Consumers spend $10.1 billion on DVDs

The domestic homevideo biz held its own in the first half of the year despite a challenging economy and a format transition fraught with hurdles.

Consumers spent $10.1 billion on discs, according to Variety sister publication Video Business, to match year-ago levels on virtually flat sales of $6.17 billion and $3.97 billion in rental revenue.

The showing is especially noteworthy given the bumpy year that the vid biz had in 2007: It started in the hole and never caught up — and uncertainty has dogged it ever since. Among the question marks: how fast DVD will fade, and whether digital downloads or pricier Blu-ray discs will make up that gap any time soon.

So far, at least, packaged media is hanging tough. High gas prices, among other things, did not deter consumers from buying top sellers “Alvin and the Chipmunks,” “I Am Legend” or “Enchanted” on disc during the first six months of the year; and a growing number of consumers bought pricier Blu-ray versions of the latest releases.

Spending on the victorious high-def format tripled compared to the year-ago period to top $200 million, offsetting most of the decline in standard DVD sales.

Studio execs were especially heartened by consumers’ willingness to pay more for Blu-ray discs in this economic climate. Although the vid biz has been recession-proof in the past, there has been some question about whether the next-gen format’s higher cost would impede its adoption during a downturn. Indeed, the continued vitality of standard DVD was by no means assured given its maturity and proliferating alternative entertainment choices.

“I think it’s extraordinary that the business is holding up this well, given how much of consumers’ dollars are being sucked up by increases in gas and food,” said Craig Kornblau, Universal Studios Home Entertainment prexy. “It’s a bit reminiscent of the last recession during the ’90s, when consumers were also not going out as much and wanted a home entertainment experience.” Ron Sanders, prexy of Warner’s homevid division, has revised forecasts upward after the strong first half; earlier in the year, he was bracing for year-over-year declines in 2008.

“We’ve seen that the marketplace is holding up better than we thought, roughly flat, and we think it will end the year at about that level,” said Sanders, who attributed the industry’s resilience to the strength of the catalog biz, “where the value is ringing true in these recessionary times.”

Homevid’s strong first-half bodes well for the second half, which will likely benefit from this summer’s boffo theatrical slate, most of which will arrive on disc by year’s end. Homevideo divisions rely on summer movies for a big chunk of their annual revenue.

A year ago, studios weren’t nearly as well positioned. Disc sales were down 6.5% to $6.2 billion for the first half of 2007, and a strong second half wasn’t enough to make up the difference: The domestic vid biz posted its first significant spending drop since the introduction of VHS and Betamax in the 1970s; sales declined 3.3% to $15.38 billion, and overall spending dropped 3.1% to $22.9 billion in 2007, according to Video Business.

Ever since, Wall Street has been hammering showbiz stocks on the presumption that packaged media is on its way out; earlier this month, Lehman Brothers’ Anthony DiClemente downgraded several congloms for their seeming inability to withstand the shift toward digital media. The studios themselves have also cited uncertainty about DVD and next-gen formats in their negotiations with the guilds.

Hit titles are selling less than they might have at the format’s peak –problematic on a title-by-title basis since studios have come to rely upon homevid coin to cover ballooning marketing and production costs. On an overall basis, however, catalog sales and Blu-ray discs are cushioning the blow, while digital downloads have yet to become a factor.

“I think people are becoming pickier on what they spend their money on, but home entertainment always represents a good value,” said Lori MacPherson, general manager for Walt Disney Studios Home Entertainment, North America.

Blu-ray now accounts for less than 10% of disc sales per title, but studio execs remain confident that ratio will keep rising now that the format war has been resolved and more consumers buy HDTV sets in preparation for the digital conversion.

Twentieth Century Fox Home Entertainment prexy Mike Dunn predicts the ratio will reach 10%-12% at the end of the year.

While eager to see electronic sell-through take off, studio execs caution that it won’t happen overnight, even with the stepped-up presence of Apple.

Apple’s iTunes Store quickly dominated the movie sector after the digital music powerhouse inked a series of studio deals earlier this year, but the movie numbers are still small compared to disc sales (Daily Variety, June 20).

Adams Media Research topper Tom Adams projects $254 million in download spending this year compared to $118 million in legal downloads last year.

Homevid’s resiliency is starting to get Wall Street’s attention. Last week, Pali Research’s Rich Greenfield, an especially bearish analyst, revised his earlier gloomy prediction for homevid to flat, and possibly up, for 2008, given the summer movies on the way to shelves later in the year.

“The DVD industry is not rapidly declining in favor of digital distribution,” he wrote, calling the latter’s revenues “completely insignificant to the Hollywood studios.”

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