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

Studios in 2011 chalked up some gains in their fight against low-priced rentals -- digital or otherwise -- an at the same time embraced the consumer’s need for digital portability by planting a flag in the cloud.

Catalog sales, too, are finally starting to climb, with another Fox title, the six-film Star Wars Saga, selling 1 million Blu-ray Disc units—515,000 of them in North America—its first week in stores, an unprecedented number for a nine-disc set at a premium price. First-week sales represent $84 million in worldwide consumer spending.

“2012 will extend growth for Blu-ray, and it will continue to drive the high-definition revolution in American homes,” said Mike Dunn, president of 20th Century Fox Home Entertainment.

Other studio presidents agree. “Consumers are stepping up their purchases of Blu-ray, and we see this continuing into 2012,” said Warner’s Sanders. “The connected BD devices are selling at incredibly compelling price points this fourth quarter, and hardware sales continue to be very strong.”

“In 2011 we saw steady growth for Blu-ray and the launch of Blu-ray 3D, which provides unique opportunities for new release and catalog programming,” added Disney’s MacPherson.

Netflix continued to make headlines in 2011. As the year began, the once-frosty relationship between the studios and Netflix had thawed to one of grudging acceptance, with most studios holding back new releases in return for lower prices. But while the studios may have holstered their guns, Netflix took a big hit when Starz Entertainment ended content license renegotiations, losing access to movies from Walt Disney Studios and Sony Pictures Entertainment once the current deal expires next February. A short time later came a self-inflicted wound: an ill-fated attempt to spin off the disc rental segment of its business, which sent its stock price spiraling downward.

The year’s other biggest headline was the launch of UltraViolet, a digital rights authentication and cloud-based licensing system with a “buy once, play anywhere” approach.
Consumers can store digital proof-of-purchases under one account and then play back their content at any time, on virtually any device. UltraViolet was developed and deployed by the Digital Entertainment Content Ecosystem consortium, which includes five of the six major studios and minimajor Lionsgate as well as retailers, consumer electronics manufacturers, cable companies, ISPs, network hosting vendors, and other Internet vendors. The only flies in the ointment: Apple doesn’t support it, and Walt Disney Studios is developing its own competing Keychest digital locker.

“UltraViolet has had a good start, given the limited amount of titles in the system so far,” Sanders said. “The conversion rates for UV digital copies are very good on Blu-ray, which we think is also driving sales of new releases. Consumers are excited about the prospects for streaming and mobile device use with UV, and we think as the ecosystem continues to develop it only drives more consumers to own more content.”

To be sure, challenges remain. 3D has yet to come into its own, in large part due to the various competing formats on the hardware side. BD-Live never became a major selling point, and retail merchandising on behalf of Blu-ray Disc, in the minds of many observers, remains woefully inadequate compared to the royal welcome afforded DVD a decade ago.

But the studios, to their credit, appear ready and willing to try anything to grow the business, from Warner Home Video offering movie rentals on Facebook to three studios cutting a deal with Google to add more than 3,000 films for rent on YouTube, some available the same day as the DVD/Blu-ray Disc.

“We have to be innovative and adapt to consumer trends,” Sanders said. “We’ve seen from adjacent content categories that to ignore the consumer can have dire consequences. While the consumption of content has become more complicated, we have to keep offering new and creative ways for consumers to discover and enjoy our films and TV shows.”

On the retail front, the home entertainment world continues to revolve around Walmart, Target, Best Buy and, to a lesser extent, Costco and Amazon. Borders went bust, and Blockbuster was salvaged from bankruptcy by a satellite company, Dish Network, in a deal that still has observers scratching their heads and wondering, “Why?”

Studio executives continue to see the retail channel as critical to the success of packaged media, their biggest profit-generator. They chalked up some gains in 2011 on the merchandising front when Target began putting new releases on checkout-lane endcaps, Walmart shed the locked cabinets and integrated Blu-ray Disc with DVD, and Best Buy, in a sweeping store redesign, moved movies in with home theater hardware. But at the same time the proverbial “race to the bottom” intensified, with new Blu-ray Discs selling for less than $15, even lower than first-week pricing on DVD in the halcyon days of that format.

Overall, however, studio executives are quite pleased with the current retail environment for Blu-ray Disc and DVD.

“We were very encouraged this year by all of our largest retail partners who clearly reinforced their tremendous commitment to our category,” said Universal Studios’ Kornblau. “Not only did they significantly grow their home entertainment footprints in stores to include expanding the space in the main aisle and adding new releases fixtures at the front of store, but they also excelled in successfully leveraging the industry’s biggest movie releases to drive greater store traffic. As a result, we saw some of the year’s biggest successes such as our own Fast Five and Bridemaids benefit substantially from the heightened level of excitement and increased purchase activity.”

What does 2012 hold in store? Powered by a strong slate of product in the pipeline as well as the promise of 3D, packaged media sales are expected to once again post year-over-year gains, while digital, spurred by UltraViolet, will grow “exponentially,” as Sony Pictures’ Bishop puts it.

“UltraViolet will prove to be a major game changer and will be an important complement to physical product,” Bishop said. “I am confident that as our industry satisfies consumers demand for great entertainment and provides convenient digital and physical distribution, our business will continue its robust performance.”

Sanders shares Bishop’s optimism. “We foresee a broad roll out of UV, with more studios, much more product and strong retailer involvement,” he said. “Blu-ray will continue its growth through the year, especially as price points for catalog become more competitive. We also see a faster digital adoption of content, both with UV functionality across devices and the conversion of DVD’s to digital libraries in the cloud.”

Disney’s MacPherson also is looking forward to the new year. “In 2012,” she said, “we’ll see greater consumption of Blu-ray and the many digital offerings, new and compelling 3D applications as well as the emergence of even more ubiquitous consumer access to our content.”

Paramount’s Maguire also believes “this upward trend” the home entertainment industry saw in the tail end of 2011 will continue, “as entertainment centers in the home get more sophisticated and the consumers who own them become more appreciative of high definition, 3D and other enhancements.”

“We’ll also see continued growth in digital delivery,” he added, “giving us multiple ways to provide and monetize our content.”

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