How Long Will the DVD Party Last?: The Year of Transition27 Dec, 2004 By: Thomas K. Arnold
Benjamin Feingold, president of Sony Pictures Home Entertainment, says 2004 will go down in the books as “the year of transition.”
Exactly what the year is transitioning into, however, remains vague, even now that it's almost over. As the DVD market enters its mature phase, opinions are mixed on what the future holds. Softer-than-expected sales on certain new mega-hit theatricals this fourth quarter are being interpreted by some as early warning signs that buy rates may finally begin to drop.
“It's an indicator that things might be slowing down,” said Bob Chapek, president of Buena Vista Home Entertainment. “I expect that next year we're going to see a significant fall in the buy rate per household. Maybe the 30th percentile will buy as much as the 20th, but with the 70th percentile you start to hit the laggards.”
Others, however, say not to worry. “I think to predict a change in the buy rate is premature,” said Thomas Lesinski, president of worldwide home entertainment for Paramount Pictures. “What's happening on the new-release side isn't anything new. What I think is amazing is that as more and more homes got added, people kept on collecting, and buy rates held steady. This shows that even in a mature market, DVD has captured the fascination of the American consumer.”
Whether or not that fascination is winding down is just one of several issues that have turned Hollywood's continued optimism about DVD from cheery-eyed to guarded.
• Escalating one-upmanship between high-def rivals Blu-ray Disc and HD-DVD — and the fact that the studios are fairly evenly split between their support — means a format war at launch, once considered unthinkable, might actually break out.
• The crumbling rental market has the big chains scrambling for other ways to make money, from subscriptions, used-DVD sales and a greater focus on games to buying one another out.
• Plunging prices on catalog titles — along with the advent of dollar DVDs, which Thanksgiving week accounted for 19 of the top 50 spots on the DVD sales chart — are triggering concerns that the DVD business is being devalued way before its time.
• And retail shelf space has not kept pace with the flow of product coming into the market, creating a space crunch that has studios fighting for premium positions — and forcing them to spend record amounts of money on marketing, not just to pump their product to consumers, but also to show retailers that they care.
“This year will go down as the most crowded year of all time,” said Mike Dunn, president of 20th Century Fox Home Entertainment. “More than 10,000 SKUs were released this year, and there are just so many alternatives. Aside from new releases, you've got catalog growing at about 5 percent, TV DVD sets up 300 percent, direct-to-video and a lot of kids TV product.
“If you look at what's happening now, a title comes out. Then two weeks after it's released, you lose your primary display and your numbers go down dramatically. It makes it very difficult.”
Difficulties aside, 2004 was another record year for home entertainment. Video Store Magazine projects total consumer spending on DVD and VHS will come in at more than $25 billion, $14.6 billion from sales — an 11.4 percent gain from 2003 that more than makes up for an 18 percent drop in rental revenue, which is projected to finish the year at $7.6 billion, down from $9.3 billion last year. (Sales of previously viewed DVDs and cassettes, meanwhile, added another $2.2 billion to the pie, up 69 percent from an estimated $1.3 billion in 2003.)
“It's been a year of tremendous growth for the category, and one that's continued to deliver good news to studio and retailers,” said Kelley Avery, worldwide head of home entertainment for DreamWorks SKG.
“Despite the challenges, it's been a fantastic year,” added Sony's Feingold. “Dating has become more difficult, and the front-loading of selloff is making people more nervous, but the reality is DVD and future optical-disc formats are a fantastic medium.”
Off and Running
The year began with one of the most robust starts ever. Hollywood came off a record holiday season for DVD players, with some 5 million new DVD households having come online in the weeks before Christmas. The result was a veritable feeding frenzy at retail in the first few months of 2004, led by Universal Studios Home Entertainment's American Wedding, which sold 3 million discs within three days of its Jan. 2 release.
Sales continued strong throughout the year, and it wasn't just the big theatricals that were doing big business. Buena Vista Home Entertainment's direct-to-video The Lion King 1-1/2, released in March, was one of the top-selling DVDs of the first half. Mid-range theatricals also consistently outperformed, including Buena Vista's Brother Bear, which earned $85 million in theaters and sold 8.5 million videos, and Universal's The Rundown, which grossed $48 million and sold 4 million videos — about what one would expect of a $100 million movie.
As a result, a catalog-dependent company like MGM Home Entertainment also was able to score big on the new-release front, said president David Bishop.
“A great example was Walking Tall,” he said. “It was a huge success on DVD, selling through as though it was an $80 million rather than a $40 million box office title.”
If it was the summer of the sequel at the box office, for DVD it was the year of the franchise. Top-selling DVDs for the year included Shrek 2, Spider-Man 2, and installments No. 3 in the “Harry Potter” and “The Lord of the Rings” series. Suppliers also took advantage of sequel fever by repackaging and repromoting the original film on DVD; Universal struck gold with its new The Bourne Identity “explosive edition,” which was the No. 1 seller the week The Bourne Supremacy opened in theaters.
“We created a whole new DVD with a new ending and a new beginning and sold more than 1 million additional copies,” said Universal president Craig Kornblau. “Later in the year, we did the same with The Chronicles of Riddick — we went back to Pitch Black and sold more than 1 million copies of a reworked director's cut.”
Niche Markets Explode
Franchise power went beyond theatrical films. Paramount scored big with its Nickelodeon cartoon compilations, releasing new DVDs of “SpongeBob SquarePants,” “Dora the Explorer” and others at regular intervals. Paramount also added PBS and Hasbro to its library of branded lines, which includes MTV, Comedy Central, CBS and Spike TV.
Lions Gate Entertainment, too, announced an ambitious deal with Marvel Enterprises to produce and distribute on DVD new titles based on comic-book characters. The company also announced new Barbie, Care Bears and Megablocks releases, with family division president Glenn Ross telling attendees at the July Video Software Dealers Association (VSDA) convention he forecasts huge growth in the children's nontheatrical video category, from $2 billion in consumer spending in 2003 to $7 billion in 2007.
The year also saw the emergence and strengthening of niche markets, with strong sales for documentaries (fueled by Fahrenheit 9/11 and Super Size Me hype) and phenomenal growth in the music DVD market, which according to some estimates now accounts for 10 percent of all music spending.
The biggest niche story, however, belongs to TV DVD, which this year expanded beyond current series to cover the entire age of television, from Groucho Marx's “Your Show of Shows” to such Golden Age classics as “I Love Lucy” and “The Dick Van Dyke Show.”
To say the market exploded is an understatement, with an estimated tripling in output, mostly of the “complete season” variety. Holdout Universal entered the business in a big way in August after hearing from top retailers that they planned to increase the amount of floor and shelf space they are dedicating to TV DVD product. A short time later, respected Merrill Lynch analyst Jessica Reif Cohen issued a report in which she forecast 30 percent annual growth in the TV DVD category, ultimately topping out at $3.9 billion.
“For us, it was the year of TV DVD,” said Paramount's Lesinski. “Who would have ever thought that David Chappelle's cable TV show on Comedy Central could sell almost 2.5 million units? TV DVD has been an extraordinary source of additional revenue to the studios.”
Rental's Slip-Slidin' Away
While DVD sales continued to post gains, it was a bad year for traditional rental. For years, the rental business had been remarkably resilient, even in the face of soaring DVD sellthrough growth.
But this year, the big chains, led by Blockbuster, began reporting declining same-store rental revenue, quarter after quarter. At the same time, they began trying all sorts of schemes to stop the red ink from flowing. Blockbuster announced a big push into the used DVD “trading” business and then a monthly subscription program. Hollywood Entertainment chief Mark Wattles announced his intent to take the chain private so he could more easily diversify into video games and other areas. And Movie Gallery, which felt the hurt a bit later than its more urban competitors due to the rural nature of its stores, also began to tinker with its business, stepping up its commitment to video games and testing in-store subscriptions.
Indeed, “subscriptions” has become the rental industry's buzz word du jour. Both Wal-Mart and Blockbuster in 2004 entered the online subscription arena dominated by Netflix, while Blockbuster and several other rental chains toyed with a monthly rental “pass.” In each case, the concept was the same: three titles out at any one time, no limit, for about $20 a month.
That's a significant development, said Sony's Feingold.
“Rental has been flat or declining for years,” he said. “The real story is the continuing expansion of the subscription model, whether it's online or in store. In the future, I think a big piece of the business will be subscription, versus a la carte. It gives people, once they know the cost base, the freedom to make their own decisions.”
Format Wars Heat Up
Big stories on the high-def front also surfaced in 2004.
Sony bought MGM in what many saw as a bid to beef up its catalog holdings and hopefully give its Blu-ray Disc an edge in software support.
The next-generation format wars heated up, and by the end of the year, five of the six majors had aligned themselves: Sony and Buena Vista with Blu-ray, Warner Home Video, Universal and Paramount with HD-DVD, whose backers touted cheaper costs and an easier transition.
Blockbuster put in a bid for Hollywood, and a week later, Movie Gallery joined the fray.
Wal-Mart delivered a year-end shocker when word broke that the giant discount chain wants permission from studios to burn DVDs of specially ordered movies in its stores.
“It's a maturing market, presenting us with new marketing and distribution challenges,” noted Stephen Einhorn, president of New Line Home Entertainment.
“I think this was the year when we got a peek into the future of the DVD marketing in its maturation phase,” added Buena Vista's Chapek. “We're looking at a flat market. If buy rates go down, you have to manage the category more than you ever have in the past.
“You watch how much product you place, you watch how much money you spend, and you have to be more discriminating about what you release, what you acquire and how much you spend on creating the product.”