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

"Harry Potter and the Deathly Hallows Part 2" (David Yates)
Jaap Buitendijk/Warner Bros. Pictures

It ends very well.

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.

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.


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.”