Industry continues steady growth

<B></i>UPDATE:</b><i> But suppliers see challenges ahead</i>

JAN. 4 | Even though none of the biggest box office hits set any new DVD benchmarks last year, the overall home video market still had a healthy 8.5% gain to reach a record $24.1 billion in consumer spending.

Warner Home Video, which was in a virtual dead heat with Buena Vista Home Entertainment last year, was the clear market share leader with 19.7%, nearly three points ahead of Buena Vista.

The rental market was off by just 0.4% to slightly more than $8 billion, including a 41% drop in VHS rentals. Roughly 90% of purchases on new release titles are DVD, and more retailers are expected to drop VHS this year.

Sales, on the other hand, were well into double-digits again with a 15% gain in 2004, pushing that side of the market to $16.1 billion. More than 94% of the money spent on the purchase of home video programming last year was for DVDs–$15.2 billion, up from $11.9 billion (85% share) in 2003.

As expected, the year’s top-grossing movie, Shrek 2, was also the year’s top DVD, with consumers spending $377 million to buy and rent the home version. And The Lord of the Rings: The Return of the King followed the franchise’s previous installments by landing in the second spot, with $310 million.

Source: VB research from studio sources, Rentrak Home Video Essentials; consumer spending on sales and rentals, DVD and VHS. Warner includes New Line and HBO; Buena Vista includes Miramax; Universal includes DreamWorks

Outside the big box office hits, there were several stand-out over-performers on home video last year, such as Universal Studios Home Entertainment’s The Rundown, MGM Home Entertainment’s Out of Time and Buena Vista’s Brother Bear and Open Range, each of which generated more than twice as much spending on DVD than at theaters.

Sony Pictures Home Entertainment’s Ben Feingold said the studio was happy with sales of Spider-Man 2 and Fahrenheit 9/11, but pointed to Seinfeld as the breakout success of the quarter as the fastest-selling TV on DVD title ever.

“This fourth was very strong, but the industry got ahead of expectations because the industry is so massively strong,” Feingold said.

Paramount Pictures president worldwide home entertainment Tom Lesinski blames the titles for any softness. “The lineup last year was just better than this year,” he said, pointing out that consumers have nonetheless continued to buy DVDs at the same rates as in previous years.

The average household buy rate of DVDs held steady at 13 to 14 DVDs a year, according to studios. But consumers are increasingly spreading their dollars to TV shows on DVD, older films and smaller box office fare. TV on DVD sales skyrocketed 62% in 2004 to $2.3 billion. “The consumer appetite for TV on DVD is unquenchable,” noted Ron Sanders, executive VP and general manager at WHV.

According to DEG: The Digital Entertainment Group, another 37 million DVD players were sold to consumers in 2004, bringing the total number of DVD households with a DVD player to 70 million, or nearly three-fourths of all TV households. The percentage is projected to increase to 80% of all TV households with at least one DVD player by the end of 2005.

Research shows that these new DVD consumers, however, might buy fewer DVDs, said Buena Vista’s executive VP sales and distribution Pat Fitzgerald. “Households coming in now are not buying as frequently as those [new households] in the past. They’re more fickle,” he said.

Matt Lasorsa, executive VP marketing at New Line Home Entertainment, said he’s concerned consumer buy rates could slow next year with the pending introduction of high-definition DVD, but only if consumers don’t understand that the new players will play regular DVDs.

There’s also more DVD competition at retail than ever before, with the number of releases up 44% in 2004, according to 20th Century Fox Home Entertainment. That has meant a fierce battle for shelf space and more pressure on studios to ship the right amount of product to stores and to sell it off as quickly as possible.

“We have to try to change the paradigm at major retailers to extend the life of new releases,” said Fox president Mike Dunn. “They need to dedicate more space to bestsellers.”

“It’s difficult to ship the same number you would have shipped a few months ago,” said Steve Beeks, president of Lions Gate Entertainment, which now commands 4% of the market after merging with Artisan Entertainment last year. “There’s more competition for space, for dollars.”

That has placed more importance on marketing than ever before, said Universal’s Craig Kornblau, who added that it will become even more crucial next year. “It’s gonna be a tough year,” he said.

DreamWorks Home Entertainment, which accounts for roughly $1.4 billion of Universal’s $3.54 billion in consumer dollars, had its biggest year ever with a fourth quarter slate that also included Collateral and The Terminal.

DreamWorks dismissed talk that it didn’t meet expectations with Shrek 2. “We couldn’t be more pleased,” said DreamWorks’ head worldwide home entertainment Kelley Avery.

Sales of catalog DVDs–those out for 12 weeks or more–were up 21% to $6 billion.

MGM, which is being acquired by Sony for its catalog, had some of its biggest successes with catalog releases of The Pink Panther Collection, The Good The Bad and The Ugly and The Great Escape. Older films repackaged for theatrical remakes such as The Alamo with John Wayne saw triple digit increases.

“Retailers are giving more space to library,” said MGM Home Entertainment president David Bishop. “There’s a greater presence at retail and the price is very attractive to consumers.”