Hit titles aren't selling the way they used to

Is a turnaround at hand or still a year or two away?

Happily, consumer spending on discs and downloads held steady last quarter — no mean feat after consecutive first-quarter declines — and there were small yet promising signs of growth on the high-def and digital delivery fronts.

But that doesn’t erase questions about the biz’s immediate prospects: Hit DVDs simply aren’t selling the way they used to, and it’s unclear how the teetering economy will affect Blu-ray’s prospects.

The vid biz has been recession-proof in the past, but consumer conversion to Blu-ray requires an HDTV, Blu-ray player and stream of pricier discs. High gas prices already seem to have affected DVD spending patterns, with previous midweek purchases of new releases shifting to the weekend.

Vid toppers brush off questions about the economy but admit they are concerned about quickly ramping up Blu-ray purchases to offset DVD erosion. Overall disc sales were basically flat last quarter at $3.5 billion, according to Variety sister publication Video Business, and total spending was virtually unchanged at $5.6 billion. (More precisely, sales edged up 0.5%, and spending down 0.3%; both margins are so small as to be considered statistically insignificant.)

“The fact it was even flat shows tremendous strength,” says Lionsgate prexy/co-COO Steve Beeks.

Warner Home Video prexy Ron Sanders had been bracing for a down quarter, so he was pleased that, when the dust settled on the back-loaded period, “it was actually very strong.”

Blu-ray sales, while still a tiny fraction of overall revenue, spiked after the format prevailed against rival HD DVD in January. The victorious format generated more than $100 million in sales last quarter despite a weakening economy.

“In this environment where people are definitely challenged with discretionary income, Blu-ray is percolating,” says Universal Studios Home Entertainment topper Craig Kornblau, an ardent HD DVD supporter preparing to release the studio’s first Blu-ray discs in July. “It’s a very small but powerful growth engine.”

Despite the uptick, Blu-ray still only represents about 1% of the overall disc market.

It’s questionable as to how big an impact these next-gen format sales will have on fiscal 2008.

“For the full year, we’re still looking a couple points down unless we get an extraordinary bump from high-def,” Sanders says. “But next year we should get back to growth.”

“The wild card in this is Blu-ray, but that continues to trend upward,” adds Sony Home Entertainment worldwide prexy David Bishop. “I think in the second quarter we’ll be OK and then end year over year up.”

Vid toppers maintain that Blu-ray’s high startup cost will not be an impediment to its adoption over coming months.

They variously point to the number of HDTVs already in homes and the fact that early adopters aren’t as price sensitive as the average consumer.

Besides, Kornblau argues, studios don’t have to convert everybody to Blu-ray, just the heavy disc buyers.

“Twenty percent of people are making 50% of the buys,” he says.

However, the conversion process needs to be managed carefully, lest studios further accelerate DVD’s demise. That means lobbying big box chains to keep a healthy DVD footprint and promoting releases on both formats.

“For us, it’s really about continuing to drive Blu-ray while of course continuing to support DVD,” says Lori MacPherson, g.m. of North America, Walt Disney Studios Home Entertainment.

Digital sales and rentals are much less a factor, but studios are taking care to foster that side of the biz as well, slowly but surely putting more of their content on iTunes and rival services such as Amazon’s Unbox.

DVD still dwarfs its newer rivals, although its might has faded.

Vid execs say some hit titles experienced worrisome softness during the first quarter, including “I Am Legend,” the top DVD seller, which Warner admits fell short of aggressive goals.

No. 2 “Enchanted,” however, got strong marks for its perf; “American Gangster,” “Bee Movie” and “The Game Plan” rounded out the top five, according to Video Business.

Other bright spots: “3:10 to Yuma” led Lionsgate’s best quarter ever, and Warners’ pre-Oscar release of “The Assassination of Jesse James by Robert the Coward” and “Michael Clayton” paid off handsomely.

Sales of “Snow Buddies,” a direct-to-disc kiddie pic, surprised even Disney, a longtime leader in that category.

The second quarter got off to a strong start with “Alvin and the Chipmunks,” which sold more than 6 million units the week after its April 1 debut to quickly become the year’s top seller.

Other major releases in the second quarter include “Juno,” “27 Dresses,” “Cloverfield,” “Rambo” and “10,000 BC.”

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