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No European Holiday for Home Video

25 Jan, 2006 By: Charles M., Sam A.

Last year heralded the death of two things in the European video sector. The first is the VHS cassette, which now looks consigned to a niche reserved for specialists and nostalgic types. The second is growth — at least the kind of double-digit expansion that had come to be associated with DVD rollout.

Of the three big markets — the United Kingdom, France and Germany, which among them make up two-thirds of the European video industry — only the latter is likely to show 2005 revenue roughly stable compared with the previous year.

Industry observers had predicted single-digit growth for the sector in 2005, so the downturn has been more brutal than anticipated. Blame for the decline was placed on the maturing of the market, a "challenging" retail climate, increasingly sophisticated piracy operations, a disappointing slate of films and, most importantly, the dramatic slump in VHS sales, which fell 72 percent to 10.4 million units. DVD sales grew 7.5 percent to 211 million units.

“It's the first time the video industry has gone into negative,” said Jean-Paul Commin, president of the International Video Federation. “But there's no need to be alarmist and see it as a sector in ruins,” he added, pointing out that the market across European Union territories is currently worth about $15 billion annually.

For Peter Smith, president of Universal Pictures International, 2005 was notable internationally for the growth of online retailers as part of the business mix.

“They are taking more share and, given the great cost base these businesses have, they are in a really strong competitive position to take more from the specialists, the department stores and the supermarkets,” he said.

Smith estimated that the online sector accounted for 10 percent to 20 percent of the home entertainment business across Europe last year from “virtually nothing three years ago” and still has a long way to go.

The U.K. market, the only one so far to have published official figures, witnessed a 5 percent drop in unit sales despite an increase in household penetration of DVD players to 75 percent of homes, according to the British Video Association.

A latecomer to the DVD boom, Germany has yet to report full-year figures, but estimates put combined video revenue in the $2.2 billion range, marginally up from 2004. According to the Federal Film Board, revenue from rental and sell-through was up 1.9 percent in the first nine months to $1.3 billion, of which VHS sales accounted for 4 percent.

“The German video market is not like the U.S. or, particularly, the U.K., where you can do a token theatrical release and, however it does, be assured of a great result on video,” said Al Munteanu, president of Munich-based independent SquareOne Entertainment. “In Germany, the video results are still very closely tied to theatrical performance. I would say DVD sales have reached a plateau in terms of growth, but it is really a question of genre.”

The exception is the rental market, which executives said remained very strong in Germany last year, especially for genre product such as horror.

In France, the market was down nearly 9 percent in terms of value but up 10.5 percent in terms of units, according to market research group GfK. Jean-Yves Mirski, director of the Video Publishers' Union, put the muted performance down to the same mix of factors cited elsewhere in Europe: a weakness in the titles offered, a tough overall economic situation and the impact of piracy.

“Another very important factor is the successful launch of digital terrestrial television in 2005,” Mirski said. “There are already more than 1 million households receiving it. It's a lot of channels, and it's free.”

DVD penetration in France is now more than 70 percent, up from 60 percent in 2004, while the average price of a DVD slumped from €15 the previous year to around €11.5."DVD is the technology that has seen the most explosive growth in history, and 2005 was the year of maturity in France,” said Daniel-Georges Levi, head of Buena Vista Home Entertainment France.

In Italy, the same pattern is repeated, with growth in volume but no increase in value over 2004's combined earnings of some $1.2 billion. DVD unit sales were up 33 percent, with more than 40 million discs shifted excluding sales through newspaper kiosks, according to industry body Univideo. VHS was down nearly 50 percent, and Univideo chief Davide Rossi predicts the near-total disappearance of that market this year.

The average price fell around 20 percent, mainly because of discounts on the part of store chains and some new entrants to the video-publishing market looking to make a bit of noise, Rossi said.

As in France, video purveyors in Italy have had to compete with the arrival of digital terrestrial, which has seen some 4 million set-top boxes deployed nationwide. DVD penetration is estimated at 50 percent to 60 percent. Meanwhile, piracy continues to be a major factor.

In Spain, rentals were down 35 percent for the first nine months of the year from the same period in 2004, while the number of units sold was down 6 percent from the same period a year ago. Up to September, there were about 18 million units sold; 480,000 were VHS, the rest were DVD.

Preliminary figures in the Netherlands show a total of 12.2 million DVD and VHS units sold last year, an increase of about 5 percent from 2004, according to industry body NVPI.

The British Video Assn. suggested that the outlook for this year might be brighter thanks to a more upbeat box office performance in the second half of 2005.

Charles Masters reported from Paris; Sam Andrews reported from London. Ab Zagt in Amsterdam, Pamela Rolfe in Madrid and Scott Roxborough in Cologne, Germany, contributed to this report.

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