Studios to Generate Record Homevideo Sales on Digital Platforms in 2014

It should turn out to be a very happy holiday for Hollywood’s homevideo divisions.

If all goes according to plan, the weeks between Thanksgiving and Christmas should generate more revenue than ever before from the sale of films and TV shows on digital platforms.

At the end of the third quarter, the industry was already close to last year’s benchmark of nearly $1.2 billion from digital downloads. Through October, it had generated $1 billion, up 33% over last year, according to the Digital Entertainment Group.

That figure could easily top $1.4 billion by the end of 2014, which would mark a new milestone. Digital sales generated nearly $425 million during the fourth quarter in 2013, an increase of 44% over 2012. “This holiday season will continue to see an explosion of digital devices being activated, with nearly 20 million expected to be opened on Christmas morning,” says Mike Dunn, president of Twentieth Century Fox Home Entertainment and the only studio president on the Consumer Electronics Assn.’s Board of Industry leaders.

Studios are eager to do anything they can to encourage digital ownership as more consumers turn to their mobile devices and power up their videogame consoles and app-filled smart TVs for entertainment.

Hollywood is already making more from sales and streaming services than it is from the overall rental market, which is down 12.6% so far this year. In 2013, the combined rentals category (which includes physical, subscription, VOD and kiosk-based outlets) declined 5% to nearly $6.1 billion, while digital sales (downloads, rentals and subscription-based streaming services like Netflix) generated $6.5 billion.

The physical business is hardly dead, however, with the sale of DVDs and Blu-rays still accounting for a majority of the $18 billion homevideo industry in the U.S. Last year, disc sales earned $7.8 billion, according to DEG.

But in addition to revenue, there are also profits to consider. With digital, there’s nothing physical to manufacture, significantly increasing the margins on each sale. As a result, studios have spent the year pushing Digital HD as a brand the industry should rally around.

The promotional effort has involved making films available through digital retailers three weeks ahead of a disc’s release in order to target the estimated 40 million consumers who are digitally active but have never started a digital collection of films, say officials from Fox, which came up with the Digital HD name.

At the same time, Walmart, Target and Best Buy have made a big push into digital, hoping to reverse the downward trend in disc sales.

Walmart, in particular, has been eager to encourage more of its customers to redeem digital codes found in the discs they purchase, believing that introducing them to online stores like Vudu could increase digital purchases.

Meanwhile, Walmart’s Vudu has joined Google Play and Apple’s iTunes in backing Disney Movies Anywhere, an app through which Disney is making more than 400 Disney, Pixar and Marvel movies available to view and purchase.

Disney launched the service in February with iTunes, through which a majority of films and TV shows are purchased. But the addition of Google’s Android will now make Disney Movies Anywhere available on a majority of the world’s smartphones and tablets for the first time, which helped attract a mass retailer like Walmart.

Whereas Disney will target families and the Comic-Con crowd with Disney Movies Anywhere, Fox was first to enlist YouTube talent to hype “X-Men: Days of Future Past’s” digital release, and courted teens with “The Fault in Our Stars,” especially 13- to 17-year-old girls and women over 18, with an extended cut of the film on most digital platforms three weeks before its disc release. The overall goal, however, is to make digital purchases appeal to everyone. That will especially be key during the holidays, when families gather. That’s also the time when most smart TVs, mobile devices and videogame consoles are purchased — hardware that powers screens that owners are looking to fill with entertainment. In fact, 68% of consumers plan to buy electronics during the holidays, according to research group IHS Technology.

“While the fourth quarter is always the most dynamic in terms of sales, mostly due to holiday spending, this year, consumer confidence is very high,” says Veronica Gonzalez-Thayer, senior analyst for consumer electronics at IHS Technology, who adds that consumers are expected to spend an average of more than $750 this season. Smart TVs will dominate purchases, at around 34%, she estimates.

Meanwhile, sales the day after Thanksgiving — Black Friday — included deep discounts of tentpoles: Best Buy offered Disney’s “Maleficent” for $9.99, 63% off its suggested retail price. Fox’s “X-Men: Days of Future Past” was reduced by 75%. Both include the Digital HD copy, again a carrot to convince consumers to make more digital purchases.

Studios will still face some competition to increasing digital ownership, though. Consumers spent $3.2 billion last year on subscription-based streaming services like Netflix, and another $2.1 billion on video-on-demand rentals through cable and satellite providers, according to the DEG.

Those VOD and SVOD categories will see growth this year as Apple, Google and Roku try to get their Internet-connected streaming devices into more hands, and Netflix continues to expand its subscriber base. Subscription services grew by 32% in 2013. They were up 26% to $2.9 billion through the end of the third quarter this year.

Success of streaming media devices, like sticks and players, “hinges in large part on younger consumers’ preference for online VOD,” says Glenn Hower, a research analyst at Parks Associates. “Over 70% of video consumption still occurs on the television. The experience of watching on the big (TV) screen is still a key part of the video-viewing event, and purchasing a streaming device is simply an easier process than the research and price-comparison involved with flat-panel TV purchases.”

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