners in the awards contest, selected by consumer votes, include Fox's The Simpsons: The Complete Fourth Season and 24: Season Two, with two wins each. Image Entertainment's five-volume complete-series package of “The Dick Van Dyke Show” wins best of show.

Operating without a contract since May, screenwriters drop their bid for more DVD residuals and sign a new contract offering them gains in health care and other areas.

Video Store Magazine will become Home Media Retailing in January, publisher Don Rosenberg announces. The name change reflects dramatic changes in the retailing, distribution and production of digital home entertainment, and will take effect with the Jan. 16-22, 2005 issue.

Playboy Home Video ceases to exist as a separate entity, with the departure of longtime SVP and GM Barry Leshtz and the layoff of 20 staffers. Playboy Enterprises folds the video unit in with online and cable operations, and dubs the new entity Playboy Entertainment Group.


Blockbuster misses profit estimates by a wide margin for the third quarter ended Sept. 30, chain executives announce. The reason: overspending on new subscription, DVD trading and video game initiatives. The bad financials are accompanied by the resignation of Blockbuster president and COO Nigel Travis.

Merger talks between the VSDA and NARM are off. The decision by the NARM board to end negotiations for a joint trade association — and a “collocated” annual trade show — is met with disappointment and surprise by those who had been working on the proposal, as well as some exhibitors and retailers.

Movie Gallery at last is showing signs of the rental malaise affecting virtually the entire industry. Same-store rentals fell 1.5 percent across the board during the third quarter, with urban stores suffering a dramatic 7 percent slip. But executives refuse to say the rental business is in trouble, blaming the drop instead on a heavy hurricane season and weak releases.

Wal-Mart.com cuts its monthly online subscription charge from $18.76 to $17.36, in the wake of similar cuts from Netflix and Blockbuster to $17.99 and $17.49, respectively.

Suppliers are pumping out a record number of elaborate DVD gift sets, spurred by studies that show bonus materials are a key selling point. Over the past four years, the number of DVD releases with three or more discs has more than quintupled, from 92 in 2001 to an expected total of 516 this year, according to The DVD Release Report.

Taking a cue from the music industry, the Motion Picture Association (MPAA) of America and member studios say they will begin suing people who trade movie files in violation of copyrights. “Illegal movie trafficking represents the greatest threat” to Hollywood ever, says MPAA president and CEO Dan Glickman.

Still stinging from worsening financials, Blockbuster makes a play for ailing competitor Hollywood Entertainment, offering $11.50 a share in a potential deal that bests the $10.25 offered by a group of investors led by Hollywood chief Mark Wattles. A week later, Movie Gallery enters a bid for Hollywood. The Los Angeles Times winks at the potential mergers in an editorial headlined “When Dinosaurs Mate.”


Three studios line up behind HD-DVD, giving the high-definition optical-disc format a big advantage over rival Blu-ray Disc. Warner Home Video, Universal Studios Home Entertainment and Paramount Home Entertainment commit to releasing product on HD-DVD in time for the format's late-2005 hardware launch. But the advantage is short-lived; a week later Buena Vista Home Entertainment joins recently renamed Sony Pictures Home Entertainment in the Blu-ray Disc camp, citing the format's superior quality and capacity. That leaves just one major, Fox, on the fence.

Hollywood Entertainment's board of directors is urging shareholders to support a $10.25-per-share bid from a group of investors led by Hollywood founder and CEO Mark Wattles, and backed by financial restructuring firm Leonard Green & Partners — despite outstanding superior offers from No. 1 rental chain Blockbuster and No. 3 Movie Gallery.

Stung by the worsening shelf-space crisis, Wal-Mart wants to let customers order movies not carried in its regular stock through its Web site and then go the nearest retail location to pick up a burned DVD copy. The giant discount chain has been floating the concept around Hollywood in recent weeks, reliable inside sources said. Studio response is mixed, insiders say, and centers around critical copy-protection issues. “Can you physically do it in a way that protects everyone's interest?” asks one high-ranking Hollywood executive. “Maybe, maybe not. And that's a great concern.”

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