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'DVD at 8' Reaches Maturity

30 Jun, 2005 By: Stephanie P. Jessica W.

After years of smooth sailing, the home entertainment industry is beginning to spot the first clouds on the sales horizon.

Eight years into DVD, growth — though still strong — is slowing, the box office pipeline is faltering and a next-generation format war is approaching.

“Y'all are crazy,” retailer Kevin Cassidy told high-definition backers unwilling to agree on a unified format. The comment came during the Next Generation Supersession at the Fourth Annual Home Entertainment Summit: DVD Magic 8, which is produced by Home Media Retailing in cooperation with The Hollywood Reporter and DEG: The Digital Entertainment Group.

“The answer is a unified format in the fourth quarter,” said Cassidy, EVP of Tower Records and Video.

“The boom times are over. We're at the plateau,” said Steve Nickerson, SVP of market management for Warner Home Video, adding that if the packaged media business doesn't carve out a place at the “high-definition table,” other digital media will take its business.

Despite the alarms, studio home entertainment presidents manning a later panel refused to jump into the fray.

“I don't think it's productive in a public setting,” Paramount Pictures worldwide home video chief Thomas Lesinski said. “Gabbing about it is not prudent.”

After that comment, the seven other home entertainment division presidents kept mum, their silence expressing the sensitive nature of the subject. On-again, off-again negotiations between the two competing HD disc camps — Blu-ray Disc and HD DVD — have yet to produce a unified format. Both HD formats have squared off with different studio and hardware supporters.

DVD Still Growing

Still, there's lots of good news on the DVD front, noted Peter Staddon, VP-elect of the DEG and executive VP at Twentieth Century Fox Home Entertainment. Sales have grown nearly 10 percent from March 2004 to March 2005, resulting in a prosperous $24.4 billion-a-year business.

“A lot of markets would like 10 percent growth,” he said.

The DVD market has reached its “final wave” of consumers, Staddon said. These late adopters are buying an average of nine discs per year, he said. Early adopters are still very much in the game, buying around 22 discs per year, an increase from 2004, Staddon said.

Still, future growth will come more from new DVD households than from increased purchases per year from existing DVD households, said Ruben Alcaraz, senior account manager for Nielsen Entertainment.

Staddon noted, as did many speakers, that marketers must work harder in the coming years to squeeze revenue out of a maturing business, mining catalog and exploiting growth areas like TV DVD, which he said “still has a lot of growth in it.”

“The pressure is on us to be a little more creative,” Lions Gate Entertainment president Steve Beeks said. “A lot of the low-hanging fruit has been picked.”

Marking the importance of TV DVD, the keynote speaker at the event was Bob Newhart, who said his work is “finding a whole new audience” on DVD. Fox released season one of “The Bob Newhart Show” in April and is preparing season two for release later this year. Newhart, 76, will provide a commentary on the sophomore set.

Catalog ‘Race to the Bottom'

One of the biggest problems for the catalog business right now is “race to the bottom” pricing, said Ron Sanders, EVP and GM of North America for Warner Home Video “It's a challenge to maintain a velocity of sale that makes up for the lower price,” he said.

Fox's Staddon noted that as of March 2005, catalog titles accounted for $6.5 billion of the overall sellthrough market, close to the $6.7 billion from new theatrical titles. But it takes a lot more titles to feed the catalog fire thanks to price erosion, he said. Catalog DVDs sold nearly 31 percent more units than theatrical DVDs for $200,000 less in revenue, he reported.

Paramount's Lesinski agreed. “Everybody's trying to grow their catalog business,” he said. “Unfortunately the prices are really, really low.”

Price erosion is across the board, according to Staddon. As of March, the average price of a DVD had dropped to $17.04 from $17.30 in 2004. New release titles took nearly a dollar dive from $19.63 last year to $18.70 this year, and catalog titles dropped from $14.37 to $13.82.

Ben Keen, analyst at Screen Digest, said DVD growth opportunities abound internationally, where DVD penetration lags in such markets as Central and Eastern Europe, Japan, Mexico, India and China.

Box Office Slump a Concern

Many speakers mentioned the box office slump, now in its 18th week, as a concern.Ralph Tribbey, editor of The DVD Release Report, noted that shrinking theatrical-to-DVD release windows — and the studios' rush to release poor performers — could result in a shortage of box office titles in upcoming months.

Titling his presentation “The Chicken Little Report,” analyst Tom Adams of Adams Media Research said “the sky is not falling” with the box office slump, “but the sky is not the limit” on DVD growth. So far this year, he said, video sales are up 6 percent, even though box office sales and admissions, video rental and the box office punch of the video slate are down for the year.

“We're getting to the flatter part of the upper growth curve [with DVD],” he said.

At least one studio president, Stephen Einhorn of New Line Home Entertainment, didn't buy the oft-reported notion that the box office proceeds are suffering because of the growth and quicker release of DVD.

“Most consumers don't know what the window is,” he said. Twentieth Century Fox Home Entertainment president Mike Dunn noted the price of gasoline may be stealing from consumer spending at the box office more than DVD.

Consumers certainly seem to have a strong preference for where they buy their DVDs, and they like good prices. A DVD buyer is more than twice as likely to buy at Wal-Mart rather than any other retailer, according to an analyst from Nielsen's Alcaraz. The Nielsen data showed that one out of every two people who shop at Wal-Mart has purchased a DVD there.

Wal-Mart also has the lowest prices of any home entertainment retailer, Alcaraz noted. Suppliers who want to get more bang out of pricing should look to partnering more with online retailers, which are on the top end of the pricing spectrum, he said.

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