Studios Find Their Best Hope for Offsetting a DVD Decline

Early electronic sell-through (EST) is a digital window where top films are finding traction

When Walt Disney Pictures releases “Iron Man 3” on homevideo Sept. 24, it won’t be the first post-theatrical glimpse fans will get of the film after its theatrical run. The movie will be available for high-definition download three weeks earlier on a range of digital platforms from iTunes to Amazon, instead of the typical simultaneous rollout with disc purchase and digital rental/VOD formats.

What was once an exception to traditional windowing for movies is steadily becoming the rule. One year after Fox announced plans to offer all of its films two to four weeks early under the “Digital HD” banner, more and more blockbuster titles are getting the same distribution treatment. Warner Bros.’ “The Great Gatsby” was available on select digital platforms weeks before its Aug. 27 street date, while Paramount’s “Star Trek Into Darkness” did the same Aug. 20 — though disc buyers will have to wait until Sept. 10.

And after a few years of scattered trials with what the industry calls “early electronic sellthrough,” or EST, it’s not just the timing and duration of the window that’s being tweaked. Both where and when films are offered is being tested outside the home in retail stores and movie theaters.

Enabling this increasing experimentation is the changing operational structure at studios, most of which have combined their digital and disc divisions. Sony, Fox and Paramount have made such moves over the past several years, followed more recently by Warner Bros. and Universal.

With disc sales struggling to maintain the value they’ve long enjoyed on conglomerate balance sheets, EST growth is critical to studios, which must transition the whole notion of ownership to digital, a format far more conducive to the much lower margins being earned by rentals.

“We’re looking to encourage ownership in a digital world, and what EST does is separate the ownership piece out, brings it directly to the consumers, and creates impulse sales like we never had before,” said David Bishop, worldwide president of Sony Pictures Home Entertainment, who said Sony was the first to offer EST, through an exclusive iTunes sell-through for 2011 documentary “It Might Get Loud.” It soon followed with the studio’s fi rst major title in the window, “Bad Teacher.”

Disc decline

Even in decline the disc business is the most valuable window after theatrical. In January, Nomura Securities estimated that home entertainment was responsible for 14% of total revenues at News Corp., 12% at Time Warner and 5% for Disney. Homevideo generated $18 billion in sales in 2012, according to the Digital Entertainment Group, slightly up over the previous year.

Whether an earlier electronic sell-through window is working is difficult to quantify, considering detailed statistics aren’t easy to come by in home entertainment, which is seeing a combination of Blu-ray sales and digital compensating for DVD losses. How much EST has to do with that isn’t clear: The early sales aren’t parsed out by the Digital Entertainment Group, which did find, however, that EST overall soared by more than 50% in the first half of the year over the same period in 2012. That amounted to $490 million of the $8.6 billion spent on home entertainment in the first half of 2013, putting the category on track to reach $1 billion this year.

An earlier digital window could be propelling that growth, or perhaps such growth can be credited in part to the emergence of Ultraviolet, which has reached 13 million accounts via its cloud-based system for digitally accessing movies from every studio but Disney. That said, while EST’s growth is far stronger than that of any other subset of home entertainment, it still amounts to less than half of what VOD or subscription VOD collects.

Still, the margin on EST is so much greater than on its digital counterparts that studios can’t ignore it. At an investor’s day earlier this year, Time Warner disclosed that HD EST contributed $17.50 per transaction — $14 more than what VOD gets, and $16 more than SVOD.

Fox’s EST revenues are up 200% vs. a year ago on comparable titles in 2012, which the studio’s CEO, Jim Gianopulos, deemed “extremely encouraging” last month. “Many people have their credit cards already loaded into their (digital viewing) devices,” said Mike Dunn, worldwide president of 20th Century Fox Home Entertainment. “We are now getting back that impulse purchase with early digital offers.”

With an early two-week window on “Paranormal Activity 4” in January, Paramount sold 12 times the EST copies sold on “Paranormal 3.” “For those who want the film first, they’ll come out and purchase,” said Dennis Maguire, president of worldwide home media distribution at Paramount.

Divisions Unite

Those successes have been enabled by integrating disc and digital departments at the studios instead of forcing them to compete for development, marketing and distribution resources.

In mid-May of this year, Warner Bros. became the most recent studio to make such a realignment. Previously, Ron Sanders oversaw physical sales and rentals at Warner while Thomas Gewecke, Warner’s former president of digital distribution, held the reins over digital film and TV transactions.

But in the wake of Kevin Tsujihara’s ascension to CEO of the studio, Gewecke was promoted to the more strategic role of chief digital officer, freeing up Sanders to deploy digital-fi rst sale offers with more gusto.

“When you’re only in charge of one piece of the business, you resist giving an advantage to digital, because you feel you like you should be protecting that one side of the business,” explained Sanders, now Warner’s president of worldwide home entertainment distribution. “When you are viewing across the whole P&L, you are willing to try things to drive ownership that you wouldn’t have been able to try in the old days.”

This single-shop approach enabled the EST international release in July on “42,” significantly before its street date in the U.S. Sanders needed to think big to connect a film about baseball to global audiences that weren’t at all familiar with the sport.

He and his team opted to give Apple’s iTunes a two-week exclusive to sell the title in the 86 countries where the American-centric story wasn’t playing theatrically. The iTunes service trumpeted its exclusivity by prominently promoting “42” on its home page in those nations. The movie was an iTunes top-five seller in a number of those territories during “42’s” first week of digital availability, and Warner is calling the experiment a success.

Universal Pictures is also more streamlined since May. The studio lured Fox digital guru Peter Levinsohn to take charge of physical and digital content across all windows after theatrical and broadcast runs worldwide. In overseeing subscription VOD as well as the transactional business, the newly minted president and chief distribution officer stands apart from many home entertainment chiefs who leave all film and TV subscription content oversight to their TV division colleagues.

What’s in Store

While Universal has been transforming the way its titles are released, the studio, instead of simply accelerating the window, has connected the transactional opportunity to a movie’s merchandise tie-ins before the movie even hits theaters.

“Despicable Me 2” made a unique splash at the retail level one week before its U.S. theatrical launch July 3, when Walmart and others were selling early EST pre-orders bundled with “Despicable Me 2” plush toys out of large cardboard stand-up displays. Consumers got to take the toys home right away and could access a digital sneak peek of the film. They will score the digital movie two weeks before its general home entertainment release across all formats at a to-be-determined date. They’ll also receive a Bluray/DVD copy on its street date.

Early EST availability for “Fast & Furious 6” was similarly marketed across retail, encouraging the digital buy at the time of the film’s launch in theaters. Brick-and-mortar stores have digital relevance given that many major chains have branded online storefronts, with Target the latest entrant to a category already occupied by Walmart and Best Buy.

Collaborating across departments was crucial to making such an innovation work, according to veteran U home entertainment chief Craig Kornblau. “There are a lot of different complications to consider before making the final move in regards to windows and timing,” he said.

In addition to pre-theatrical retail, early EST popped up this summer in select theaters in the form of souped-up movie tickets that were tied to new releases.

For about $25 plus the price of theatrical admission, patrons of Canadian theater chain Cineplex scored a ticket to see “Pacific Rim,” and guaranteed future access to an early digital HD copy. Purchasers were also granted immediate exclusive access to digital content created by the film’s director, Guillermo del Toro.

At select U.S. theaters, folks were offered a deluxe $50 ticket to Paramount’s “World War Z,” encompassing movie ticket, future digital copy, limited-edition poster and 3D glasses.

Rattling Windows

Tying pre-orders to a digital-first title in theaters is all the more unusual considering early EST treads on the tail-end of the theatrical window, which generally runs about four to five months until the DVD window begins. It speaks to the delicate balance among all windows in the distribution scheme that is the backbone of the studio business.

An earlier EST window may be less of a threat to that old world order than so-called premium VOD — the delivery of in-home rentals before or during the theatrical window — a prospect exhibitors have treated as a nuclear option for top-tier titles. While early EST could conceivably dilute the value of the theatrical window by riding its coattails so closely, it’s a bet home entertainment divisions are willing to make, because the window is seen as a way to train the subset of the audience who are DVD collectors to make the jump to digital ownership by getting movies earlier than they would on disc.

Digital storefronts where early EST is made available also benefit. John Batter, CEO of M-Go, a relatively new service that provides films and TV for purchase and rentals from many studios, sees it as a win-win. “Viewers value getting the movies earlier, and it’s great for services like M-Go because it drives adoption,” he said.

While a consistent window might help in that regard, too, don’t expect one anytime soon. Lionsgate in particular has tried multiple options; there’s a gap of just three days between the Aug. 30 digital release of “Now You See Me” and the release on disc, for $14.99 in standard definition and $17.99 in HD. That’s within the $13-$20 range most EST is priced at regardless of whether it’s on the early side or not, though there is experimentation there as well.

“I think the only standard is that there is not a standard,” said Steve Beeks, co-chief operating officer of Lionsgate and the president of Lionsgate Motion Picture Group. “Sometimes we go early with different pictures. It’s (calculated through) an algorithm that we use to try to maximize what the return can be.”

Lionsgate centralizes control of what it calls “all entertainment in the home” in one integrated department that pushes disc, transactional digital, VOD and TV distribution. Beeks has ultimate oversight, with Ron Schwartz, president and g.m. of home entertainment sales and distribution; and Jim Packer, president of worldwide TV and digital distribution, his top lieutenants primarily focusing on physical and digital, respectively.

Disney Undivided

Disney is the only major currently sticking to a separated digital and physical sales strategy, overseen by Janice Marinelli, president of ABC-Disney Domestic Television; and Lori MacPherson, exec VP of global product management, respectively.

Adding a third unique layer, Bob Chapek serves as Disney’s president of consumer products, managing all retail distribution of studio franchise merchandise, spanning toys, food, clothing, titles and other items.

Because Disney deals more in multiproduct brands and franchises than in single-title launches, the studio believes it takes a more complex approach to get product to consumers. Nevertheless, those on the team said they go out of their way not to compete with each other.

“This absolutely works for us,” said Marinelli, who handles subscription, streaming and transactional digital operations. “We are all coming to the table to discuss ‘Iron Man 3’ for fall. Lori is looking at setting up a window for the physical world; I’m looking at advancing the digital, and Bob is inside retail stores on this. We’re looking to try to manage the whole brand, as opposed to individual businesses.”

Disney has been slower out of the gate on early EST, with “Wreck-It-Ralph” its first such offering Feb. 12, prior to the March 5 bow of the title on Blu-ray/DVD and VOD. It’s important for the studio to take its time figuring out how to maximize revenues when considering this new way of looking at the home entertainment sector.

“Everything is in transition,” said Marinelli. “For the longest time, home entertainment was content delivered to your home. Now it’s something that is so much broader. Ultimately, we’ll have to come up with a better term to acknowledge how the business is transforming itself.”

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