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How DVDs became a success

Vision, compromise leads to prosperity

In the mid-1990s, Hollywood wasn’t yet sold on the DVD.

The homevid business had been built around renting clunky plastic videocassettes, and the idea of selling movies on shiny silver discs generated more skeptical questions than support.

“Some studios were very invested in the VHS rental model, and they didn’t want to tinker with it,” recalls Richard Cohen, at the time MGM’s president of home entertainment.

Warren Lieberfarb, the former Warner Home Video president who is regarded as the father of the DVD format, remembers doubters asking, “Who wants a playback-only DVD machine?” Others were convinced, Lieberfarb says, that “the DVD’s copy-protection security will be hacked and it will destroy the industry.”

And when Fox, the last major studio to begin releasing movies on DVD, decided to put TV shows like “The Simpsons” and “The X-Files” on the discs, “everybody had a heart attack,” recalls Pat Wyatt, then-president of Fox Home Entertainment. Skeins on disc would surely hurt ratings and syndication revenues, many assumed.

A decade after the DVD’s U.S. debut in the spring of 1997, the disc is the foundation of the entertainment business — and all the naysayers have vanished.

Domestic DVD sales generated $16.6 billion last year, with rentals adding an additional $7.5 billion, according to the Digital Entertainment Group.

Retailers like Wal-Mart and Target have gained in power as rental businesses such as Blockbuster and Movie Gallery have faded. Netflix has shipped more than a billion DVDs to its members, and the operators of automated kiosks that rent and sell DVDs expect their business could rake in $3 billion annually by 2009.

The vision thing

For many in the mid-1990s, the concept of putting movies on discs brought back memories of the failed LaserDisc format, which targeted money-is-no-object cinephiles.

But at Warner Bros., Lieberfarb felt discs were the perfect answer to the threat posed by digital delivery systems such as cable and satellite, which offered a panoply of new channels. The need to control Blockbuster’s burgeoning market clout was also an issue.

“Forty percent market share for Blockbuster and 12% for their next largest competitor meant a loss of control over pricing and other terms and conditions for the studios,” Lieberfarb says.

Indeed, DVD offered a way for studios to exert more control — in fact, selling discs let them keep two-thirds of every dollar compared with only one-third for renting tapes.

Of course, no good format gets launched in the homevid biz without a format war.

In 1993, Warner and Toshiba were working together to develop data compression and storage technologies needed to put full-length feature films on 5-inch optical discs.

The two companies invited Philips to help develop the so-called Super Density (SD) disc, since the gadget maker holds a number of key patents related to the audio CD.

Philips, however, had other ideas, teaming with Sony — another company hugely vested in CD technology — to create the Multimedia Compact Disc (MMCD).

The two sides would have marched headlong into debacle similar to VHS v. Beta. But Lieberfarb was able to do some notable consensus-building, first allying with key studio partners, including Universal, then gaining the support of the computer biz, which was looking for a format to replace the CD-ROM.

By the fall of 1995, Lieberfarb had the backing he needed to forge a truce, and the two sides announced the Digital Versatile Disc (DVD) at Comdex that year.

In 1997, the first DVD players hit store shelves in the U.S., listed at $799 and up. Warner released 30 titles, including “Twister,” priced at $25, comparable to VHS.

Still, Disney, Fox and Paramount remained on the sidelines, concerned that DVD’s newly adopted copyright protection standards weren’t good enough — and perhaps loath to pay format royalties to Time Warner.

Again, Lieberfarb stepped in to campaign for the format. Fox, the last holdout, came onboard when Lieberfarb convinced Time Warner officials to end a feud with Rupert Murdoch and carry his Fox News on TW’s cable systems.

By 2002, about 80 million DVD players had been sold, making it the fastest-adopted consumer electronics device ever. By June 2003, DVD rentals had surpassed VHS rentals for the first time, and players could be had for about $100.

“I was very optimistic about DVD, but what actually happened was 10 times better than what I had forecast,” says Cohen, who now heads TNR Entertainment, a Houston-based DVD kiosk company.

As the home entertainment industry shifted from renting programming to selling it, new power players like Wal-Mart and Target emerged, taking over the dominant role in Hollywood that national rental chains like Blockbuster once played.

“On the sell-through side, VHS had been purely about family content,” says Mike Dunn, Fox Home Entertainment president. “A few live-action movies like ‘Titanic’ and ‘Independence Day’ were huge sellers on VHS, but when DVD came out, buying discs became a mainstream purchasing habit.”

DVDs also heralded the arrival of deleted scenes, director’s commentary tracks, and other extras. Dunn considers David Fincher’s “Fight Club” to be one of the first DVDs supervised by a movie’s director.

“Entertainment Weekly had given the theatrical release a grade of D,” Dunn recalls, “and when the DVD came out, they reconsidered and gave it an A, declaring it the DVD of the year and putting it on the cover. That was the first film that really used and defined the features you see today.”

Meanwhile, aggressively exploiting its vast library on disc and pocketing a lion’s share of royalty riches, no studio profited from the DVD explosion like Warner.

But amid the ascent of the DVD, Lieberfarb was fired from Warner in late 2002 after a clash with CEO Barry Meyer.

Ten more good years?

After making huge yearly leaps in the early part of the decade, DVD’s revenue growth has stopped. In fact, the first quarter of 2007 saw overall homevid revenue slide 5.1%, the biggest quarterly dip of the DVD era.

Some wonder if digital downloading and cable video-on-demand libraries, coupled with consumer confusion over the two incompatible high-definition disc formats, could lead to a not-so-distant future in which consumers no longer use discs.

At Lionsgate Entertainment, prexy Steve Beeks envisions a future where studios offer consumers a choice of high-definition discs, standard-definition discs and digital downloads on sites like iTunes and CinemaNow. (Lionsgate has joined the Blu-ray team and is majority owner of CinemaNow.)

“I think for a long period of time, high-definition and standard-definition DVDs will coexist, since it’s going to take a long time for all of those standard-definition households to convert,” Beeks says.

Disney homevid topper Bob Chapek is also bullish on Blu-ray: “The early numbers coming back from the Blu-ray format are exciting to see, as consumers are obviously voting with their dollars,”notes Chapek, whose studio is prepping to release the first two “Pirates ” films in the format. 

Many homevid vets don’t believe that discs — whether standard or high-definition — will be replaced by digital delivery anytime soon.

“I’d be surprised if, four years from now, downloading of movies by consumers represents more than 7% of the total consumer spending on home entertainment,” says Bo Andersen, president of the Entertainment Merchants Assn.

Lieberfarb agrees that discs won’t be let go of easily: “There is a reluctance to experiment with transformative models, for fear that it’ll cannibalize revenues in the short run.”