Summer blockbusters promise holiday DVD sales

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Two years ago, when DVD's long period of double-digit growth came to an abrupt end, studio executives were beside themselves with worry. For nearly a decade, they might as well have been minting money, but as 2005 wound down, the big hits, in particular, weren't selling as well as expected. And when the final year-end numbers came out, they showed business flat with the previous year.

So far in 2007, the home video business isn't just flat -- numbers are down. Sales estimates vary, but Home Media Magazine estimates consumer spending on video purchases slipped about 3% in the first half of this year, coming in at $6.8 billion, down from $7 billion in the first six months of 2006. Executives blame the weak slate of theatrical features that came to DVD in the first half of this year. But as the industry gears up for the Entertainment Merchants Assn.'s annual Home Media Expo, which runs through Thursday at the Venetian Resort Hotel and Casino in Las Vegas, executives point with optimism toward the fourth quarter, when the current roster of summer blockbusters will arrive on DVD and hopefully put consumer spending back on track.

"The boxoffice is up 5% so far this year, and as a product-driven business this theatrical uptick bodes well for the DVD business later in the year," says Mike Dunn, president of 20th Century Fox Home Entertainment.

"Almost all of the decline (in consumer spending in first-half 2007) can be attributed to theatrical releases to date, and there is no doubt this will turn around in the fourth quarter," adds Steve Beeks, president and COO of Lionsgate.

No official release dates have been announced, but industry observers widely expect the three heavyweights -- Sony's "Spider-Man 3," Paramount's "Shrek the Third" and Disney's "Pirates of the Caribbean: At World's End" -- to drop in October, November and December, respectively. That could help drive consumers into stores and lift sales of other titles, as well, given that 40% of DVD sales are believed to be impulse purchases.

"As we've seen, strong boxoffice is one of the key factors in predicting strong home entertainment sales, and the 2007 boxoffice is running ahead of last year," says Kelley Avery, president of worldwide home entertainment for Paramount Pictures.

"By the end of the year, the positive effect of the fourth-quarter releases will lift the current trend to end the year flat or with a slight decline in year-over-year performance," adds David Bishop, president of Sony Pictures Home Entertainment.

In hard numbers, Sony projects total 2007 consumer spending on home video to come in at $23.4 billion, down 2% from 2006. Spending on DVD sales is expected to reach $15.7 billion, while rentals should come in at $7.7 billion. Last year spending came in at $24.2 billion, with $16.6 billion in DVD sales and $7.5 billion in DVD rentals.

Not so long ago, words like "flat" or "slight decline" would have been cause for alarm, but now, executives are taking a more pragmatic approach to the numbers. "Two years ago, we didn't expect to see the dip we saw, but this year we all recognize that the business is mature," says Ron Sanders, president of Warner Home Video. "The U.S. boxoffice for titles that have been released to home video so far this year is down about the same percentage as the new-release business, 8% or 9%.

"In a mature business, spending is product-driven, and just as we had a relatively weak slate of product in the first half of this year, we've got huge boxoffice flowing into video in the second half," he adds.

The total boxoffice value of titles expected to be released in the second half of this year, according to Warner research, is $5.2 billion, up from $4.9 billion in the second half of 2006. But managing that "huge boxoffice" will be a challenge, studio presidents say, since so many of those titles will be vying for the same shelf space. Retailers haven't been expanding home video footprints because of flat sales, and the influx of two next-generation formats, Blu-ray Disc and HD DVD, means that space is at an all-time premium.

"With the competing HD formats and the use of both wide-screen and full-screen versions on standard-definition product, shelf space has become increasingly challenged," Bishop says, adding that the situation will continue to worsen until one of the rival HD formats fades into obscurity and the proliferation of wide-screen TVs makes full-screen DVDs a thing of the past.

"At the end of the day, shelf space is a function of the profitability our products deliver to our distribution channels," notes Stephen Einhorn, president and COO of New Line Home Entertainment.

Space constraints aren't the only hurdle facing executives, however. They're also looking for new distribution channels -- which is why so many studios and independent suppliers are targeting such alternative outlets as airport gift shops and sporting goods stores -- and starting up direct-to-video divisions to create more exciting product. At the same time, there's even more pressure to keep an eye on the bottom line.

"Every home entertainment distributor has to work harder and smarter to succeed in today's market," Paramount's Avery says. "In addition to our new theatrical and direct-to-video titles, we've got to be more strategic in our marketing and drafting opportunities for catalog titles."

"You really have to focus on the pennies and taking the costs out of the system," Warner's Sanders adds. "Assuming a flat release slate and mature category, you have to show improvement and profit by reducing costs, so we have to be much more critical of supply-chain costs and how we spend our marketing dollars."

That said, Sanders doesn't discount the need for good old-fashioned ingenuity. He notes that while the TV DVD business has been impacted by so many hot current shows finishing their DVD complete-season runs, marketers developed a whole new business with pricey "complete series" boxed sets that helped improve overall TV DVD catalog business by 13% year-over-year.

"Last year we had phenomenal success with 'West Wing' and 'Friends,' so this year we are doing more, including a complete series box of 'The O.C.'and 'Full House,'" Sanders said. "It's become a real nice business for us in the fourth quarter, and because of the price points it doesn't require huge unit volume to do strong numbers."

20th Century Fox's Mike Dunn takes a philosophical approach to the current state of the business-and its future growth potential.

"The market doesn't need to grow for us to grow," he says. "We've structured our business to identify and exploit growth opportunities wherever they exist. One way is building scale through strategic partnerships. Another, more organic type of growth comes from identifying underserved consumer segments like our Fox Faith business and categories in which we have the opportunity to broaden our portfolio, as we've done through internal development, production and key acquisitions. And we're also looking overseas for growth in places like Russia, where we're in business now, and China, where we recently announced a joint venture."

Studio presidents also are anticipating a sharp uptick in the sale of packaged high-definition media, despite the format war between rivals Blu-ray Disc and HD DVD.

"I think the question to ask is what high-definition packaged media can offer consumers that they can't get today, and there are two key answers," says Craig Kornblau, president of Universal Studios Home Entertainment. "The first is incredible quality, and the second is interactivity, which extends the experience beyond the movie and takes the viewer inside the film and even inside the community."

"The rapidly growing HDTV population is starving for more pristine high-definition content," Sony's Bishop adds. "And with year-one Blu-ray hardware and software sales outpacing year-one DVD, we are looking forward to emerging the entire home entertainment market."

Note that Bishop says "Blu-ray," not "high-definition." Sony is one of four hard-line studios supporting Blu-ray exclusively; the others are Buena Vista Home Entertainment, Fox and Lionsgate -- while Warner and Paramount support both. Only Universal exclusively supports HD DVD, the decided underdog. (Software sales are running about 60% in favor of Blu-ray.)

Sanders echoes growing sentiments that the format war between Blu-ray Disc and HD DVD isn't hampering acceptance of next-generation packaged media. Indeed, it actually might be giving consumers more incentive to adopt the new technologies, he says, by putting pressure on hardware manufacturers to drop prices -- and on both camps to step up promotional efforts.

"To me, the corollary is how we had DivX in the early days of DVD, which forced both camps to get very aggressive in hardware pricing and marketing, and which in turn allowed DVD to take off much more quickly than it would have had we not had DivX in the market," Sanders says.

Bishop and Dunn adamantly disagree. "The cost of consumer confusion and slower adoption outweighs the argument for the accelerating drop in hardware pricing," Bishop says. "Further, retailers are negatively affected by the format war by having to provide space for underyielding formats."

Lori MacPherson, general manager of North America for Walt Disney Studios Home Entertainment, shares those sentiments. "Consumer confusion never speeds things up; it only slows things down," she says. "Studios already have the incentive to aggressively promote high-definition because the time is right for this transition. Although it may seem that promotional efforts are being stepped up because there are two competing formats, competing messages risk canceling each other out."

Complicating matters somewhat further is digital distribution -- from dedicated movie-download sites like Movielink and CinemaNow to Apple's iTunes Music Store and download services offered by merchants like Amazon.com and Wal-Mart. But is it really a business yet?

"Consumers have spent about $35 million in electronic sell-through -- on movies only -- since iTunes started offering downloads (in late 2005)," Lionsgate's Beeks says. "That spend could total about $100 million this year, if current trends continue."

By 2010, Beeks says, he would envision consumers spending upward of $1 billion on movie downloads, but that still pales in comparison to where packaged media stands today -- and where it will likely continue to be at in the foreseeable future.

"As we look back at what happened with previous technological innovations, every time you make entertainment content available in new ways, with new technology, the pie grows," Warner's Sanders says. "The consumer tends to not only do the legacy way of consuming media, but then there is a group of the population that also wants to try the new way -- so it tends to be additive. And there's no reason to doubt it won't be the same scenario with digital and physical media."  

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