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Analysis: 2003 Was a Year of Triumph for DVD

23 Dec, 2003 By: Thomas K. Arnold

The year began with fireworks on the studio level, as three of the six majors found themselves with new presidents. But after the storm clouds came the silver lining, as everyone basked in the continued success of DVD.

Indeed, little grumbling was heard as explosive DVD sales pushed home entertainment spending to record heights.

“This was the year when DVD became one of the most prominent consumer items in the entire marketplace,” said Bob Chapek, president of Buena Vista Home Entertainment. “DVD this year has gone beyond anything I think anybody really expected. It was used as a key driver for retail in the fourth quarter, something to get people in the doors.&quo;&quo;This year indicates that consumers are increasingly attracted to DVD purchases of both new releases and catalog titles,” said Benjamin Feingold, president of Columbia TriStar Home Entertainment.

Video Store Magazine projects total consumer spending on home video will come in at more than $23 billion, with sales leading the way — particularly in the fourth quarter, when hordes of consumers snapped up DVD players priced as low as $19.99 and the household penetration rate finally hit 50 percent.

The Big One
“This was the single biggest growth year in DVD households we've ever had and ever will have,” said Craig Kornblau, president of Universal Studios Home Video, referring to estimates that 17 million DVD households came online in calendar 2003.

“Families are driving the growth of the DVD market,” said Kelley Avery, worldwide president of DreamWorks Home Entertainment. “Purchasing is actually growing faster in households with kids; on average they're buying 12 DVDs versus nine last year. They've completely embraced the format.”

Season of Little Discontent
The few signs of discontent that did appear were either discounted or downplayed. A judge threw out the last remnants of a lawsuit that independent video specialty retailers had brought against Blockbuster and the studios, accusing them of fixing prices and other anticompetitive maneuvers.

Meanwhile, Blockbuster and the No. 2 rental chain, Hollywood Entertainment Corp., stumbled in their attempts to maintain their leadership status in an increasingly sellthrough world. Both chains took hits in rental revenue and faced skepticism about whether consumers, trained to buy movies at mass merchants, would change their ways.

“They've gobbled up all the market share they could on the rental side, so now if they want to grow their topline revenue, they're going to have to figure out how to sell against the mass merchants,” said analyst Tom Adams of Adams Media Research.

Even so, overall the rental business didn't fall off as dramatically as many pundits had predicted, with most sources putting rental spending flat or slightly down from the previous year. Video Store Magazine projects total consumer spending on video rentals will come in at $9.3 billion this year, up 4 percent from 2002. “We're definitely not at the end of the curve,” Adams said. “There's no real growth, but there's not a major meltdown, either.”

“There are renters and buyers in any market, whether it's entertainment or housing,” said Steve Beeks, president of Artisan Home Entertainment. “Not everyone wants to own a movie, even if it's $10 or $15.”

Columbia TriStar's Feingold notes that 2003 will be remembered as the year in which “there was significant growth in the subscription model as well as an exponential shift from VHS to DVD in the traditional rental outlets.”

Sellthrough Is King
If the rental market in 2003 showed surprising resiliency, it also was marked by increasing irrelevancy, at least as far as the studios are concerned. As rental pricing for VHS thundered toward extinction, with the VHS cassette itself trailing not far behind, the focus at the studio level was on selling, selling and more selling — regardless of whether the customer was a consumer or a rental dealer.

“There is no differential,” said Thomas Lesinski, president, worldwide, of Paramount Home Entertainment. “Historically, the differential was in the rental price, and with DVD 80 percent of the business, that's going away.”

Sales to consumers, however, are clearly where the studios are focusing their efforts. Even as DVD went mainstream, buy rates held steady at about 15 discs a year for the average DVD household — a rate three times as high as in the peak year of VHS sellthrough. And the studios are anxious to maintain this momentum.

“You can't pick up a newspaper or turn on the TV without seeing something about DVD,” said Buena Vista's Chapek. “It has really permeated American culture to the ultimate extent this year.”

“DVD has really come into its own as a consumer product,” said Artisan's Beeks, who will head the home video arm of Lions Gate Entertainment after its acquisition of Artisan Entertainment. “Every studio marketing department is made up of major consumer products executives, and they think about marketing differently — they realize it's their responsibility to make sure stuff leaves the shelves, just like their counterparts at Procter & Gamble.”

Fueling buy rates in 2003 was the widespread deep discounting of hot new releases by big retail chains that use DVD as a loss leader to drive traffic into their stores. Virtually all of the year's big titles, including Buena Vista's Finding Nemo and Warner Home Video's The Matrix Reloaded, could be purchased for less than $15 at Wal-Mart, Target and other big-box retailers during their first week in stores.

This, in turn, has front-loaded DVD sales, mirroring what's happening on the theatrical side, in which films earn as much as half their total theatrical gross during opening week.

“One of the most notable trends we saw this year was a lot more sales in the first or second weeks than we ever experienced in the history of the business,” said David Bishop, president of MGM Home Entertainment. “You're seeing a lot more savvy consumers who recognize that in the first one or two weeks of a title's release, it's going to be at its lowest price.”

This has had a pronounced impact on studio marketing strategies, Bishop said.“We now recognize that a lot of marketing expenditures need to be more upfront,” he said. “We're spending more on the weekend before street date, and the weekend after street date is critical, because if we haven't sold through 30 percent or 35 percent of the amount of product we shipped into the market, we're in trouble.”

So Happy Together
DVD in 2003 also continued to bring about a closer alliance between home entertainment and Hollywood's creative side. Video was no longer seen as the bastard stepchild of theatrical. Increasingly clever and compelling special features brought new respect to the format, and in a growing number of cases — most prominently, with New Line Home Entertainment's the “Lord of the Rings” franchise — special extended versions of the film were produced especially for the DVD.

“The whole issue of added-value features differentiating DVD became completely old news and completely accepted,” said Stephen Einhorn, president of New Line Home Entertainment. “And another very significant thing that emerged over the last year is the understanding by filmmakers that the DVD version is their film legacy.”

Previously Viewed Profits
On the retail front, a cottage industry developed in the used-DVD trade, with even Blockbuster promoting a new trade-in policy in the hopes of boosting its stuttering sellthrough business. At the same time, used CD stores began branching out into used DVD, paying as much as $5 for recent hits.

The burgeoning market for used DVDs also helped rental dealers dispose of surplus product after rental demand died down, making them more willing to take risks with secondary titles — and stilling studio fears that with everything priced for sellthrough, the market for ‘B' movies would disappear.

Without the selloff potential of used rental product, “the ‘B'-title business would be dead,” said Mike Dunn, president of 20th Century Fox Home Entertainment. Instead, he said, “the rental market [for secondary product] has actually gotten healthier over the past couple of years, and if you have a genre picture it will not only sell into the rental market and rent, but the previously viewed market for a $6.99 ‘B' snake movie is very, very good.”

Complete-Season Craziness
New channels of programming also emerged. TV shows on DVD, particularly complete-season packages, became the latest rage, as the DVD format's compact size and high capacity met up with the growing demand for collectable product.

Total spending on TV DVD product topped $1 billion, a tripling in just two years. A study from Adams Media Research showed that top TV DVD sets of such shows as “The Simpsons” and “The Sopranos” can generate upwards of $50 million in net DVD sellthrough revenue for the studios.

“The TV business, I thought, would be half a billion dollars this year, and it's double that,” said Fox's Dunn.

“No one predicted that TV would be a significant part of the whole DVD business,” said Paramount's Lesinski. “Now, you've got both classics and new shows finding consumer acceptance.”

Music DVDs also experienced a surge, and music retailers who never knew what to do with music VHS finally had a high-end audio solution that made sense. “It's our largest DVD growth category,” said Rick Timmermans, director of video merchandising for Tower Records and Video, a 98-store chain of audio-video combo stores based in West Sacramento, Calif. “Music has just gone through the roof. In 2002 it accounted for maybe 12 percent of our video business; this year, it's close to 20 percent, maybe a little over.”

Shaking Things Up
A number of other stories made headlines. At the beginning of the year, three major home video divisions got new presidents, Dunn at Fox, Jim Cardwell at Warner and Lesinski at Paramount.

Best Buy finally threw in the towel on its two-year attempt to turn its Musicland mall stores into a network of mini electronics emporiums.

Universal Studios left its troubled French Vivendi umbrella for a new home with NBC, while Lions Gate Entertainment bought the much-larger Artisan Entertainment to create an uber-indie.

New Lions Gate home video chief Steve Beeks said he's eyeing a home video slate for 2004 of nearly 100 titles. “Based on how well DVD did this year and how well we think it's going to do in 2004, we're looking forward to creating quite a company,” Beeks said.

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