Home vid flashback for studios

Format war, consumer malaise mirror '97 dynamics

Studio execs are looking ahead at 2008 with guarded optimism.

The high-definition disc format war may be nearing its end, given Warner Home Video's surprise defection from the HD DVD ranks to Blu-ray Disc this month. Now they can focus on battling consumer indifference toward next-generation media — the success of which all agree is critical to the continued well-being of the home entertainment business.

"We no longer have to be wary of what the other camp is doing," said David Bishop, worldwide president of Sony Pictures Home Entertainment. "So our strategy has shifted from proving Blu-ray is the better of the two formats to sending a message to consumers that they need to convert from DVD to the next-generation format."

Bishop and his fellow studio leaders agree that this message is critical, as standard DVD clearly is on the decline and the home entertainment business desperately needs something to invigorate it. Last year was 1997 all over again. A mature format lost its sparkle, and consumers weren't as hungry as they once had been. At the same time two emerging formats were locked in a bitter battle for succession rights, and neither one was doing anywhere near as much business as anyone had hoped.

Ten years ago, the VHS-driven rental business had peaked and was beginning to decline, while DVD and Divx, a pay-per-play variant on the much-ballyhooed disc format that had launched in March 1997, were too busy battling each other to aggressively court consumers.

In 2007, it was the DVD sellthrough business that was trending downward, and Blu-ray Disc and HD DVD were locked in a bitter format war that was threatening to derail the entire promise of high-def next-generation media.

And as the new year dawned, then and now, studio execs were focused on consumer behavior and working feverishly to stave off further declines while lighting a fire under a new format.

"Our industry's biggest challenge continues to be our need to focus on the consumer and explain the benefits of high-definition media," said Ron Sanders, president of Warner Home Video. "Unfortunately the dueling formats took the focus off the consumer. Putting the consumer in the center of all our efforts for high-definition media is crucial to industry growth in 2008."

For standard DVD sales and rentals, 2007 "was a somewhat volatile year," said David Bishop, worldwide president of Sony Pictures Home Entertainment. "Our business is more like the theatrical business than it was in years past. We've always had this undercurrent of sales coming from the catalog, but as that has moved into decline, you've lost that safety net, so that when boxoffice ebbs and flows, so do we."

Fortunately for home entertainment, boxoffice numbers were up in 2007, so the declines in home entertainment spending weren't as dramatic as everyone was predicting as recently as November, when the business was tracking about 5% behind 2006. A rash of high-profile theatricals hit DVD in December and brought a last-minute spending lift.

As a result, when the final numbers were tallied and presented by DEG: The Digital Entertainment Group in early January at the Consumer Electronics Show in Las Vegas, the outcome was better than many had feared.

Overall consumer spending on home entertainment declined a modest 2%, to $23.7 billion, the DEG reported. Consumers spent $16 billion buying DVDs, down from $16.6 billion in 2006, while the rental business was flat at $7.5 billion.

Combined sales of Blu-ray Disc and HD DVD media contributed just $300 million to the top line — also a far cry from what studio executive expectations had been at the start of 2007.

Analyst Tom Adams, president of Adams Media Research, has tracked industry trends during both of what he calls "transition years": 1997 and 2007.

"What happens at the consumer level at times like this is a general hesitancy to buy because of fear of obsolescence, both of the old format and of the new," Adams said. "But things are more challenging this time because there are not only two formats of high-definition discs but also the Internet, and consumers are thinking, 'Some of my movie consumption is going to the Internet; isn't the whole world going digital, anyway?' "

But 2007 wasn't all about dashed hopes.

The robust TV-DVD category continued to hold its own, even as many popular shows concluded their "complete series" run. Marketing ingenuity came into play, in the form of pricey "complete season" sets, issued in limited quantities, that in virtually every case were a quick sellout.

"The continued growth in the TV-DVD category also "spilled over to the family/tween market, with strong franchises like 'High School Musical' and 'Hannah Montana' driving sales," said Lori MacPherson, general manager, North America, for Walt Disney Studios Home Entertainment.

The rental business, too, remained remarkably resilient, perhaps because consumer DVD libraries are so full that people again are renting what they want to watch and buying what they want to keep.

Electronic delivery, meanwhile, remained a nonstarter.

"Electronic sellthrough remains an exciting but relatively small business," MacPherson said. "It will continue to grow but will probably not become sizable for another seven to 10 years."

Lionsgate president Steve Beeks agreed. "We see the emergence of digital as a win-win rather than an either-or," he said. "We see digital media making the overall home entertainment revenue pie larger as all successful technological innovations before it have done."

What lies ahead for 2008? Assuming DVD sales remain flat or continue to decline, the great hope is that after so many false starts, HD media sales will take off — something industry leaders agree hinges on an having unified standard format.

Kelley Avery, worldwide president of Paramount Home Entertainment, said, "The industry experienced its first downturn this year, so the biggest challenge in 2008 for everyone is reversing this and re-igniting the category for the consumer."

In that regard, there are two encouraging signs. In what might be the only positive aspect of the format war, the existence of two rival platforms has driven down hardware prices a lot faster than they would have fallen had there been just one format in the market.

The other is that while Blu-ray Disc and HD DVD finished the year in a virtual deadlock, the tide shifted when Warner Home Video abandoned its dual-format strategy and announced that after May it will only support Blu-ray.

That leaves the Sony-developed format with a decided advantage, prompting a shift in strategy among Blu-ray supporters.