<I>VSM</I> Roundtable: Challenging a Transformed Industry31 Jan, 2004 By: Kurt Indvik
Piracy, the battle for retail and rental shelf space, pricing, high-definition DVD and the future of VHS are just some of the issues Video Store Magazine tackled in a recent “roundtable” with 10 presidents of home video divisions. Their comments, culled from e-mail and interview responses, will shed light on how leading suppliers approach the business in 2004.
VSM: What single event or trend most impacted the industry in 2003?
Steve Beeks, president, Lions Gate Home Entertainment: As DVD has really come into its own, studios' sophistication with the product has really grown. Even though we have all made moves toward being consumer-products-focused, the success of the format has really changed the way we look at the home video business. The importance of the first week of sales, the advertising and packaging issues, all are part of this business's transformation into a consumer products business.
Mike Dunn, president, 20th Century Fox Home Entertainment: For us, it was expansion of TV on DVD as a category. It's heading for a $1 billion year this year in consumer revenue, and we're about 40 percent of that. That's been a found piece of revenue for our company that wasn't there three years ago. For the industry, the consumer audience broadened last year. The good news is about the 10 million DVDs sold over the four-month holiday season -- it appears that those consumers are buying DVDs at a rate much higher than the rate many of us expected. Right now, 70 percent to 80 percent of DVD households are avid buyers, buying at a much higher rate than the old VHS households.
Craig Kornblau, president, Universal Studios Home Video: 2003 was the year of the franchise. Looking at the top-performing films and videos this year, studio franchise properties continued to strike a chord with both moviegoing and home-viewing audiences. Impressive box office and home video results for such titles as The Lord of the Rings: The Two Towers, American Wedding, The Matrix Reloaded and 2 Fast 2 Furious validated the importance of studios building franchise hits to lay the foundation for long-term growth and returns. Then there was the unprecedented power of catalog. Studios are responding to consumers' insatiable appetite for not only recently released movies, but also the film gems in each studio's library.
Stephen Einhorn, president, New Line Home Entertainment: Clearly, piracy is the most important issue facing the industry today. In this respect, every segment of the supply chain must take a long-term perspective as it relates to serving our customers' needs for convenience and availability, notwithstanding its effects on specific distribution segments. Another important strategic problem we face is the “commoditization” of our products as retailers continue to compete with each other on the basis of price and continue to push for lower catalog prices.
VSM: What are the biggest issues facing the industry going into 2004, and what can be done about them?
Beeks: Everyone is talking about piracy, though some would argue that right now it's [having] a minor impact. We want to make sure it doesn't impact the movie business in a major way, and we all have to actively deal with that, especially as bandwidth on the Internet increases over the next few years.
We also want to keep the rental market healthy. We can't forget that the rental market is important and here to stay for the foreseeable future. We have to be able to react to the needs of the rentailers, whether that's with revenue-share deals or flat pricing on VHS.
David Bishop, president, COO, MGM Home Entertainment: No. 1 is piracy. MGM has a three-pronged approach. First, we will continue to push legislation that makes various methods of piracy illegal and anticipates fast-changing technological advances. Secondly, we need to continue our wide-ranging educational campaign to build public awareness that copying films is stealing. And we need to continue providing legitimate, high-quality and affordable alternatives to piracy, from legal download services such as Movielink and CinemaNow to DVD and other delivery platforms.
No. 2 is maintaining profitability through all retail channels.
Bob Chapek, president, Buena Vista Home Entertainment: The biggest issue we face is the potential for widespread piracy and file sharing in the mid- to long-term future. Until we have an adequately protected format, this will be the biggest risk to our business. The good news is that the next-generation technology holds the promise of being able to significantly mitigate this risk. The other risk is that the next-generation format developers [will] introduce multiple formats to consumers, confusing them and discouraging adoption of a format. We only have to look as far as DVD-Audio and SACD [Super Audio CD] to see the impact of competing new formats.
Henry McGee, president, HBO Home Video: In order of importance, the three biggest issues are theft, piracy and illegal distribution -- three different terms for the biggest threat to the vitality of the business. We need to redouble our efforts at enforcement of antipiracy laws and continue to work with engineers and scientists to develop new and improved encryption technologies.
Kelly Sooter, head of domestic home video, DreamWorks Home Entertainment: Pricing from both a retail and consumer perspective is an issue facing the industry. A race to the bottom is never a successful business strategy for the long term. As an industry, we have to be cognizant of how low pricing devalues DVD; we don't want it to be just a commodity, with price being the most important factor. Another issue is that home video sales at retail are imitating what is happening with theatrical box office grosses, with 50 percent to 60 percent of a movie's business being done week one. The cluttered environment and lower pricing at retail exacerbate this issue.
Finally, the growth of the business is coming from the number of individual titles, not an individual title's performance. We need to address what happens if we don't continue to feed the same number of releases into the pipeline.
VSM: How important is the acceleration of high-definition DVD, and do studios need to make a choice soon for the next-generation format to move forward?
Beeks: It's essential that there be an agreement on one format. There has to be a meeting of the minds. We can't have a format battle that lasts a long time and creates confusion in the consumer's mind and slows the acceptance of high-definition DVD. I think you're going to need to see the copy-protection issue dealt with before you see any studios moving toward a format. If you look at the growth curve of DVD, and when the rate at which DVD [adoption] begins to really slow, then right around 2007 is the appropriate time for a rollout of high definition.
Bishop: Eventually, it will become clear which format has the most momentum and will win out with consumers. The consumer-electronics group with a thoroughly developed, consumer-friendly format that also addresses the studios' needs will win the day. I believe the process will take about three years before the format of choice surfaces.
Einhorn: I believe the industry must be in a position to provide consumers with HD programming or they will find other ways to satisfy this need. It is very important to roll out the new format with universal support -- much like the support that was garnered when DVD was originally rolled out. This is likely to happen within the next two years.
VSM: In general, a video's first week or two on the shelves is generating 50 percent of its revenue or more. Will this have any impact on release windows in the future?
Chapek: It's true that sales volume is more and more compressed into the first several weeks after release, but I think that has a lot less to do with windows than it has to do with an abundance of choices for consumers at retail, combined with necessarily shorter prime retail space available for any one title. Regarding windows themselves, my guess is that they will not get much shorter over the next year or so. Filmmakers would have to finish their films even earlier than they do now for that to happen.
Dunn: I think the theatrical window is about as short as it will ever get. That is the sacred cow. All the TV and international deals are generated off the level of theatrical activity, and you don't want video stepping on that. Success of video is going to be generated off the promotion at theatrical; that's the genesis of the brand. On the other side, I think there will be some tests on the PPV/VOD windows. My gut feeling is those tests won't show any upside for PPV/VOD, and those windows will remain where they are.
Kornblau: Early on, we recognized the importance of the first- week sales resulting in our eventizing approach to key DVD releases. In 2003, we continued to create multilayered and high-profile events to capture the consumer's attention the week of street.
In addition, choosing the right time of the year to release a title is becoming increasingly important. Though the windows are getting shorter, we see this as an advantage. Theatrical, home video and PPV can benefit from the increased awareness generated by each medium's marketing campaigns. Remember, more than 55 percent of audiences who purchase DVDs have never seen the film in theaters.
VSM: Are we nearing a retail shelf space crisis any time soon? Is it getting tougher to place so-called ‘B' titles that generated less than $25 million or so?
Beeks: We are all seeing a need to move more product off the shelves early. The competition for shelf space and floor space is dramatic and getting stiffer as the velocity of programming being released increases. I think you will see more retailers converting a greater percentage of VHS space to DVD, but the entertainment departments at major retailers aren't going to be expanding to any extent. I think we have seen an overreaction to compete on the ‘A'-level blockbuster titles, and in some cases ignore product that did $25 million to $40 million at the box office that, in some cases, will rent better. It's in their interest to have that product on their shelves.
Bishop: We already are experiencing difficulties holding onto shelf space for long periods. But we don't see it necessarily getting more difficult for ‘B' titles as a result. Retailers see these titles as a way to increase profit margins because these movies have high awareness from their theatrical release, but are less price-sensitive and don't need to be priced as aggressively as the blockbusters.
Dunn: It's definitely getting crowded. Separating retail from rentail, at retail our space is expanding because the music business is in decline so there is more space available for video. VHS is being pared down to where it's about right. Rentail right now is a little bit of a mess. It's pretty easy to rent the new theatrical product, and previously viewed product goes quickly, but the overall rental business, including catalog, is ugly compared to what it used to be. They can't quite have the three pieces of the business they want: The new-release business, the previously viewed sales and the rental catalog business — of the three, they are really going to have to start thinking about that theatrical rental catalog business that was pure profit for them.
Einhorn: Definitely there will be more aggressive programs developed to compete for shelf space. Rentailers have been and are getting more difficult in the shelf space they allocate to ‘B' titles, but must also consider programming, genre and the star power. This is certainly going to be a long-term problem to which there appears to be no immediate answers.
Sooter: There does not seem to be a threshold in terms of what consumers will and will not buy.
We are hearing from retailers that they are expanding their home video space to capitalize on the consumer appetite for home entertainment products.
On the rental side, it's less about not being able to place a ‘B' title than recognizing that rentailers are being selective about what they take in and how much.
VSM: What's the prognosis for VHS in the next 12 months?
Chapek: It will continue to decline at a sharp rate; however, even with a steep decline, it will still be a multibillion-dollar business for the industry. It will have a life after 2004, but it will start to become a business with selective potential, depending on title or consumer value.
Dunn: If you are looking at family titles, you are still seeing 30 percent to 35 percent business, and I certainly don't want to kiss that goodbye. VHS will clearly be around in 2004. I think it's wrong for retailers to abandon VHS. You can rationalize reducing the square footage given to it, but I think they really have to think hard before they abandon VHS.
Einhorn: VHS is dead. There is no real life after 2004.
Kornblau: VHS continues to be an important factor as evidenced by the $6 billion in sales and rental revenue in 2003. Though the percentage VHS contributes to overall consumer spending will continue to shrink, it still will have a viable impact in 2004 and beyond.
Sooter: Total VHS spending represents more than 25 percent of the $24 billion generated by overall consumer spending. It's premature to walk away from a $6 billion industry. There are still more than 93 million VHS households, and VHS remains a viable format, especially in the rental market. At DreamWorks, it all comes down to marketing a movie, not a format (DVD vs. VHS) and providing the proper mix of formats to give consumers what they want.