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JAN. 21 | The home entertainment industry suffered its first significant year-to-year decline in consumer spending in 2007, a victim of an overcrowded fourth quarter and the raging high-definition format war. But studio chiefs are heading into 2008 hopeful that growth in high-def will finally make up for losses in the maturing DVD format.

Overall, consumers spent $22.9 billion on home entertainment rentals and purchases, marking a 3.1% drop from 2006. Both sales and rentals slipped, falling 3.3% to $15.38 billion and 2% to $7.5 billion, respectively, according to VB research.

The previous two years were relatively flat, with overall growth of 0.5% in 2006 and a decline of just 1.1% in 2005, according to VB research.

The studios’ home video presidents owned up to mistakes over the last 12 months, including underestimating competition from videogames and over-anticipating consumer appetite for aging film franchises.

But with evidence in January of surging interest for Blu-ray Disc, following Warner Bros. Entertainment’s late-December decision to exclusively release high-def titles in BD, there is hope the DVD business can stabilize in 2008. The HD DVD camp also has many high-profile titles scheduled in the coming months, including Paramount Home Entertainment’s Bee Movie and Universal Studios Home Entertainment’s American Gangster.

Studios also are heartened by the fact that there is relatively more variety on deck with 2008 DVD releases, dotted with both new ideas and known brands.

“The industry has experienced its first downturn this year,” Paramount president Meagan Burrows said. “We’ll need to reverse this and reignite our efforts for the consumer in 2008. But we feel poised for a phenomenal year, with a combination of beloved franchises and fresh innovative product.”

This year’s top title, Transformers, “is certainly the biggest title Paramount has had since the VHS release of Titanic in 1998,” Burrows added. Across formats, Transformers generated $189.5 million, according to the studio. Paramount will strive to follow that success this year with a combination of the new, with Iron Man, and the established, with Star Trek.

“One of the story lines in 2007 was that despite great box office, video performance didn’t live up to expectations,” Warner Home Video president Ron Sanders said. “The good news for 2008 is that there aren’t a lot of sequels, and there will be a lot of fresh content, which will be something that resonates with the consumer.”

For 2008, Warner will back a major sequel in the next Batman entry, The Dark Knight, which will be balanced with first-to-film franchises Speed Racer and Get Smart.

Sanders said consumers were slammed by the large amount of entertainment choice this year. Within a three-month frame, shoppers had to choose between a collision of the biggest number of $300 million-plus theatricals to hit DVD yet—namely Spider-Man 3, Transformers, Shrek the Third and Pirates of the Caribbean: At World’s End—and hot game titles, such as Guitar Hero III.

“We have never tried to sell that size and breadth of titles before,” Sanders added. “I can tell you, we don’t look at a release slate for a film before looking at the games that are also coming out, and that is going to be even more the case in 2008.”

This year’s sequel-based films accounted for 25% of the available DVD product, said Ron Schwartz, Lionsgate executive VP and general manager, which compares to 18% of titles in 2006.

“Sequels as a whole will under-index non-sequels” in DVD performance, said Schwartz. “But the market held up well, where we did not see decay in terms of non-sequel properties.”

For example, in some Lionsgate highlights, Crank generated $64.1 million on DVD, representing 231% more dollars than its box-office revenue. Bratz earned $23.5 million on DVD, 235% better than its theatrical run.

Blu-ray also is showing its muscle in January, noted Schwartz. This month, the studio’s BD releases War and 3:10 to Yuma have already outsold each of Lionsgate’s 2007 BD titles, including ones that earned much more at the box office, he said.

Walt Disney Studios Home Entertainment plans to broaden its BD slate with its first made-for-disc releases, feeling assured there is little risk with consumer demand. Tinker Bell will street on Oct. 28, and Little Mermaid: Ariel’s Beginnings will launch on BD sometime this year as well.

“I think high-definition is certainly the big opportunity, and our hope is that the market will get back to flat or have single-digit growth,” said Lori MacPherson, Disney general manager of North America.

“This was a good transition year,” added Mike Dunn, 20th Century Fox Home Entertainment president. “We had a primary issue of the consumer not investing in software that could be obsolete. [Yet with Warner choosing BD], I think the most important thing is that the Blu-ray demand will be there.”

Sony Pictures Home Enter­tainment president David Bishop believes the studio’s 2007 tentpole, Spider-Man 3, might have performed better if fewer resources had been spent on the format war fight. Although Paramount and Universal Studios Home Entertainment remain HD DVD exclusive, there is growing industry consensus around Blu-ray, which now has the exclusive backing of studios with a combined 75% market share.

“That money could have been used for other uses,” laments Bishop. “We could have sold a few million more units. So much of our marketing efforts were about one-upmanship.”

However, with Paramount’s resounding success of Transformers on standard-def and HD DVD, there is still plenty of fight in the competing format. Universal president and HD DVD-backer Craig Kornblau foresees high-def software of both formats punching up business in 2008.

“Right now, our current plan is to solely exploit high-def content in HD DVD,” he said. “We will be watching consumer adoption very carefully with the two formats. I definitely think we will see tremendous growth in high-def.”