Home Entertainment Software Spending Continues to Rise in 2012
The bulls are back.
Consumer spending on home entertainment software, which had been steadily declining since its 2006 peak, once again rose in 2012. Final numbers are not yet in, but at the end of the third quarter DEG: The Digital Entertainment Group reported that consumer spending on home entertainment as a whole – disc sellthrough as well as rental, plus digital distribution – was up, by about 1 percent.
IHS Screen Digest is even more bullish, predicting that home entertainment spending will finish the year at $18.7 billion, 5 percent more than last year. To an industry that has seen annual spending drops for the past five years, any gain, no matter how slight, is cause for optimism.
"This was a year in transition – for the positive," said David Bishop, president of Sony Pictures Home Entertainment. "Relative to the past several years, 2012 was a year of growth for our business, and the year-end numbers should show that the home entertainment industry is moving in a direction that is cause for optimism."
"Our preliminary projection is that the overall home entertainment consumer spend for the year could grow by as much as 1 percent as the packaged media sellthrough market has stabilized and digital platforms are surging," added Ron Schwartz, EVP and GM of Lionsgate. "The best news for our business is that consumers’ appetite for content continues to grow and will result in approximately 6 billion home entertainment turns for all platforms in 2012, up nearly 70 percent from 3.6 billion turns in 2008."
Lori MacPherson, EVP of home entertainment for The Walt Disney Studios, said 2012 "was a year of positive change." She added, "The most encouraging development was the continued strong growth of Blu-ray Disc and the convergence of entertainment experiences afforded by the connected Blu-ray player. We also created new opportunities for consumers to extend their enjoyment through added offerings on physical product that provide a bridge to digital experiences, such as digital comic books and music downloads."
Several factors are being credited with the apparent turnaround in home entertainment’s fortunes, including a continued climb in Blu-ray Disc sales – on track to finish 25 percent ahead of last year – and explosive growth in subscription streaming, with consumer spending nearly tripling in the first nine months of the year, according to DEG.
But perhaps the most compelling reason is that after years of new and innovative distribution methods appearing on the market, 2012 was the year they all began to come together. Instead of cannibalizing each other, they began to feed off each other. And the result was a multi-channel, multi-device approach that makes it easier than ever for consumers to digest entertainment in their homes – or on the go.
"2012 is best described as the year when the home entertainment industry was no longer defined by one unique project," said Amy Jo Smith, executive director of the DEG. "There are many ways for consumers to enjoy movies and television content. They still love their DVDs and Blu-ray Discs, but they also enjoy watching content on to the go on their portable devices, from tablets to smartphones, and digitally through cloud storage and unique offerings like UltraViolet."
"Consumers - and notably the millennial generation - are truly embracing the multitude of options that technology makes available to them," added Dennis Maguire, president, Worldwide Home Media Distribution, Paramount Pictures. "This growing awareness will change the way we deliver entertainment - and measure revenue - from this point forward."
UltraViolet, in fact, may represent the tipping point that helped take the industry back to growth – and will keep it there. The fall 2011 launch of UltraViolet was seen as a transformational moment. It allows consumers to store the rights to movies and other purchased content in a "digital locker" in the cloud and access this content whenever they choose, on whichever device they choose.
A year after launch, there are now more than 7 million consumer households with UltraViolet accounts, and upwards of 8,500 titles available. UltraViolet received a big boost in April 2012 when Walmart launched its "disc to digital" initiatives, which offers consumers the chance to add UltraViolet downloading and streaming to discs they already own. Other retailers, including Best Buy and Barnes & Noble, have since followed.
"UltraViolet is positioned to explode," said Ron Sanders, president of both Warner Home Video and the DEG. "Account registrations are growing at a remarkable pace, and we can expect to see a vast expansion in UltraViolet-enabled titles. We’re also looking forward to a significant number of retailers and platforms offering UltraViolet products next year, each one promoting UltraViolet in their own way, which will further position the industry for growth."
"UltraViolet supports ownership of our product across both physical and digital channels," added Sony Pictures’ David Bishop. "Research has shown that users have a high level of satisfaction with the experience. To date, the bulk of activity is driven off of the purchase of physical media and we see this - improving the value proposition of physical media – to be the biggest impact to date. I have no doubt that UltraViolet will similarly play a huge role in supporting the value proposition of EST."
Craig Kornblau, president of Universal Studios Home Entertainment, agrees.
"As Blu-ray continues its steady climb bundled with UtraViolet as its perfect companion, digital ownership is perfectly positioned to aggressively grow with physical media," he said. "Consumers are increasingly inclined to take advantage of an ever-growing UltraViolet ecosystem that provides them the freedom and flexibility to watch their movies wherever and whenever they want."
The industry still has work ahead if it really wants to make UltraViolet fly, though, notes Mark Fisher, interim president of the Entertainment Merchants Association. "From a consumer perspective, although UltraViolet has made great strides toward a more consistent consumer experience, it's still not easy," Fisher said. "The consumer experience has to become nearly as simple as turning on a TV and putting in a DVD or turning on HBO. And it will - but we aren’t there yet."
Optimism about the promise of UltraViolet is compounded by encouraging signs in the packaged-media side of the business, still home entertainment's bread and butter. In the first nine months of the year DVD and Blu-ray Disc sales were off less than four percent from the prior year, after several years of precipitous double-digit declines.
Final-year tallies aren’t in, but preliminary fourth-quarter reports are positive, particularly after a robust Black Friday holiday – particularly for deep-discounted catalog titles as well as premium-priced gift sets – and higher-than-expected sales for new releases like Universal Studios’ Pitch Perfect, which posted first-day sales that were up to three times higher than what some key retailers expected.
Much of the credit goes to both the caliber of movies that came to disc in 2012 and still-growing Blu-ray Disc sales – as well as the proliferation of combo packs that include the same movie on DVD and Blu-ray Disc.
"Truly ownable and repeatable titles like Ted, The Dark Knight Rises and Brave showed extraordinary strength in 2012," said Universal Studios’ Kornblau. "Additionally, Blu-ray clearly has become the format of choice among consumers, as Blu-ray-centric titles such as Snow White and the Huntsman now routinely top 50 percent of total consumer sales. And while movie consumers increasingly have been getting a taste for digital ownership, the home entertainment industry nevertheless saw the largest percentages ever of Blu-ray combo pack purchases in 2012."
One of the biggest developments in consumer home-entertainment consumption habits was the stunning growth in video streaming, or SVOD (subscription video-on-demand), which in the first nine months of 2012 saw a near-tripling in consumer spending, to more than $1.7 billion.
Netflix, the unrivaled leader in the streaming game, in June said that for the first time its subscribers had streamed more than 1 billion hours of content in a single month. Amazon signed a three-year streaming deal with Epix that gave it access to more than 2,000 movies from Paramount, Lionsgate and MGM. And Hulu Plus said it will end 2012 with more than 3 million subscribers, twice as many as the year before.
Electronic sellthrough, for years a nonstarter, remains a small sector of the market. But studios are experimenting with preferential windowing in the hopes of giving digital downloads a much-needed boost, and preliminary efforts have been successful.
Sony Pictures Home Entertainment was the first to initiate early EST, having tested the concept back in 2009 with It Might Get Loud. Since then, the studio has released more than 20 titles on early EST, including The Amazing Spider-Man and Men In Black 3, generally two weeks before the DVD/Blu-ray Disc hits stores.
Another big player in the early EST game is 20th Century Fox, which in September 2012 began selling digital versions of the sci-fi thriller Prometheus three weeks before the disc’s street date. The release kicked off the studio’s Digital HD initiative, which allows consumers to download or stream more than 600 Fox films on connected devices. The titles, which cost less than $15, are accessed through Amazon, CinemaNow, Google Play, iTunes, PlayStation, Vudu, Xbox Live and YouTube.
Other studios are doing their own trials – to the point where Disney’s MacPherson calls "continued experimentation with preferential windowing" one of the key trends in 2012.
"It's a strategy we've employed on select Blu-ray and HD EST releases for years now," she said. "Lately, the industry has been utilizing this window strategy to drive interest in digital ownership. What we’ve learned is that consumers like to have a variety of options from which to choose."
While disc sales appear to be on a comeback - and electronic distribution, on a roll – the only real fly in home entertainment’s ointment is traditional disc rental. As of Sept. 30, 2012, disc rental at brick-and-mortar shops was down a staggering 29.3 percent from the same period last year, according to DEG. The once-mighty Blockbuster video rental chain continues to bleed red ink, even under the ownership of the Dish Network, which bought the ailing chain out of bankruptcy with the intention of selling mobile devices to stream Blockbuster movies.
But the Federal Communications Commission took longer than expected in deciding whether DISH should be able to use its satellite spectrum for that purpose, and in October 2012 CEO Charlie Ergen announced he was giving up on an ambitious strategy to offer a Netflix-like mailed disc and streaming movie service through Blockbuster. At the time, he told Bloomberg, "I don’t think [buying] Blockbuster is going to be a mistake, but it's unclear if that’s going to be a transformative decision."
Elsewhere on the distribution front, 2012 will be remembered as the year studios finally made their peace with Netflix and Redbox. Relationships in prior years had been strained by accusations that by-mail disc rental (by Netflix) and dollar-rental kiosks (from Redbox) were cannibalizing sellthrough. Studios tried withholding product from the rental services and when that didn’t work – discs were simply purchased at retail on street date – several studios took the matter to court.
Ultimately the dust settled and the relationship now is one of peaceful co-existence, with some studios striking deals with the two services in which discs are delayed in return for lower prices. To be sure, challenges remain.
"Keeping up with consumers’ expectations of being able to access entertainment through any of the wide array of delivery options is a major challenge," said Amy Reinhard, EVP and GM, domestic home media distribution, Paramount Pictures. "We recognize that consumers want to be in control of how they watch our content and we continue to refine our release strategies to meet their expectations and ensure that we’re maximizing revenue."
"We need to continue to educate consumers on the idea of digital ownership,"” Sony Pictures’ Bishop added. "They need to be comfortable with the idea and appreciate the value proposition of the technology. Although we are not quite there yet, we are still very encouraged in the area. The trend is growth. 2102 has seen growth in the EST market, driven both by key titles and the early EST release pattern. We think that digital ownership will continue to grow as UltraViolet becomes more ingrained and the digital product gets better. Additionally, we need to create strategies and programs to retain DVD and BD buyers/collectors as they migrate from physical to digital."
Lionsgate’s Schwartz agrees. "Consumers still want to own content, whether on a Blu-ray disc or in a digital locker, and now our challenge is to continue to capitalize on new technology, innovate new business models and create new windowing and pricing strategies as we adapt to changing viewing habits," he said.
Packaged media also will have to work at maintaining its seat at the head of the home entertainment table.
"A key challenge is demonstrating the value of our content in a complex marketplace that offers so many low cost distribution plays and consumer alternatives," said MacPherson. "Disney focuses on family movies, which are inherently repeatable and ownable. However, we’re continually focused on how we can enhance the product value through programming innovations like Disney's Second Screen and Disney Intermission or experiential enhancements like digital comic books and music downloads."
But overall, the mood going into 2013 is one of optimism. Happy days might not yet be here again, but at least the industry is beginning to smile.
"The home entertainment industry saw a number of encouraging trends in 2012," said Warner’s Sanders. "Overall, consumer spending remained stable and Blu-ray continued to make impressive gains. Consumers clearly prefer to watch movies and TV shows in high-definition, which is why Blu-ray has become the standard for watching at home. We also saw huge jumps in electronic sell-through and VOD this year, which reflects a broader availability of titles, as well as consumers becoming more comfortable with digital products. 2013 is going to be another great year for the home entertainment business."
"As Blu-ray continues its steady climb bundled with UtraViolet as its perfect companion, digital ownership is perfectly positioned to aggressively grow with physical media," added Kornblau. "Consumers are increasingly inclined to take advantage of an ever-growing UltraViolet ecosystem that provides them the freedom and flexibility to watch their movies wherever and whenever they want."
The EMA’s Fisher also gazes into the future and likes what he sees. "The industry has made entertainment content readily available to all consumers in their preferred format, and is seeing its rewards," Fisher said. "A lot of credit is due to retailers and studios who are responding to consumer demand for a variety of ways and price points to access content. Retailers, both brick-and-mortar stores and online, remain the portals to access entertainment. We're seeing some retailers opening new stores and kiosk locations, and we are seeing new digital retailers aggressively entering the marketplace."
"Studio support of both Blu-ray and UltraViolet continues to be impressive, and both of these formats promote not only new release sales, but also offer opportunities to revitalize catalog titles," he said.
Bishop predicts "consumer confidence in both the traditional and digital distribution platforms will continue to rise in 2013, and with it I believe there will be attendant growth in the home entertainment industry. Business has become more fragmented, but our industry has become more sophisticated and savvy in managing these many distribution channels."
"The foundation for digital innovation has been established with the launch of UltraViolet," he added. "We are in a great position to bring UV to the mainstream through multiple retailer partner services and to optimize the consumer experience with our movies across a variety of new consumption devices."