Strong summer movies drive DVDs to '06 rally

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Call it the year of smoke and mirrors.

When 2006 began, fearful studio executives were still reeling with the first down year in DVD history. They were anxiously looking for salvation, and hoping to find it in high-definition discs, digital downloads or perhaps a combination of the two.

The next generation of software did launch in 2006, regrettably with two incompatible formats, first HD-DVD in April and then Blu-ray Disc in June. Digital downloading began as well, with all the big Hollywood studios aggressively selling their hot new movies on Movielink, CinemaNow, Apple's iTunes and other download services. Studio executives even coined a new term, "electronic sell-through," or EST, for the lucrative business model.

But in the end, none of these technological marvels really mattered. High-def discs still are a blip on the sales radar, and digital downloading are even less of a blip. And lo and behold, what saved the day for home entertainment was an unexpected resurgence in the DVD market, fueled by a powerful slate of summer theatricals.

And thus it was that in a year when everything seemed to change, nothing really did. The bottom line was still good boxoffice leads to good video sales, as it has since this business was launched nearly 30 years ago. Or, as New Line Home Entertainment president Stephen Einhorn said, "At the end of the day, home entertainment is still a new release-driven business."

"What we're looking at is a market that is up slightly from last year, overall," Sony Pictures Home Entertainment president David Bishop said. "But if you break down the components, we're projecting DVD sales to be up 3%, year-over-year, and rental to be up about 12%. What drags the industry down to a flat or slightly up basis is that VHS sales and rentals are virtually going away."

"The industry is up as a whole, despite a decrease in overall pricing," said Kelley Avery, president of worldwide home entertainment at Paramount Pictures. "Contrary to popular belief, reports of the decline of DVD have been exaggerated."

Other studio presidents agree. The year is expected to again finish more or less flat, but this time no one's running for the hills. It's become clear now that the home entertainment business has entered the mature phase, and the Great Slowdown of 2005 was due more to a weak boxoffice (which traditionally precedes a down video market), as well as a dramatic drop in videocassette sales and rentals, than anything else.

"Everyone's feeling pretty good," 20th Century Fox Home Entertainment president Mike Dunn said. "Thanks to the fourth quarter, the year may wind up in positive territory, and a big reason is the strong slate of summer theatricals -- as well as TV-DVD and some really strong catalog titles and promotions."

"Notwithstanding last year's disparaging headlines regarding declining boxoffice and DVD sales, 2006 ticket sales and DVD purchases proved that the public actively enjoys moviegoing and the in-home DVD experience despite the proliferation of other entertainment alternatives," Genius Products CEO Trevor Drinkwater said.

Much of the cheery-eyed optimism floating around the studio DVD divisions stems from the fact that the industry has just come off an exceptionally strong fourth quarter. Things got off to a good start when 20th Century Fox's "X-Men: The Last Stand" and Buena Vista's "The Little Mermaid Platinum Edition" generated $80 million in consumer spending in a single day. Further triumphs came as the quarter progressed, culminating this month when Buena Vista's "Pirates of the Caribbean: Dead Man's Chest" sold 10.5 million DVDs its first week in stores, putting it on track to become the top-selling live-action DVD ever.

"A couple of interesting things happened in the fourth quarter," Warner Home Video president Ron Sanders said. "You had some very strong theatricals that performed very well across the board, and you also had the additional benefit of TV-DVD continuing to have a huge upside, year-over-year. All of this pointed to a very healthy category."

"The consumer is the ultimate arbiter of what moves in the marketplace," Buena Vista Home Entertainment general manager North America Lori MacPherson said. "And when good entertainment is released to the home entertainment market, the consumer responds."

The fourth-quarter DVD sales rally was probably the biggest home entertainment story of 2006, even though it didn't make the biggest headlines. That honor went to the launch of the two high-def disc formats and the flurry of major studio deals with digital downloading services.

On the packaged-media front, the launch of two rival, incompatible formats was, if not a disaster, a major disappointment. But the real culprit, and the reason software sales have been anemic (fewer than 10,000 units of even a really big title are typical), wasn't so much a lack of a unified standard. It was the fact that consumer electronics manufacturers really dropped the ball, with a series of delays that really pinged adoption rates. The HD-DVD camp never got beyond two Toshiba models, including an entry-level model retailing for $499, while only at the very end of the year did Blu-ray get additional players to join the $999 Samsung model that arrived in stores in late June.

"Everyone was disappointed in the quantity (of players) that came out of the electronics companies," Sanders said. "But what is encouraging is that the attach rate of the software was amazingly high. On average, consumers bought 28 to 30 movies per set-top box, and that's just below what it was for DVD in the same time frame."

Digital downloading, simmering on the back burner for several years, also had its official coming out in April when five of the six major studios begin selling downloads of their movies over the Internet, through services Movielink and CinemaNow. New releases went out day-and-date with the DVDs. Holdout Disney soon joined the party, and by year's end, the two dedicated download services were joined by a wide variety of others, including Apple's iTunes, Amazon.com and file-swapping service BitTorrent. The only hitch was that in most cases, downloaded movies could not be burned to standard DVDs for easy transport into the living room.

"We determined that there is consumer interest in the ability to download content digitally," Sanders said. "What is unclear is how big the economic potential is and what platforms will ultimately win out. But every studio wants to place a lot of bets, so we are leading consumer trends instead of following them, as the music industry did."

The year brought other developments, as well. Several major shifts took place on the content distribution side, with the MGM library moving to 20th Century Fox, DreamWorks transferring over to Paramount, and brothers Bob and Harvey Weinstein tapping Genius Products to distribute content from their film studio, the Weinstein Co. The brothers subsequently bought a 70% interest in Genius.

Genius' Drinkwater sees a common thread: A desire by content providers to obtain "more control of how their products are marketed and distributed."

In the retail world, the mass merchants continued to clobber each other over price and exclusive gifts with purchase on hot new theatrical DVD releases, while two veteran audio-video combo chains, Musicland and Tower Records and Video, bit the dust. The former was acquired by Trans World Entertainment after filing for bankruptcy, while Tower, which also filed for Chapter 11 bankruptcy protection, wound up being purchased by a liquidator.

So what lies ahead for 2007? For starters, studio presidents expect big things from high-def discs. The prognosis for 2007 is that one of the two rival formats will fall by the wayside, consumer electronics makers will rally and start cranking out players, the Chinese will weigh in with cheap players of their own and by the fourth quarter, high-def discs will be a viable, significant business.

"We're seeing tremendous growth in household penetration for high-definition displays and big-screen televisions," Dunn said. "At the same time, you have broadcast, cable and satellite delivery of high-def programming growing at an incredible rate. Given the popularity of purchasing and collecting movies, the next logical step is making those films available in a packaged-media format."

"Consumers are buying more high-definition TVs than ever before," Universal Studios Home Entertainment president Craig Kornblau said. And once they get hooked on high-definition entertainment through digital cable, he said, consumers are going to want, even expect, high-def content from all their media, spurring demand for high-def discs.

Lionsgate president Steve Beeks agrees, noting that "the most sought-after gifts this holiday season were HD television sets" and predicting sales of high-def discs will mushroom in 2007 once hardware prices fall and a unified format is established.

The digital download market, too, is expected to grow significantly, particularly with the prospect that consumers will be able to burn downloaded movies onto DVDs playable in their set-top units. CinemaNow introduced the download-to-burn option on select catalog titles during the summer, but this year the gates are expected to be thrust wide open. An encouraging sign: The DVD Forum in late November gave its formal nod to a new type of recordable disc that will accept movies and other content encrypted with CSS, the same copy-protection system used on commercial DVDs, for playback on set-up players.

Depending on how well the summer theatrical features fare at the boxoffice, studio chiefs say 2007 could be a very good year, overall, for home entertainment.

"Certainly boxoffice is a key indicator in a maturing business, so that will do a lot to drive our business," Bishop said. "But I would say this time next year we are going to be in a growth mode. Will it be double-digit growth? I would say probably not. But I think you are going to start to see Blu-ray Disc get some traction in the marketplace and for whatever flatness we have in DVD you're going to start to see some incremental growth come out of that category."

"The great story coming out of 2006 is that despite the drag of VHS, DVD still kept us flat for the year," Sanders said. "And when you look at 2007, when you factor in no VHS drag with the upside of high definition, you have nothing but great prospects for the year. When you look at the lineup of summer theatricals -- sequels to 'Harry Potter,' 'Spider-Man,' 'Pirates of the Caribbean,' 'Shrek 3' -- it's the biggest summer in memory. So for home entertainment, I think it's going to be a massive 2007."
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