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Indies Feel the Crunch

25 Nov, 2008 By: Chris Tribbey

Hiring freezes, budget cuts, fewer title acquisitions, even layoffs.

The idea that home entertainment is a recession-proof industry? Yeah, not so much, at least not this time around, according to the numbers and the leaders of more than a dozen independent distributors.

“I doubt that any distributor, major or independent, now considers our business recession-proof,” said Maria Lynn, president of Wolfe Video.

The “recession proof” hopes for home entertainment are similar to the idea that bars can be recession proof: People drink during good times, and maybe more during bad times. People who’ve lost their jobs and seen their 401k disappear are likely to escape from their troubles with a DVD at home, the thinking goes.

“In the past, it has been proven true for the major blockbuster titles that recession doesn't affect them,” said Martin Mair, head of home entertainment for Cinema Libre. “For niche films like ours, we are seeing a drop in sales … but we think the niche market consumers of our titles are usually a little more affluent and less likely to stop buying them.”

Today the sales are going against the theory. According to Home Media Research, sales of packaged media — both DVD and Blu-ray Disc — are down 7.62% through Nov. 16, compared to the same period last year. Consumers have spent $6.71 billion in 2008 through Nov. 16, compared to $7.26 billion in sales at that point in 2007. The 2007 figures include the sales of the now-defunct HD DVD. In a word, the climate for selling packaged media is “brutal,” according to Phoenix Entertainment Group president Tony Perez.

“Retail is only looking for Iron Man, The Incredible Hulk, The Dark Knight, etc. this year, mostly as loss leaders to try to sell other stuff to consumers,” he said. “The economy has been tight, and it has affected how buyers view product.”

Product from independents has long played second fiddle to new theatrical releases. “When corporate-owned sellthrough retailers make cuts to their buys, they often see our films as expendable. An ironic plus for us is that when we see this happen, we usually do see an increase in our business with online retailers,” said Michael J. Shoel, president of Ariztical Entertainment.

And the loss of several retailers in recent years has made sellthrough for independents that much more difficult.

“Business is stable, but the retail environment is difficult. In three years we’ve lost Musicland, Comp USA and Circuit City. That’s about 3,000 stores total,” said Greg James, president of Topics Entertainment.

Freyr Thor, president and CEO of Vanguard Cinema, said independents are suffering from cash-flow challenges, without theatrical revenue or overseas operations to compensate for a slowdown in domestic DVD sales.

“I think we are all vulnerable,” he said. “I can see major studio concerns over inventory returns after this holiday season. It remains to be seen how bad it will be.”

Belt-tightening is happening in every industry, and the independent movie distributors are no exception. Ariztical Entertainment is cutting back on how much it offers to producers of films. Topics Entertainment cut 10% of its staff in September, and may have to make more personnel cuts. Phoenix Entertainment Group is dropping its release slate from 25 to 15 for 2009. Advertising and marketing spending is being reined in by many independents, forcing them to get creative with viral, online campaigns to get their product noticed.

“I think the relative mediocrity of studio DVD releases this spring and summer contributed to consumers concluding that buying DVDs just wasn’t as valuable as it once was,” said Bruce Frigeri, president of Lifesize Entertainment. “Add on the collapse of consumer confidence in the economy, and we are where we are.”

The plight of independents is also hurting Blu-ray, with several companies saying they have no choice but to steer clear of high-definition for now.

 “Quite frankly I have not seen a significant demand for it,” Ariztical’s Shoel said. “Perhaps after the holidays, that may change. For the moment, it hasn't yet happened.”

Vanguard’s Thor added: “Blu-ray is on hold. Consumer demand needed to grow considerably for the bottom line to work for indies, which would also drive costs down. Neither is happening.”

Shawne Kleckner, president and CEO of The Right Stuf International, said Blu-ray might not be the answer to declining DVD sales.

“The idea that Blu-ray is going to solve all of our problems? Not gonna happen,” he said. “There’s going to be a lot of pressure to get the retail price down.”

If there is a recession-proof portion of the industry, it’s in the rental arena, several independents agreed, and the numbers back them up. According to Home Media Research, as of Nov. 23 consumer spending on DVD rentals is up 3.1% over the previous year, to $7.05 billion.

“The rental market is the closest thing to recession-proof in our business,” said Berry Meyerowitz, president of Peace Arch Home Entertainment. “People need that two-hour break to take their minds off more serious things.”

Frigeri said his company’s emphasis on rental product has left Lifesize in a better position than other independents. Ariztical’s Shoel added, “Rentals in whatever format takes shape will provide an inexpensive form of needed entertainment and escape.”

There are other silver linings to be found, some said. Jon Soo, VP of sales and marketing for Tai Seng Entertainment, pointed to the success of Summit Entertainment’s Twilight ($69.6 million on opening weekend) as proof that the movie industry as a whole continues to be attractive, even during a recession. And Dan Gurlitz, VP of video for Koch Entertainment Distribution, said positive sales figures for catalog titles show the industry is “recession resilient.”

“Broadness of ordering seems to be back on track again vs. depth of copy, a signal that both the trade and consumers are once again seeking selection,” he added.

Larry Brahms, president of MTI Home Video, said no industry is recession-proof. “That being said, any expenditure that averages under $5 and can entertain for multiple hours may be one of the last to go,” he added.

But Right Stuf’s Kleckner warned that not every distributor would survive the recession.

“People are running scared,” he said. “You’re going to see companies with strong balance sheets ride out the difficult market. The ones weak to begin with will go away.

“It’s not a pleasant market environment right now, and you’ll see a lot of deadwood cleared out.”

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