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H’wood looks to goose vid biz

Growth slows for aging ancillary as consumers' shelves overflow with DVDs

How’s this for mixed messages?

DVD sales and rental revenue has grown 11% so far this year and the number of households with a DVD player is expected to grow 14% by the end of the year.

But there are signs that the DVD is becoming a “mature product.” With VHS spending in freefall, the overall homevideo market in the first half of 2005 increased a meager 1%.

In other words, the explosive growth of the home video market is slowing down. It’s still a good time to head up a home entertainment division. But if you sit atop a studio, the trend is troubling. Faced with flagging box-office and TV ad revenue, media moguls can no longer count on the boom in DVDs to give them what Wall Street has come to expect: ever-increasing profits.

Call it the end of DVD’s adolescence. Instead of consistent growth driven by rapid adoption of hardware, studios now face a market where most affluent consumers and movie enthusiasts have a DVD player and have already filled their shelves with their favorite pics.

As a result, Hollywood is counting on huge opening weekends of new DVD releases to keep them afloat and competing so brutally with library titles that they’re watching margins shrink.

Overall spending in the first half of the year was $11.4 billion, up just 1% from the first half of 2004. Even if 2005 finishes strong, the 8%-9% growth studios have seen in the past couple of years looks unlikely.

While the DVD biz is still growing fast, it’s no longer enough to cover up the collapse of VHS, which fell 52% in the first half of 2005 to $900 million, or just 8% of all homevideo spending.

Blame it in large part on the profile of the households making their first entry into the DVD market.

First, there are fewer of them. The number of households with a DVD player is expected to grow 14% to 80 million by the end of this year (out of 110 million total U.S. households). Last year it grew 23% and in 2003, it was 43%.

Consumers getting their first DVD player are typically the biggest spenders, as they stock up on their favorite movies for the first time. Households getting a DVD player for the first time this year are the last third to do so. They typically don’t make a lot of money, they’re older, and/or they aren’t particularly interested in movies.

As a result, these late adopters spend less on DVDs than the people who bought their first player in 1999 or 2000. And with the spending rates of those early adopters slowing down, the market simply can’t grow as fast.

It’s a typical trend for any new technology and one that homevideo execs have been preparing for. Because DVD took off so quickly, though, execs have seen a slowdown sooner than they expected.

“We all knew this was going to happen, but every growth study said we would reach penetration this high around 2007,” says Lions Gate prexy Steve Beeks, who heads the indie studio’s homevideo unit. “We’re about a year and a half ahead of the curve.”

The slowdown in growth is not resulting in fewer titles on store shelves. As of July 15, there were 6,130 DVDs released in 2005, putting the market on track to easily beat last year’s 11,331.

More supply, of course, is pushing down prices. But the price pressure isn’t distributed equally. Because retailers don’t need them to draw consumers, studios are finding they have to cut wholesale prices on older pics.

New releases remain a loss leader for big retailers, so studios have largely been able to keep their profits and let Best Buy and Target bite the bullet when titles are sold for as little as $14.99.

Studios aren’t just making more of their money on new releases, they’re also getting it quicker. Big opening weeks have become increasingly common in homevideo, as evidenced by studio’s frequent press releases trumpeting multimillion-unit premiere weeks.

But a quicker starter means a quicker finish. DVDs typically disappear from store shelves within a year or less, while they used to last two years or longer. That helps to explain the rush to get out “anniversary” or “special” editions that can move a title back to the front of the store.

It’s also having a dramatic impact on marketing spends. Whereas homevideo departments used to spend about 70% of their promotional coin after a DVD hit stores, execs say they now spend that much before a street date.

With DVD growth flattening, homevideo insiders are focusing on the industry’s hope to respark growth: a new format.

Two high definition formats, Blu-Ray and HD-DVD, are set to debut in the next year and execs hope that enthusiasts will begin to repopulate their library with the discs promising higher quality and more room for supplemental material.

But the prospect of a format war could confuse consumers and lead them to avoid an upgrade entirely until it’s clear they won’t be investing in the 21st century version of a Betamax.

Also on the horizon: video-on-demand, including Internet download-to-own, which could give studios the ability to sell movies to consumers without the costs of physical production or the hassle of limited shelf space.

But for the time being, Hollywood is faced with a homevideo market that, for better or worse, has reached adulthood and won’t have any more big growth spurts.

(Scott Hettrick contributed to this report.)

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