Holidays couldn’t overcome earlier softness

JAN. 20 | After almost a decade of unprecedented DVD growth, 2005 was a sobering year for the home video industry.

Overall consumer spending dipped 1.1% to $23.84 billion for the year, the first time spending on video has dropped since its introduction more than 25 years ago.

DVD is still growing, though more slowly, with disc sales up 4.5% to $15.73 billion for the year, according to Video Business research. But disc growth wasn’t enough to make up for VHS losses, as the format continues to slide into oblivion.

“The business is coming to grips with the fact that this is now a mature industry with flat to slow growth, which is so different from what we’ve dealt with since 1997,” Lionsgate president Steve Beeks said.

Studio execs say it was a roller-coaster year and blamed a weak third-quarter release slate, compounded by devastation in the southeast from Hurricane Katrina and high gas prices.

Those factors “knocked the bottom 10% out of the market,” 20th Century Fox Home Entertainment president Mike Dunn estimated. “That dampened the year.”

The rental market was relatively stable despite troubles at Blockbuster Video, with spending at $8.8 billion, off 1.8% from 2004.

“It’s still a huge business,” said New Line Home Entertainment president and chief operating officer Stephen Einhorn. “It’s to everybody’s interest to sustain that business.”

Warner Home Video, which had a strong fourth-quarter slate with The Polar Express, Batman Begins and Charlie and the Chocolate Factory, once again was No. 1 in market share, with a 21.2% slice, or $5.05 billion in consumer spending. That put the studio far ahead of No. 2 Buena Vista Home Entertainment, which had a 15.8% share, or $3.77 billion, due to a relatively weak new release slate.

Universal Studios Home Entertainment tied with Fox for 14% of the market, or $3.34 billion in spending. DreamWorks Home Entertainment’s 3.8% market share is included with distributor Universal.

Fox and No. 5 Paramount Home Entertainment reported some of the strongest growth during the year. Fox’s fourth-quarter slate was jammed with some of the summer’s only box office hits—Star Wars: Episode III—Revenge of the Sith, Mr. & Mrs. Smith, Fantastic Four and Robots.

Paramount, which hit the gas on its catalog and TV release slate this past year, saw 30% growth with strong sales in the TV category with Chappelle’s Show, Laguna Beach and other titles.

“We’re in a very fortunate position in that we have a lot of key brands and key products that are resonating with the consumer right now,” said Meagan Burrows, domestic president of Paramount Home Entertainment.

Consumers spent $342 million to buy and rent Buena Vista’s The Incredibles, making it the top performer of the year and giving it a wide lead over DreamWorks’ Madagascar at No. 2 with $218 million in consumer spending. Neither set any new sales records.

“The key to 2005 is really that the market is dramatically broadening out,” said Universal Studios Home Entertainment president Craig Kornblau. “You’ve got a much more fragmented audience. The top has come off on the biggest titles; they’re not hitting new highs. But more titles are doing well; there’s strength in the mid-box office ranges and TV titles.”

Performance leaders in the mid-box office range included Universal’s Ray, which took in $176 million in video sales and rentals, more than doubling its $75 million box office. New Line’s The Notebook more than doubled its $81 million box office gross. And Fox’s Napoleon Dynamite, released in late 2004, pulled in an additional $133 million in 2005, nearly triple its $45 million box office.

Lionsgate’s Beeks said genre pictures also were among the least affected by the changing market.

TV DVD sales were up roughly 25%, making it the strongest growth sector.

“It’s a fantastic business,” said Sony Pictures Home Entertainment president Ben Feingold, whose studio saw strong sales on Seinfeld.

Studios are continuing to mine for new niches within the increasingly segmented DVD audience. Universal debuted two DVD premieres—Carlito’s Way: Rise to Power and American Pie Presents: Band Camp—as part of its new Universal Originals line that expands theatrical franchises.

Fox released Family Guy Presents: Stewie Griffin—The Untold Story and The Sandlot 2 and is in production on films for the Christian audience.

The new release business in 2005 was tough. Sales started out strong early in the year, but changing consumer buying habits forced DreamWorks and Pixar to take back heavier than expected returns on Shrek 2 and The Incredibles, respectively. With rising gas prices and no new Lord of the Rings release during the summer or early fall to drive up store traffic, sales remained soft until the holiday season.

“Consumers came in and out of the category more than they did in the past,” said Buena Vista senior VP sales Patrick Fitzgerald, who noted that there is more competition for consumers’ time than ever before from TV shows on DVD, videogames and TV. “We’re all fighting for consumers’ time.”

Many have complained that the record number of DVD releases in the market has diluted spending on individual titles.

DreamWorks head Kelley Avery said she couldn’t comment on returns and shipment problems with Shrek 2 and Shark Tale that knocked DreamWorks off course earlier in the year, but she said by the fourth quarter, the industry seemed to have “self-corrected” itself.

“We’re not seeing anything in terms of people saying they’ve got too much in their DVD collection,” Avery said. “There’s a lot more product out there. It’s a share game. … Purchasing hasn’t declined.”

Nearly 82 million households had switched to DVD by year-end, according to the Digital Entertainment Group. However, there hasn’t been an even trade-off of what consumers spent on VHS versus what they’re spending on DVD.

“One of the biggest concerns seems to be as we reach saturation in terms of DVD household penetration, we’re not getting a full conversion of VHS households into DVD,” said Warner Home Video president Ron Sanders.

Sanders said it isn’t clear whether the last VHS households have stopped buying videos altogether or whether they’re buying less on DVD than they did on VHS, but the declines in VHS sales and rentals haven’t been made up on DVD. Sanders said some of those lost dollars may be going to TV DVD sales.

“People are being more selective in what they’re buying,” he said.

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