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Managing Expectations in an Age of Uncertainty

15 Sep, 2009 By: Thomas K. Arnold

Ah, how we long for the days of DVDs that sold 5 million copies or more their first week in stores. That sounds about as distant a concept these days as dollar-a-gallon gasoline. There's no question DVDs aren't selling as they used to, and one of the many culprits studio executives are fingering, aside from the troubled economy, are the ubiquitous Redbox kiosks and Netflix envelopes that are making it easier than ever for movie fans to be cheapskates.

Forcasting DVD sales has always been equal parts science and art. Sure, there are plenty of formulas: A movie that grosses between $25 million and $50 million in theaters will likely sell X DVDs, while a blockbuster with domestic box office earnings of more than $100 million will sell Y DVDs. There are plenty of variables: Action movies tend to sell better than comedies, comedies tend to sell better than dramas and films with lower box office grosses tend to sell more DVDs, proportionately, than movies with higher box office grosses. We've even got fancy terminology, such as "overindexing" (when a DVD of a movie does significantly better than expected in relation to the film's box office, and "VTR ratio" (video-to-theatrical, or a film's video gross divided by its theatrical gross).

But in the end, there's an art to predicting DVD sales, and for years our studio brethren have sharpened up their forecasting skills with an ample supply of gut instinct and become quite good at it, really.

Until now. Films that were expected to do well tanked — in some cases, missing target by as much as 30%. And films that were not expected to do well — well, lots of them did even worse, while some surprised everyone and did unexpectedly well.

"It's really become a crap shoot," noted one observer, an industry veteran who asked not to be named.

When DVD sales first began to slow in the second half of 2005, studio executives began realizing that they had to manage their expectations. The days of double-digit growth, year after year, were over, and studio forecasting models had to be stripped of multipliers and essentially held flat.

But then the economy tanked, and DVD sales began sliding downward at a faster pace than anyone wanted to believe. We've all lashed out at the bogeyman, Redbox, but no amount of screaming and shouting is going to make those sales numbers come back up.

So we have to contend with a declining market, and adjust our businesses accordingly. But that's easier said than done, simply because we have no idea what's going to happen to the economy — and the DVD-buying public has become increasingly fickle and unpredictable. It's hard to manage expectations when we issue what we think is a conservative forecast, only to discover we're still 15% or 20% off — while the other studio's title, which we had pegged as a real stinker, somehow catches on and sells millions of copies its first week in stores.

What's the answer? Sadly, there isn't any. And that's what makes being a studio executive with a home entertainment division so frustrating these days.

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