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Fox's Dunn Bullish On DVD and Blu-ray

29 Jul, 2006 By: Erik Gruenwedel

Michael Dunn

Mike Dunn, worldwide president of 20th Century Fox Home Entertainment, has been with the studio for nearly 20 years. He remains a strong believer in packaged media, notably the next-generation format Blu-ray Disc. Mindful of burgeoning digital distribution, Dunn believes the medium is in its infancy and that the focus should remain on filmed entertainment's cash cow: DVD.

As previously done with other key executives, Home Media Retailing asked Dunn to elaborate on packaged media's durability and where he sees growth potential, among other issues.

HMR: What effect has the maturation of the DVD industry had on your business?

Dunn: We're at 80% DVD market penetration in the United States, and we've reached this point in record time. It is one of the most successful consumer electronics products of all time and, at $25 billion, home entertainment remains one of the biggest consumer categories for all classes of retail trade.

Overall, it has become a product-driven business, meaning that a key growth driver for us this year is the incredible lineup of new theatrical releases from our studio. We've saved Ice Age: The Meltdown for the critical holiday season. Also in the fourth quarter is X-Men: The Last Stand at $233 million and The Devil Wears Prada heading over $100 million.

There are certain niches such as TV DVD and, for Fox in particular, inspirational or faith-based titles that are driving growth. For example, the faith business has been very successful for us, with more than $100 million in revenue in the past two years. And TV DVD, which is still the fastest-growing segment of the business, will gain 8% to 12% this year, with consumer spending well over $2 billion. As a leader in [TV DVD], we expect our business to grow significantly.

And, a real ace in our pocket is our new relationship with MGM, which will provide a steady stream of new release and catalog titles. It's an exciting time, and we're very bullish on the business.

HMR: Has the strong global box office season this year shored up the theatrical distribution food chain?

Dunn: This year, the studios — and Fox in particular — have been successful at making films that are attracting a worldwide audience, with the total business finishing up 7% to 10%. A strong theatrical business this summer is going to echo right to the fourth quarter in DVD. The box office sets the bar for DVD and the value of a film through all windows of distribution. For most movies, DVD is the profit driver.

HMR: How does Blu-ray fit in a download world? Without a unified format, is there a possibility Blu-ray Disc and HD DVD could become the next UMD?

Dunn: First of all, the format war is really only going on in the press. Come the late fourth quarter, starting in November, Blu-ray is going to be showing huge numbers. The early adopter is going Blu-ray, and I think it will be readily apparent to that crucial second tier of consumers that Blu-ray is the obvious choice.

It really is an easy argument to make. Right from the start, Blu-ray is going to be in consoles, computers and video games. You've got 170 companies involved, many of which are among the most trusted consumer brands, along with every major motion picture company but one. The penetration of Blu-ray is going to be in the millions of households by early 2007, compared to less than 100,000 households for HD DVD. And, it will penetrate faster than DVD did — going from zero to 10 million households like a rocket. Once the delta between the two formats begins to widen like that early on, it becomes a Blu-ray no-brainer for the consumer.

As for digital downloading, it is at its very beginning stages. There is a long way to go before the download world leaks into the DVD business. That, too, is going to be an issue in the press but not in the marketplace. I think packaged media is pretty safe for the next 10 years.

HMR: As it has with theatrical, does an ever-increasing percentage of a film's DVD sales come from abroad?

Dunn: Home entertainment is a worldwide business. The household penetration rates are north of 50% in all of the developed countries. It is a very significant marketplace and a very complicated one because there are different levels of piracy and competition in each territory. There are roughly 300 million people in the United States and nearly 6 billion in the rest of the world. Our business isn't 50-50 yet, but that's our goal. We've structured our company to aggressively drive sales in every market. It's a well-oiled machine that gives us a true competitive advantage.

HMR: Do the studios have a control on piracy overseas?

Dunn: Piracy is like a rash. You have to fight it, fight it and fight it. There is not one solution to piracy; there are multiple solutions. It is an everyday competitor that we are attacking in a variety of ways. This studio is mobilized to meet this challenge on every front, every day.

HMR: How important is it to market DVD to alternative retail outlets (supermarkets, Starbucks, convenience stores, etc.) compared to mass merchants such as Target, Best Buy, Wal-Mart and Costco?

Dunn: I still like the early Coca-Cola strategy: “be an arm's length from a consumer's need.” Simply, the more ubiquitous the distribution, the better you serve the consumer. We are definitely increasing our distribution base.

In the last year alone, we've opened 3,000 new doors, Christian bookstores, that we're serving not only our faith-based fare but also appropriate all-audience, family and kids titles.

The consumer dynamics in this country continue to evolve, and we are really pushing into high-end stores where people have money.

HMR: Is Fox interested in working with Starbucks to distribute titles?Dunn: I don't have much to say about that. I believe Starbucks has talked with everybody in town. There are different levels of interest and different projects among the studios. Starbucks clearly attracts an upscale consumer with a certain level of taste, and that is very attractive.

HMR: What kind of a second half of 2006 can we expect in home video?

Dunn: We see a growth level of about 5% compared to last year. The strength of the product is really solid and complementary to the consumer. For instance, this year there are three very strong family movies — Ice Age: The Meltdown, Cars and Over the Hedge — compared to one last year, Madagascar. There was no Devil Wears Prada last year with a female-skewing demo yet also appealing to men. The moviegoing audience is responding. Exit surveys are telling us that people like the movies they see — not only ours, but also some of our competitors,' too. Simply, better movies make for a better DVD market.

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