Studios hope formats can stop DVD erosion

Homevid arms plan to do everything they can to jumpstart their various formats next year. Given the size of the biz — just under $24 billion domestic annually — and studios’ reliance on this coin to offset theatrical costs, they have to.

Ten years in, the DVD format appears to have peaked and its successors remain more murky than ever: Consumers are taking their sweet time warming up to high-def (i.e., HD DVD and Blu-ray) and are even slower to embrace digital delivery (i.e., download and streaming).

As with every other aspect of showbiz, there is the question of the writers strike. In the short term, viewers deprived of their favorite shows may buy them on DVD: The first season of “The Office,” for example, has seen a recent spike in sales as reruns air on NBC.

But one of the concerns in the long term is the current abbreviated season. TV series on DVD is a growing segment of the biz and most series are facing the possibility of very few segments, which will affect pricing and sales of the season’s episodes down the road.

Studios plan several tactics to weather the upcoming year. Chief among them: resolving the high-def format war, luring consumers into digital distribution and offering even more massive boxed sets.

The homevid biz started the year in the hole and will probably end in the hole. There have been bright spots in the fourth quarter — “Transformers,” “Superbad” and “The Bourne Ultimatum” flew off shelves — but other B.O. hits such as “Spider-Man 3” and “Shrek the Third” didn’t.

A late-year turnaround, due to a flurry of high-profile titles, is possible but not likely. However, there’s enough momentum that some are holding out hope the biz will end flat this year.

“By and large the category is holding up,” says Warner homevid topper Ron Sanders.

Early 2008 projections are sobering, however. Analysts and homevid toppers caution that the DVD biz could erode upward of 3% next year if next-gen formats don’t take off soon.

Two major toppers forecast a 5% decline next year as the worst-case scenario, which would translate into $1.2 billion less in consumer spending. Of course, that would still mean consumers spent more than $20 billion on homevid, compared to the $9 billion or so on domestic B.O.

Disc mavens can’t control the vagaries of the product pipeline, and at this stage of the DVD format’s lifespan, they can’t rely on catalog to boost the bottom line either. What’s more, as this quarter has reminded, monster B.O. hits don’t always convert to equally massive disc sales. Franchises such as “Spidey,” “Shrek” and “Fantastic Four” showed signs of fatigue, while others, including “Harry Potter” and the third installments of the “Bourne” and “Pirates of the Caribbean” franchises, did not.

Non-sequels such as “Transformers,” “Superbad” and “300” performed exceedingly well. The good news, execs say, is that next year is shaping up to be less dependent on sequels. On the other hand, that means as-yet untested commodities will be making their way to homevid.

“It’s kind of like the theatrical market,” says Fox homevid topper Mike Dunn. “It’s been around 80 years and it’s tied to product. We’re tied to product.”

There’s also a growing belief that the high-def battle is hindering the success of a replacement format; even Warners, the lone studio backing both formats, has indicated its desire to back one format in the near future.

“We have to ensure that high-def takes hold and breaks out of the niche business,” Sanders says.

He believes the key to success will be to emphasize consumer benefits of high-def, drawing attention away from the format war.

Blu-ray backers are bullish about the coming year, crowing about fourth-quarter sales in their format. Execs say they should have a better idea about high-def after the Consumer Electronics Show in early January, when homevid execs confer with their manufacturing brethren. Should Warner drop HD DVD then, sibling New Line is expected to follow suit, further tipping the scale toward Blu-ray.

Paramount, the last studio to drop dual-format support, is committed to HD DVD through the coming year; Universal also supports HD DVD only.

“The table is probably set for high-def in 2008,” says Dunn. “I think by CES it will be pretty clear there will be one format.”

“We see meaningful movement toward Blu-ray globally,” says Sony homevid topper David Bishop, who points out that the Sony-developed format has dwarfed HD DVD in countries like Japan and Australia.

Others aren’t certain the battle will be resolved so quickly. Earlier this month, Adams Media Research and sister research outfit Screen Digest projected that both formats would co-exist at near parity for several years to come.

Adams forecast that in 2012, standard DVD discs would generate $10 billion in consumer sales Stateside, and HD DVD and Blu-ray would each generate $5 billion, with Screen Digest projecting a slightly greater edge to Blu-ray globally.

A key question is digital. Four studios have released (or will soon bow) DVDs with digital copies that can be transferred onto PCs and certain portable devices.

Fox got out of the gate first with “Live Free or Die Hard,” followed by Warners with the latest “Harry Potter” disc last week. Sony will soon do the same with a Wal-Mart exclusive of “Resident Evil: Extinction” and New Line plans to experiment with the option early next year.

Fox says 10,000 users unlocked digital copies of “Live Free or Die Hard” the week after the disc hit shelves. The studio plans to embed future discs with digital copies.

Warners, which earlier experimented with offering low-cost Internet downloads with DVD purchases, believes free digital copies embedded on discs is a better way to get consumers to dip their toes into digital delivery. Not only is it cheaper, but it’s a lot faster to copy files from discs to a portable device than it is to download them.

“You have to keep it simple for the consumer,” concurs Bishop, who says the studio is in test mode on the strategy. “If you try to upsell consumers it’s an added step that makes the proposition awkward.”

“People like to migrate their movies onto laptops and other devices,” says New Line homevid exec VP of marketing Matt Lasorsa. “That’s something the industry needs to respond to. We need to offer more alternatives to ripping or pirating movies that don’t compromise our revenue.”

He points out that a managed-copy function is built into high-def but not being used yet. Also worth noting: at this point, Mac and iPod users can’t make copies to their devices. If studios make deals with Apple to distribute movies on iTunes, that could change.

In addition to such pioneering moves, the homevid biz will be tweaking with proven hits, like boxed sets. Warners had twice the orders for “Harry Potter” sets than it created, so the studio will likely reissue another collection next holiday season.

Fox, which took over distributing MGM and UA fare little over a year ago, was pleased to see that Oprah Winfrey’s endorsement of UA’s 90th anniversary set worked the same magic as her book club endorsements despite an almost $900 pricetag.

Uncertainty about the future of Hollywood’s cash cow hasn’t escaped Wall Street’s notice. Several analysts have downgraded the entire entertainment sector due in part to these concerns. Last week, Bear Stearns became the latest investment firm to do so in a report that projected 3%-4% annual declines for the U.S. homevid biz over the next five years.

“With little traction on HD so far, pricing pressure, and less penetration opportunity left, we believe that the decline in the DVD market will accelerate in 2008 and beyond,” Spencer Wang wrote somewhat ominously in his Dec. 10 report, titled “The Tipping Point.”

That day, Pali Research analyst Richard Greenfield projected a modest decline in consumer DVD spending this year and a 3% dip in 2008.

“With the DVD ‘halo’ gone and digital distribution still in its infancy, studios need to make profitable movies; catalog will no longer save them,” he opined.

Happy holidays!

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