Home entertainment accounted for more than $22 billion in U.S. consumer spending in 2002 -- more than twice the boxoffice total -- according to PricewaterhouseCoopers, which predicts the home entertainment number will exceed $30 billion in combined sales and rentals by '07 (when theatrical revenue is projected at about $13 billion). Clearly, this is a category to keep an eye on. With pundits predicting record-breaking revenue this holiday season, The Hollywood Reporter decided to commemorate the official launch of the "Super Bowl of retail sales" by bringing together five presidents of home entertainment for a discussion about the state of their industry.

Moderated by The Reporter's editor-in-chief and publisher, Robert J. Dowling, the roundtable included DreamWorks Home Entertainment worldwide chief Kelley Avery, Artisan Home Entertainment president Steve Beeks, Buena Vista Home Entertainment president Bob Chapek, 20th Century Fox Home Entertainment president Mike Dunn and Universal Home Entertainment president Craig Kornblau.

The Hollywood Reporter: Home entertainment has always been a major revenue producer, but always kind of behind the scenes. Now you guys are like celebrities. Is that all a result of DVD?
Bob Chapek: I would say the DVD's got a lot to do with it, primarily because of filmmaker interest. In the VHS world you rarely heard from them, and as a result it really took a secondary position in the marketplace. On the DVDs, there are so many features and better audio quality, better video quality. Filmmakers are so involved now in the actual production of the DVD and the bonus features -- which in terms of the number of hours can outpace the length of the movie by five, six, seven, eight, nine times. They start developing the DVD bonus features well before the feature is finished. All of that has raised the provenance of DVD.

THR: So the DVD had a lot to do with it?
Steve Beeks: The sell-through pricing of the DVD has made it a cultural phenomenon. In the last five years, this is the first time the consumer has had the ability to pick up a picture on its initial release -- at a sell-through price. Everything is sell-through now.
Craig Kornblau: It used to be a very simple business. We put product in the rental pipeline, and it was kind of quiet. Today it's such a sell-through consumer business that we're spending a ton of money on advertising. It's very visible to the public. And I think talent is involved both because of the legacy, in terms of all the value-added that Bob (Chapek) talked about -- but also because of the visibility of their product in the marketplace.
Kelley Avery: And I have to agree with Craig. This business has always been a marketing driven business, but the fact that we have day-and-date sell-through release dates -- our marketing spends have gone up some 30% from 2001. So we have this tremendous format, we've created this huge consumer appetite for DVD, and we're letting them know about it. I also think that in the family market -- and kids are a really important component -- DVD has created a tremendous cool factor. It's created a chat factor among kids.

THR: You buy a music CD and listen to it over and over again. How many people play movies again?
Beeks: It's a strange phenomenon, and I think it's more akin to books than to music. People buy books even though they can go to the library and basically get them for free. This is a collectible society. And as a discretionary purchase, DVDs are cheap.
Chapek: Family films have always had that repetition factor that made purchase a no-brainer. What we're seeing though, has to do with the absence of a rental window. That has excited people because there's no penalty now, to purchase these things. You don't have to wait.
Mike Dunn: There's two phenomena that are very interesting. DVD, because it's digital, has put the consumer demo on its head. You have about 15 million high-end systems out there, and they need something to show. DVD is the sexiest thing. So you now have males buying DVDs, whereas in the old VHS days that male shopper was few and far between. Go to Best Buy on Tuesday morning and you're going to see lot of guys that work at Kinkos, that wear T-shirts, buying movies. The second thing is the explosion of devices that allow viewership in many parts of the home, and even in the car and on planes. It's made it more like music in that DVD is portable and VHS wasn't.

THR: Bob mentioned filmmaker interest, and practically every DVD has extras ...
Kornblau: It's much more of a personalized approach. In the commentary, the director can talk about why he did a scene a certain way. He knows he's going to have the ability to put in his deleted scenes. Filmmaker involvement in the creation of the DVD, not only in the special features, but the physical materials, is much greater than it ever was in creating the film version. They really see it as their opportunity to present the picture the way they want to, to talk about it and to really feel appreciated. It's to the point now where they expect to be involved, even if it's a library picture we're bringing out for the first time. If you don't call the director and ask them to get involved they get pretty upset. They see it as their medium.
Chapek: In the beginning, when DVDs appealed mainly to early adopter film zealots, filmmakers looked at DVD as an opportunity to have a permanent digital record of their experience making the film and their audience was themselves and the other folks who made the film. I think that's changed over time as a general audience has become receptive and almost demanding of these bonus features. So the filmmakers are now looking at (DVD production) not only through their own eyes but through the eyes of their audience. That, to me, has been the big difference and that's why bonus features have become so much more interesting than they were in the beginning, when they were essentially repurposed EPK materials or you'd put a camera on the director and let him talk for three hours. Now it's much more interactive, and that's what's adding value to the proposition.

THR: It seems almost a dichotomy because from the beginning to the end of the movie, with all the crafts involved in it -- the whole idea is that you don't notice the artifice -- you just experience the ride, so to speak. The extras are much more academic: Here's how it worked, this is what we did. And the two wouldn't necessarily seem to work together.
Kornblau: It's a look under the hood. Many people are very interested in that. And the water-cooler talk now, not just in Hollywood, is, "What's the boxoffice?" You can go to Detroit, and that's the water-cooler talk.
Dunn: The kind of extras that have appealed to consumers have also changed as the medium has evolved. Initially you had repurposed behind the scenes, director's commentary, a copy of the script. Those all appealed to early adopters. And we did consumer research when we were releasing DVDs back in '97, '98, and those were the things most important to consumers and their intent to purchase. Today that's changed, and the things consumers really like are alternate endings, deleted scenes, perhaps the enhanced sound. We found that overwhelmingly the No. 1 item they prefer is an alternate ending. Something you can't see.
Kornblau: Filmmakers, right in the scripting stage, are talking about what they would they like to put in these movies. For instance, with ("American Wedding," the third "American Pie" film) there's an extended 20-minute bachelor party that it didn't make sense to put in the theatrical version, but for the DVD it's perfect. We're going to have an unrated bachelor party that's going to be a lot of fun. We're finding that a third of these consumers, when they're making the final purchase decision in the store, say they're significantly influenced by the value added content.

THR: When you guys started in the business the theatrical people did all the decision making, and when they were done handed you the cassette. Are your groups now involved in the deciding what kind of films are made and how they're going to be marketed? Is it one continuum instead of two separate events?
Kornblau: At Universal, we're completely integrated with our theatrical group. We're an integral part of the greenlighting process in terms of what we think the economics of a certain movie will be. Given that home video represents about half of the revenues coming in on a movie, it's an important piece of the puzzle -- but it's really important in terms of, "Does the budget make sense for that movie?" more than, "Do we make that movie or not?"
Beeks: Video has always been kind of the key component for us, here at Artisan and now as the combined Artisan Lions Gate. It's basically the lead. We make pictures that are intended to be commercial from the start but with a gear toward the ancillary markets. We won't make a picture that is in a genre that doesn't perform disproportionally well on video when compared with the average.

THR: But you don't have veto power over it?
Beeks: We do at Artisan.
Dunn: It's never come to that at Fox, but similar to what Craig says, the economic value of our marketplace is factored into every film. And there's a download after the film goes theatrically, so we understand which markets worked and which didn't. Then there's a download after the DVD is released to see (whether) we continue with this type of movie. I think that's what's made our Searchlight division so successful, the relationship between the theatrical division there and the home video division. Homevideo is 50% of the revenues for big Fox, but it's close to 75% of the revenues for Searchlight. When you have a limited-release slate like that, it's very important where the DVDs are placed in the market -- as opposed to a 3,000- screen release market where a film is just put out nationally. We're very selective on which markets are heavied-up and which markets are light and where the advertising is placed.

THR: Is there a disconnect as to what works in, say, the four quadrants for theatrical, and what works in the DVD business? Or is the DVD world just a mirror of the theatrical world?
Dunn: With DVD, what you can do is armchair quarterback the theatrical and really understand the markets that are working. If it is a male quadrant, you can really exploit that in DVD. Sometimes I think theatrical goes for the big picture. They might go for four quadrants, but what's really important is going for quadrant one.

THR: So are your forecasts predicated on what happens in theatrical?
Dunn: Our forecast is set way in advance of the movie being made, and I'm sure everybody here is held to that number even if the film doesn't work.

THR: But you're looking at the same set of assumptions. Isn't the likelihood that if it didn't work in theatrical it isn't going to work in video?
Dunn: It can work better in video.
Avery: Being a second window, we have an opportunity to exploit our successes and improve on things that were disappointments theatrically. Boxoffice is not the sole indicator of a movie's success in the video market. And a lot of times what we fall prey to is a movie that might not succeed theatrically is stamped in our industry as a failure. But in the video marketplace, if you've got a good movie that plays well, and you can find out who the audience is and go after that audience and market to it, you can get results. We've seen that with movies like "Spirit," which went on to do some 7 million units. It's a great movie, but it wasn't able to break out to the level we would have liked in theatrical.
Chapek: Boxoffice is really important, but there are certain genres, as Mike said, that really pop. lf it's a heavy action-adventure male-oriented movie it's going to really pop on DVD. If it's a Eurocentric heavy drama, it's going to be much more difficult on DVD in the U.S.
Dunn: An interesting type of film is one that gets high "second-choice" scores theatrically. "The League of Extraordinary Gentlemen" was released with ("Pirates of the Caribbean: The Curse of the Black Pearl.") "Pirates" obviously came out very big and "League" had high second-choice. When that gets to video, the pent-up demand will be realized, and it will perform much bigger than the boxoffice. As long as we don't release it the same weekend as "Pirates." (Laughs)

THR: How many titles are released a year?
Kornblau: Our estimate is over 2,000. That's a combination of new and catalog.
Avery: It's as competitive as the theatrical market or more -- because whereas they're losing their screens, we're losing our (shelf) space. The issue with every single release going sell-through is you've gotta be doing 50% of your volume in that first week or you going to be losing display space. And if you're not out there in front of the customer, you're not selling that product, which places a lot more risk on studios in this primarily sell-through world.

THR: I've become more aware of the commercials on a Wednesday and Thursday night than I am of the shows, and video advertising has become really apparent. It seems like there are as many video ads as theatrical. Is the media approach similar?
Kornblau: It's similar. The only difference is we have the opportunity, maybe, to appeal to more niche markets. It's not all prime dominated. There's the opportunity to buy a Lifetime or something like that to try to get a particular audience because we don't look at it as four quadrants. When we do our targeting we do it much more finitely than that.
Dunn: Theatrical movies are new. We've got to find a way to be relevant. So you get very good at dominating cable. I may not have a 15-second on (NBC's) "Friends," but I've got two 30s and a billboard on Comedy Central. I try to dominate, and you have to, because theatrical is outspending us two-to-one, in some cases.

THR: Is online generating significant sales?
Dunn: Online is important. Amazon.com is a significant customer, but in relation to WalMart and Best Buy and Target they're very small. The core demo, those 15 million early adopters, are clearly online. Our TV product does extremely well online.

THR: The MPAA gives a number of around $30 million for the average theatrical marketing campaign. What about video?
Chapek: There is no one model, but when you've got an event film like, say, "Pirates of the Caribbean," the spending is comparable with theatrical in terms of total media value.
Avery: Promotional partners are probably more important in homevideo than in theatrical.
Beeks: For us, we're often orchestrating the theatrical campaign to position the film for homevideo. It's a cohesive campaign.
Kornblau: "Event" is a very important word in terms of our marketing, because when we launch a movie we're trying to bring it back to the culture in a big way. We also partner with retailers to bring what we call a "retailtainment" event to their stores. Because more than a third of shoppers are making their purchase decisions right in the store.

THR: Do you use consumer research? Like an NRG or anything like that?
Kornblau: We spend an awful lot of time on purchase intent. We'll show various packages to consumers and adjust it based on the results. We test our TV spots, too. You have this one moment to capture the public's attention and it has to be dead on. And in order to have the benefit of 20/20 hindsight, you have to wait until people have an impression of a movie. With the shorter windows -- an average of four months between the theatrical and video release, plus you have to wait a few weeks until consumers actually have an impression of a particular movie -- you don't have much time. You're playing full court basketball, sprinting up and down.
Chapek: But you know, about half our business is from titles that haven't seen a boxoffice in 10 or more years. It's much more important to have an event behind a "Lion King" than something that's just been released, and it's a much bigger challenge.
Avery: The greatest risk the studios face right now is that this becomes a total commodity business, where it's only about price and not marketing.

THR: And now with TV DVD coming on so strong, there are even more titles to get in front of people.
Beeks: I think what's really amazing is something like what happened at Mike's company with (Fox's) "Family Guy," which only aired for one season but went on to become this phenomenal DVD success ...
Dunn: And we're going to go back into production on "Family Guy" specifically for the DVD market, as a result of the DVD success. I think this 34-year-old male, who is a very avid purchaser, fits right into the demo of our TV DVD business. The things that really work, like (Fox's) "The Simpsons" -- which will do 1.6 million units on Season One alone, over the period of a year and a half -- are in that sweet spot, and it's created a revenue source that didn't exist during the VHS days. It's that male consumer that has a high-end home entertainment system and is a collector.

THR: In terms of exposure, you hear that home video generates twice the revenue of theatrical. Does that mean that twice as many people are seeing the movies at home?
Dunn: The rental market is the No. 1 trial source of the business. A decent rental title will go into at least 20 million, sometimes as many as 30 million households.
Kornblau: More than half the people who buy a DVD never saw the movie in a theater and never rented it. Our challenge is to not only get the people who love the movie to buy it, but also the people who have never seen it.

THR: Sell-through obviously accounts for the lion's share of revenue. PricewaterhouseCoopers projects sell-through for 2003 will be $14.4 billion at retail and rental $9.4 billion. But on a transactional basis, how do sell-through and rental compare?
Avery: There will be close to a billion sell-through transactions this year, and about 3.5 (billion) to 3.6 billion rental transactions. Renting movies is a habit.
Kornblau: If you go back about six years, it was pretty even -- with about $8 billion in sell-through and $8 billion in rental. So while rental has stayed rather flat, there's been this phenomenal growth in sell-through, which speaks to the hunger for our product. And what's new today is a third of the people buying DVDs have never bought a videocassette.
Avery: Today, there are about 66 million active purchasing households. If you go back to the heyday of VHS there were about 58 million. So that's about a 15% increase.

THR: There has been talk of going back to a two-tier system of rental and sell-through pricing with DVDs. Where does that stand?
Kornblau: As long as the buy-rate, the number of times somebody buys a DVD, stays as high as it is, that screams to us to stay with this model. I think we'd all admit we're monitoring it every day, but when you have a $40 million film that can sell 2.5 million units into the marketplace, it's an easy call.

THR: Everything seems to be migrating to digital storage and online. If true VOD arrives, will this still be a packaged goods business?
Chapek: I think it will be primarily a packaged media business for the foreseeable future. That said, I think in the long term, say 10-plus years, you're going to have a bigger electronic distribution opportunity than you have today. Whether that will eventually be bigger than packaged media, I don't know.
Avery: There has always been a variety of ways the consumer can access the material: In a theater, on TV, on pay-per-view. There will be an audience that wants to download a movie. That will be just one of many options.

THR: You hear about this new blue laser. How long do you give the existing DVD format?
Chapek: Our projections show DVD will peak out around 2007, as a category. Hopefully somewhere around that time we'll have the next generation DVD format.
Dunn: And it will be backward-compatible, so you're not going to see this big drop like you see in the video game business.

THR: OK, we'll hold you to that, Mike.