Year of the Turnaround: Home Entertainment Posts Gains as Netflix Fumbles

"Harry Potter and the Deathly Hallows"
"Harry Potter and the Deathly Hallows"
 Jaap Buitendijk/Warner Bros. Pictures

Home entertainment executives aren’t quite ready to sing “Happy Days are Here Again,” but things certainly began to look up again in 2011.

Hollywood finally broke the back of Netflix – or, rather, watched Netflix break its own back – after years of railing against the subscription rental service for taking too many consumer dollars out of the market and not only cannibalizing sell-through, but also not sharing to the degree the studios felt was appropriate.

The home entertainment industry also posted its first positive quarter since the start of the 2008 global economic meltdown, with consumer spending in the third quarter of 2011 actually up from the comparable year-ago period.

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While electronic sell-through, or EST, remained a nonstarter, the video-on-demand business began showing some serious signs of life, drawing consumers away from the physical rental business the studios have never really been keen on.

And in perhaps the biggest development of 2011, a consortium of studios and other companies launched UltraViolet, a cloud-based “digital locker” that lets consumers stream and download purchased content to multiple platforms and devices.

But it was packaged media’s comeback-kid performance in the tail end of the year that has studio executives looking forward to even better times ahead.

“We started out the year with tough year-over-year comps to box office, but have made steady gains throughout 2011, with an especially strong third quarter,” said Ron Sanders, president of Warner Home Video. “We seem to be getting some momentum in the sell-through space, with catalog being a particular bright spot. Black Friday was very strong this year and also bodes well for a strong finish to 2011 and good momentum into the first quarter of 2012.

“The third-quarter numbers were an indicator that our business is on track for strong performance for the rest of this year and into the future,” added David Bishop, president of Sony Pictures Home Entertainment. “A strong upcoming slate of highly anticipated new releases like The Girl with the Dragon Tattoo, Mission Impossible: Ghost Protocol and Steven Spielberg’s War Horse, as well as franchise titles like Men In Black III, the new Spider-Man and the new Batman, promise an even stronger 2012.”

Lori MacPherson, EVP of global product management for The Walt Disney Studios, said 2011 saw unprecedented synergy between technology and choice. “As entertainment consumption choices are proliferating, 2011 was about harnessing technology to create innovative entertainment experiences for consumers wherever they enjoy our content,” she said. “From applications like Disney’s Second Screen that provide an immersive experience, to multi-media combo packs that offer the ultimate in functionality and convenience, to 3D, which provides yet another way to engage viewers, we’re continuing to explore ways to enhance the consumer experience.”

“2011 showed that home entertainment continues to excite and enthrall consumers,” added Dennis Maguire, president of worldwide home media distribution for Paramount Pictures. “Blu-ray and EST continued to surge, and new delivery systems and devices offer viewers more and more opportunities to enjoy our content, expanding demand even further.”

Lionsgate president Steve Beeks agrees. “We don’t view the home entertainment landscape as an ‘either/or’ proposition between our traditional and digital media partners,” he said. “We believe, instead, in the continued need to enhance the packaged media experience through incorporation of new technologies—and at the same time capitalize on emerging opportunities to monetize our content through social networks, electronic sell-through and myriad apps that enrich the home entertainment and mobile viewing experience.”

The plethora of new viewing options made managing windows more important than ever, Beeks said. “We believe that it is important to listen to the consumer, and the consumer is telling us that they want flexibility and they attach premium value to sequenced windows with pricing based on convenience and availability,” he said. “The addition of sequential windows has historically enlarged the size of the home entertainment revenue pie, and we believe it will continue to do so. We will continue to explore new models and tailor availability to individual films in the premium VOD space.”

After several tough years, the home entertainment industry also has learned to manage its expectations. The gaga days of DVD are over, and Blu-ray Disc, which turned 5 in 2011, never had quite the same impact. But fault lies not with the format, but with a misinterpretation of consumer habits. The glory years of DVD had everyone convinced a nation of renters had become a nation of buyers, and once Blu-ray Disc took hold everyone would buy their libraries all over again.

But DVD was something of a false bubble; consumers had never before been able to own movies at an affordable price the very first day they hit home video, so they went overboard, buying movies they never intended to watch again and amassing huge collections of discs, many of them never opened.

Once the novelty wore off, consumers effectively split into two camps. The ones who had bought DVDs because the price was so low and it was more convenient than renting now had Netflix, Redbox and streaming to satisfy their cravings. Meanwhile, the ones who had become genuine collectors continued to buy, although a lot more selectively than before.

This year, the realization finally set in that the industry is unlikely to see a hot new release sell upwards of 10 million units its first couple of days in stores. But in the spirit of making lemonade from lemons, when a more modest sales tally is registered, it’s acknowledged and applauded – particularly since the consumer rush to buy on day one is over and the industry is once again seeing its product sprout legs.

That said, the success of Blu-ray Disc is nothing short of phenomenal. Even during the worst economic crisis since the Great Depression, the format continued to post sales gains – one of the only consumer products to do so other than the Apple iPhone.

And in the fourth quarter of 2011, Blu-ray Disc sales accelerated to the point where even family titles were generating at least half, if not more, of their sales from the high-definition disc – partly a function of the proliferation of combo packs, but also a reflection of growing consumer awareness and acceptance. Another factor, albeit to a lesser degree, was the emergence of Blu-ray 3D.

“Blu-ray had a remarkable year, with the format showing significant growth and bolstering overall home entertainment consumer spending for the first time in three years,” said Craig Kornblau, president of Universal Studios Home Entertainment. “New releases benefited tremendously, with female-targeted comedies like Bridesmaids hitting the masses and surpassing industry expectations. Catalog also saw impressive gains, as evidenced with the stellar Blu-ray debuts of such huge fan favorites as Scarface, Star Wars and The Big Lebowski. With the number of Blu-ray homes exceeding 30 million and growing—and with more than half of first-week sales of physical products now credited to Blu-ray—the consumer appetite for high-def movies has never been more palpable.”

Indeed, summer tentpoles like 20th Century Fox’s X-Men: First Class and Warner’s Harry Potter and the Deathly Hallows—Part 2 sold incredibly well on Blu-ray, beating studio expectations by as much as 20%, insiders say. Warner doesn’t release sales numbers, but Fox says the latest X-Men movie is on track to sell nearly 8 million units, half of them on Blu-ray.

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