Without a doubt, 2015 was the year of OTT. The delivery of movies, TV shows and other content over the Internet –- led by Netflix, with its cheap all-you-can-watch monthly subscription fee –- was the talk of the home entertainment business, eating into disc sales and cable bundling alike.
Meanwhile, the studios – who let the genie out of the bottle in the first place by selling content to Netflix for far more money than they could generate by putting the same movies out on DVD or Blu-ray Disc –- saw their catalog and secondary-movie businesses collapse.
And yet home entertainment’s traditional transactional model, in which the consumer pays to watch, or own, a specific movie or other program, was kept alive by studios keeping new movies out of the hands of the OTT operators, including Netflix, “which from us at least only gets movies nine years old or older,” quipped one studio executive.
“While OTT has generated a lot of media attention, it remains just one piece of the overall home entertainment business,” said Bob Buchi, president of Paramount Worldwide Home Media Distribution. “Digital sales continue to rise and consumers are enjoying our content on all of the many platforms available to them.”
“While OTT made significant strides in 2015, it has been a year of ownership,” added Ron Schwartz, president of Lionsgate Home Entertainment. “It’s an exciting time for us to be in the home entertainment business as it constantly evolves and expands. Consumers still have a rabid appetite to collect and own their favorite content, either digitally or on packaged platforms.”
Fueled by new releases that go on sale two or three weeks before they become available on discs, electronic sell-through is expected to be up by about 20% for the year, with consumer spending approaching $2 billion.
One studio president said iTunes now generates more revenue for his studio than Target Stores, the No. 2 discount retail chain, behind Walmart.
“Our digital business produced outstanding results this year as we continued to build awareness on the advantages and value of digital ownership and we worked aggressively to get our films and TV shows into more digital stores, giving consumers as many options as possible,” said Janice Marinelli, president, Disney/ABC Home Entertainment and Television Distribution.
“We continue to see promising trends in the set-top box market,” added Paramount’s Buchi. “Building on successful EST launches by Comcast, Orange and Sky UK, we now have close to 20 players in that space worldwide and expect another dozen or so in the next year. Despite this growth, we think there is tremendous untapped potential in the living room, and have been aggressive in pushing premium transactional models via the set top box, either via full EST services or through a premium VOD model.”
In addition, Buchi noted, Paramount successfully worked with theatrical exhibitors to create a flexible distribution initiative “that made two of our films, ‘Paranormal Activity: The Ghost Dimension’ and ‘Scouts Guide to the Zombie Apocalypse,’available to viewers on digital platforms much earlier than usual following their theatrical runs. While results are still coming in, we believe that this strategy will maximize the revenue for certain titles in both the theatrical and home viewing windows by giving fans legitimate digital access when interest is at its highest.”
Disc sales, also dominated by new releases, continued to fall in the double digits but still amounted to a healthy consumer spending total of $5.32 billion as of Sept. 30, according to DEG: The Digital Entertainment Group – 27% more than was spent on streaming in the same time period, according to DEG numbers.
“Every year is going to be the year of OTT, but we shouldn’t forget that while digital continues to drive growth, physical discs are still 70% of the business,” said Man Jit Singh, president of Sony Pictures Home Entertainment.
“Clearly, the disc business remains under pressure as consumers become increasingly engaged by the broadening scope of entertainment choices,” said Eddie Cunningham, president of Universal Pictures Home Entertainment. “Overall, Blu-ray and DVD sales continue to significantly contribute to the studios’ bottom lines and it is incumbent on us as an industry to continue to innovate and enrich our offerings to ensure our retail partners remain committed to the category and that our consumers remain ever-enthusiastic and engaged.”
Ron Sanders, president of Warner Bros. Worldwide Home Entertainment Distribution, summed it up like this: “2015 has shaped up to be a really interesting year, and one that has defied expectations. First, the physical business is not dead, and has declined at a slower rate than most ‘experts’ predicted. Second, the digital business (especially EST) has remained an incredibly strong growth engine for consumer sales despite several years of double-digit growth performance. Finally, the explosion of new technology and higher quality sources has injected real optimism for the future.”
Indeed, much of 2015 was spent shoring up the home entertainment business to remain viable in the future. The Blu-ray Disc, which celebrates its 10th birthday next year, is prepping for resurgence with the arrival of Ultra HD, the much-ballyhooed new format that not only offers viewers four times the resolution of HD, but also includes high dynamic range (HDR), which produces brilliant highlights, vibrant colors and greater contrast on compatible displays.
Streaming services continue to have challenges transmitting HD, so people upgrading to 4K will likely turn to the Blu-ray Disc for content. The Blu-ray Disc Association finalized the Ultra HD Blu-ray spec and logo in May 2015, and began licensing the technology in August.
Less than a month later, Samsung unveiled the industry’s first Ultra HD Blu-ray Disc player at IFA 2015, the big global trade show for consumer electronics in Berlin. And 20th Century Fox promptly announced its intent to release upcoming movies on Ultra HD Blu-ray disc on the same day as standard Blu-ray and Digital HD. The studio also will go back and reissue recent hit films in Ultra HD, including “Kingsman: The Secret Service, “X-Men: Days of Future Past,” “Exodus: Gods and Kings,” “Life of Pi” and “Fantastic Four.”
“When my colleagues and I at Fox first saw the side-by-side comparison of Ultra HD with High Dynamic Range versus HD, it was reminiscent of the difference between standard def and high def,” 20th Century Fox president Mike Dunn said in Berlin. “This is a massive leap forward for the consumer experience.”
Since then, Sony Pictures also has announced plans to release Ultra HD Blu-ray Discs, with the other major studios expected to do likewise, most likely at the Consumer Electronics Show in Las Vegas in January 2016.
“It’s important to provide the best quality and choice to consumers. With the rapid adoption of 4K TVs, it’s interesting that both digital and physical consumers will be learning about 4K content at the same time, which was not the case with HD,” said Sony’s Singh. “The mix remains to be seen, but 4K is an opportunity for us to present a new offering to consumers and develop a unique new market across formats.”
On the digital front, there were significant inroads, as well. In August, the Secure Content Storage Association announced the availability of specs for Vidity, an enabling technology allowing consumers to move their digital content easily around to virtually all their devices. SCSA was founded by 20th Century Fox, Warner Bros Home Entertainment, SanDisk, and Western Digital.
Vidity is expected to make consumers much more comfortable with buying and collecting 4K UHD movies, and other filmed content, knowing they will have full control of managing and moving their high-quality digital movie libraries. Movies will play on any device, at any time, without the need for an account, device activations or connection to the Internet for playback.
Studio home entertainment executives concede their business has become more challenging than it ever was, and sometimes long for the good old days when consumers were spending upwards of $16.6 billion on DVDs and Blu-ray Discs, as they did in 2006 (by 2014, the total spend on packaged media had fallen to $6.9 billion).
And yet the promise of digital delivery, in all its forms, and an anticipated rebound in Blu-ray Disc sales once Ultra HD kicks in has studio executives looking ahead with at least a modicum of optimism.
“We foresee huge opportunities to further excel at retail,” Sony’s Singh said.
Lionsgate’s Schwartz notes that much of the decline in disc sales during the first nine months of 2015 “could be attributed to a significantly smaller slate, as well as comps from 2014, most notably ‘Frozen.’ However, with the record summer box-office slate hitting home entertainment shelves in Q4, we’ve seen a firming in packaged media spend in October and November, holding nearly stable versus a year ago.”
For 2016, he said, “we are projecting that consumer spend will continue to climb higher, operating margins for our industry will continue to increase, and consumers will be buying and collecting digitally more than ever.”
Paramount’s Buchi said that in 2016, he expects “all of the studios, including Paramount, will continue to experiment with windowing. We plan to closely analyze our slate and customize our release strategies to maximize revenue on every platform.”
“From the digital bridge technologies like SCSA, to Ultra HD with HDR for both physical and digital, to the promise of virtual reality, the future of home entertainment is very bright indeed,” summarized Warner’s Sanders. “Most of these new growth areas, like digital and newer technologies, also come with much better margin profiles for the studios, so the trajectory of our profit performance as an industry is on a much better curve going forward.”
For more information on the home media business, visit HomeMediaMagazine.com.