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DVD Honeymoon Is Over

25 Jul, 2005 By: Thomas K. Arnold

Animated hits Shark Tale and Bambi are among the top DVD releases of the year so far.

The recent hoopla over Shrek 2 and The Incredibles video sales speaks volumes. The hit movies sold millions of copies on DVD, even breaking records. But because sales tapered off quickly and the final tallies didn't quite match expectations, the studios got hammered by the press — and by Wall Street.

The honeymoon's over, studio executives grudgingly concede. After years of double-digit sales gains, the home video industry is no longer growing as fast, or as furiously. Indeed, while consumer spending on home video was up a robust 25.7 percent in the first quarter of 2005, clocking in at a record $4.3 billion, spending actually dipped slightly in April and again in May, according to an analysis of VideoScan numbers by Home Media Research.

“The business is certainly softening at rates we expected or even more,” said Bob Chapek, president of Buena Vista Home Entertainment and also president of DEG: The Digital Entertainment Group. “We're still doing research, but I will tell you that growth rates over the past couple of months are down significantly, and it's hard to say whether this is a blip or a trend.”

“We're now in year eight of the format, and certainly business is softening on the feature-film side, both in terms of new releases and catalog,” said Benjamin Feingold, president of Sony Pictures Home Entertainment.

What's behind the slowdown? Early DVD adopters now have sizeable libraries and are buying more selectively. And the latest wave of DVD converts simply isn't as aggressive as its predecessors.

“These are the people who waited eight years to buy a DVD player,” Chapek said. “By definition, they're not going to consume as much as other households do.”

While DVD growth has slowed, VHS sales are in a freefall. In May alone, VHS sales were down 54.5 percent from May 2004 numbers. Combine the two, and it's clear the business is no longer in its salad days.

“For a long time, we've felt this year and next year are the years in which the industry will start to mature, and I think what you're seeing now is that even though we continue to see growth, you're not seeing explosive growth,” said Steve Beeks, president of Lions Gate Entertainment.

How much growth is there? That depends on who's talking. At Twentieth Century Fox Home Entertainment, worldwide president Mike Dunn said the home entertainment business in the first six months of this year was up 8 percent from the first half of 2004, with sellthrough up 12.3 percent and rental essentially flat. Universal Studios Home Entertainment president Craig Kornblau said the overall business is up 3.5 percent, led by a 7 percent year-over-year gain in sellthrough.

The business has gotten to the point where a high-profile release won't shatter sales records on its own, as was frequently the case in previous years. Now, Kornblau said, “intelligent marketing and strategic placement make all the difference.”

Slower growth isn't the only issue video executives are grappling with. There's more product than ever coming out, thanks in large part to TV DVD, one of the few categories that still is experiencing rapid growth. And that's leading to a severe shelf-space crunch at retail — and mounting pressure to make a big splash the first week a title is in stores.

“We're all trying to sell off 50 percent to 60 percent of the amount shipped in the first six days,” said Lions Gate's Beeks.

“If you consider the fact that Paramount alone is releasing approximately 340 titles this year, you have a gauge on just how much content is being released weekly into the marketplace,” said Thomas F. Lesinski, president of worldwide home entertainment for Paramount Pictures. “Retailers need a good reason to keep a title on the shelves.”

To break through the clutter, studios are spending more money than ever to market their films — a record $1.08 billion last year, according to Nielsen-Monitor Plus. Studios also are paying closer attention to what goes on at retail.

“One of the keys to success is appropriate placement of the right title in the right store,” Kornblau said. “The smartest retailers are looking at the demographics of consumers who shop at individual stores and putting the right product in those stores.”

Video executives also are pushing out their titles earlier and earlier in the hopes of drafting off their theatrical momentum. Since the start of this year, films that earned at least $25 million in theaters came to video an average of 138.9 days after their theatrical opening, according to The DVD Release Report — down from 145.8 days last year and 153 days in 2003. But executives don't expect windows to get much shorter, noting that it takes a certain amount of time to prepare a film's DVD release.

So far this year, the three biggest DVD sellers are animated family features. Buena Vista's The Incredibles stands as the year's No. 1 seller, with sales pegged by studio sources at nearly 15 million units. DreamWorks' Shark Tale is No. 2, with sales of more than 10 million units, followed by Buena Vista's Platinum Edition Bambi at nearly 7 million units, Universal's Meet the Fockers at 6 million units, and Buena Vista's National Treasure at about 5 million units.

Studio executives are cautiously optimistic about the remainder of the year, even though box office is way down and home video, despite all its diversity, still depends largely on theatrical features. The third quarter is flooded with TV DVD product, and the fourth quarter is rapidly filling up with hit spring and summer movies, including Star Wars: Episode III — Revenge of the Sith, said to be arriving in stores Nov. 8. In addition to Robots and Episode III, Fox's fourth-quarter slate includes a 40th anniversary edition of The Sound of Music. Paramount's Lesinski expects the studio's biggest fourth quarter ever with the theatrical hit The Longest Yard, special editions of Titanic and Airplane!, and TV DVD.

The wild card: a high-definition successor to DVD. Studio executives agree a new format would be the best medicine, although the prospect of competing formats HD DVD and Blu-ray Disc compromising seems dim.

“The solution to the soft market, honestly, is a format change,” said Buena Vista's Chapek. “We need a single, viable next-generation format that can renew consumer interest in the category in general and put them on the path of replenishing their existing libraries.”

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