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A Strong Finish

6 Oct, 2005 By: Thomas K. Arnold

'Batman Begins' is among several big Q4 titles.

As the critical fourth-quarter DVD selling season gets underway, studio executives are cautiously revising revenue forecasts upward. They're predicting as much as 10 percent growth in the three-month period ending Dec. 31 from the fourth quarter of 2004.

That's enough to push total consumer spending on video purchases and rentals for the year past $25 billion for the first time ever.

Granted, it's not the double-digit growth the home entertainment business has come to expect these past few years, as the DVD household penetration rate soared. But it's still a healthy climb for what is now a mature business, said Craig Kornblau, president of Universal Studios Home Entertainment. He notes that the bigger-than-expected fourth-quarter lift would lead to a 5 percent annual growth rate, which means “we're looking at nearly a billion dollars in growth.”

Mike Dunn, president of 20th Century Fox Home Entertainment, believes the strength of the fourth-quarter DVD slate will generate consumer spending growth of between 8 percent and 10 percent for the quarter, which he calls “a very fine pace.”

Warner Home Video president James Cardwell also is optimistic, predicting consumers in the quarter will spend $5.8 billion just on buying DVDs, up from $5 billion in the fourth quarter of 2004.

“We think it will be the biggest fourth quarter ever,” he said.

Hollywood's sudden optimism stands in sharp contrast to the mood mid-year, when growth had all but stalled. U.S. consumers spent an estimated $11.33 billion buying and renting DVDs and videocassettes in the first half of 2005, not much more than the $11.31 billion spent during the first six months of 2004, according to estimates compiled by Home Media Retailing.

Modest gains in DVD sellthrough had been all but swallowed up by precipitous drops in both videocassette sales and overall rental activity, and a weak box office slate only exacerbated the situation.

“DVD sellthrough growth actually has been fairly strong all year, but VHS really pulled the growth rate down,” said veteran industry analyst Tom Adams, president of Adams Media Research. “Now that we've pretty much washed VHS out of the system — at this point, we've got it down to about 3 percent — we're assuming growth rates will be better.”

Adams has just released his latest projections for calendar 2005, limited to the sellthrough business. He sees a VHS decline of 61 percent, to $475 million, and a DVD sellthrough growth of 12 percent, to $17.3 billion.

Several recent developments are spurring optimism in Hollywood:

  • The long-planned fourth-quarter launch of a high-definition, next-generation, optical-disc format was pushed into next year, giving studio marketers a breather and letting them concentrate on the existing DVD business. “It's good that we can focus exclusively on DVD this fourth quarter,” Universal's Kornblau said.

  • Release schedules were stepped up so that virtually all of the summer theatricals are coming to video before the end of this year. As a result, said Fox's Dunn, despite the lingering weakness at the box office, the combined box office clout of theatrical movies coming to video in the fourth quarter of this year is pegged at $3.6 billion, down just 4 percent from the fourth-quarter 2004 slate.

  • TV DVD grew at a faster clip than predicted. While Merrill Lynch analyst Jessica Reif Cohen last year forecast 30 percent annual growth, this year the TV DVD business is on track to finish at more than $4 billion, “nearly double what it was last year,” Dunn said.

  • For the video industry, the fourth quarter got a “soft launch” Sept. 20 when Paramount Home Entertainment released The Longest Yard, at $158.1 million the year's No. 9 theatrical grosser. First-week sales came in at more than 3 million units, significantly higher than expected.

    “Given that success, I believe the fourth quarter will be exceptionally strong for our entire industry,” said Meagan Burrows, domestic home entertainment president for Paramount Pictures.

    Fox's Dunn isn't surprised. While there's been some softening at the very top — as evidenced by the much-publicized sales shortfalls earlier this year of Shrek 2 and The Incredibles — overall DVD sales are strong. “So far this year, box office [of Fox titles] is down 5 percent, while unit sales of theatricals are up 22 percent,” Dunn said. He added that at Fox, the average “conversion rate” — taking the number of units sold over a 26-week period and dividing it by the film's box office gross — is up 30 percent. Last year through August, Fox titles were at 2.72 units, Dunn notes; this year, the ratio is 3.5.

    Any chance of the industry returning to double-digit growth? “Doubtful,” said Bob Chapek, president of Buena Vista Home Entertainment. “While fourth-quarter titles and seasonality can lift the category, it will likely not be enough to restore year-to-year growth beyond a few percentage points.”

    But even the 5 percent 2005 growth that appears to be the industry consensus is nothing to sneeze at, studio executives say.

    “Most industries would kill to be growing at anywhere near 5 percent,” said Steve Beeks, president of Lions Gate Entertainment.

    “If the music business grew by a billion dollars, if the paperback book business grew by a billion dollars, if the box office grew by a billion dollars — that would make headlines,” added Universal's Kornblau.

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