If 2014 was the year of the truly connected consumer, then it should come as no surprise that the year also saw stepped-up efforts by the studios to connect with that consumer.
The proliferation of delivery as well as viewing options reached a fever pitch, and Hollywood was right there, ready and willing to serve up content wherever, whenever and however it could.
Accordingly, while disc sales slipped precipitously yet again, the mood at the home entertainment divisions was far from somber. Consumer spending on home entertainment in all its incarnations – physical and digital sell-through, streaming, VOD – has remained remarkably resilient, and with the proliferation of screens and delivery methods some studio executives see plenty of unexploited opportunity.
“Consumers clearly still want to own high-quality, repeatable entertainment,” said Dennis Maguire, president of Paramount Media Distribution. “This was made abundantly clear earlier in the year by the phenomenal sales of ‘Frozen’ and again in the fourth quarter by the robust sellthrough performance of ‘Transformers: Age of Extinction’ and ‘Teenage Mutant Ninja Turtles.’ Whether it’s an original animated film or a new installment in a longstanding franchise, consumers will buy entertainment they love.”
“Home entertainment consumers are engaging with content through a growing number of delivery options, driving positive momentum throughout the industry,” said Lionsgate’s president of home entertainment, Ron Schwartz. “The continued proliferation of digital platforms, combined with stability in packaged media, is enabling home entertainment conversions to continue to expand and operating margins to increase.”
Hollywood continued to look toward Digital HD – the official moniker for electronic sell-through (EST) — as a way to continue the sales model without the expense of manufacturing, shipping and returns. UltraViolet, the industry-backed, cloud-based movie access platform, finished the year with 20 million registered accounts, an impressive 33% gain from 2013. Walt Disney Studios launched its own digital movie service, Disney Movies Anywhere, and late in the year announced an ambitious partnership with Google Play to make content available on Android devices.
Not surprisingly, given the continued practice of early windowing, electronic sales of movies and TV shows grew significantly during the year. As of the end of the third quarter, Digital HD sales were up a whopping 33% from the year before, while disc sales – Blu-ray Disc and DVD combined – were down 8.2%, according to numbers compiled by DEG: The Digital Entertainment Group.
“Digital HD has redefined digital ownership by playing to the mobility of our digital lifestyles in an affordable and convenient way for the consumer,” said Mike Dunn, president of 20th Century Fox Home Entertainment. “It is now a key part of the Fox mix in delivering premium entertainment.”
Ron Sanders, president of Warner Home Video, agrees. “The exciting thing is that for every consumer dollar that we trade from physical to digital, the studio’s profitability is significantly improved,” he said.”
The consumer trend in digital ownership has been sustaining a very strong growth rate over the last couple of years. EST has grown in the mid-30% range over a year ago. Digital sales of content immediately following the theatrical window are up 70% compared to a year ago, and EST is in fact offsetting the slow decline of new release theatrical packaged goods. As TV content is often available for free on a number of platforms following telecast, new release theatrical product offers a better view into the consumers’ response to digital offerings. I’m very optimistic about EST and the future of digital collections.”
“MSOs like Comcast offering electronic sell-through has helped make digital ownership significantly more accessible and understandable to mainstream audiences,” added Paramount’s Maguire. “And the cloud is becoming far less cloudy. As ease-of-use and compatibility across services have increased, so, too, has consumer adoption. We’re seeing delivery on the promise of a seamless storage environment with universal accessibility and when consumers no longer have to think about the cloud, that’s when its use will become ubiquitous.”
Jason Spivak, EVP of digital distribution for Sony Pictures Home Entertainment, said digital ownership “has moved beyond popularity with early adopters alone. EST transactions have grown markedly in the past year to 18 months, with strong performance across genres, including comedy, action adventure and drama.”
Growth by a Thousand Cuts
But percentages can be deceiving. Even with 33% growth, EST sales during the first nine months of 2014 accounted for only $1.02 billion in consumer spending, while disc sales generated more than four times that amount at an estimated $4.6 billion.
And with revenue from disc sales continuing to spiral downward – since 2010, consumer spending on Blu-ray Discs and DVDs combined has fallen nearly 30%, according to DEG numbers – it could be argued that for the home entertainment industry in general 2014 was the year of growth by a thousand cuts.
Studios worked diligently to protect their bottom lines by trimming costs wherever, whenever and however they could. Meanwhile, more as a matter of necessity than anything else, they licensed and created an increasing amount of original content for SVOD.
Warner Bros. announced a sweeping 10% reduction in personnel across all divisions, including home entertainment. Downsizing was the norm at other studios as well, and among the departing executives were such well-regarded veterans as Universal Studios Home Entertainment president Craig Kornblau, Paramount worldwide marketing chief Mary Kincaid, and publicity titans Fritz Friedman (from Sony Pictures Home Entertainment) and Ronnee Sass (from Warner Home Video).
“It’s not surprising that studios are continuing to focus on reducing costs, given the recent reduction in consumer spend for physical video,” said Warner’s Ron Sanders. “What I think we’re all finding out is that we are better, more nimble organizations after streamlining our operations. It allows us to quickly adapt our businesses to the fast-changing consumer habits, which will position us much better for the future.”
Meanwhile, subscription streaming continued its meteoric rise, with consumers as of the end of the third quarter having shelled out nearly $3 billion to watch movies and other entertainment in this manner, up 26% from the previous year. Netflix remained at the front of the subscription streaming pack, and during 2014 saw one competitor bite the dust – Redbox Instant by Verizon – and several others emerge.
Both HBO and CBS announced plans to launch subscription streaming services. HBO announced an April 2015 launch date, with the promise of original programming, while CBS bowed CBS All Access, giving viewers access to catalog content for six bucks a month.
The biggest noise on the streaming front, however, came from Amazon, which continued to nip at Netflix’s heals with its Prime Instant Video movie and TV show streaming service. Like Netflix, Amazon is focusing more and more on original content. In April, Amazon launched an Internet video-streaming and gaming device, Fire TV, which not only streams Prime Instant Video content but also provides access to Netflix, Hulu Plus, YouTube and other video services. Then, in October, Amazon unveiled a streaming adapter for HDTVs, the Fire TV Stick, which plugs into the HDMI port on a TV set. The year ended with Amazon promising to stream movies in 4K Ultra HD and, according to the New York Post, launch a free video service, supported by advertising, to lure consumers to Prime and further nibble away at Netflix’s commanding market share.
Even independents are getting involved in the streaming/VOD frenzy. “We have seen consumers clearly signal they are willing to pay and/or subscribe for the content they want – and consequently they are cutting the cord on cable packages that force unwanted channels on them,” said Bill Sondheim, president of Cinedigm. “This democratization of viewing has stimulated numerous programmers to launch more narrowly defined OTT channels that satisfy the specific programming goals of the diverse consumer. We have already launched Docurama, an AVOD streaming service, and in early February, we will launch a SVOD/ AVOD service called CONtv — dedicated to fanboy content and bringing the Comic-Con experience to that passionate consumer base. Our family and faith-centric channel, the Dove Channel, will follow in late April or early May, with several more channels in the pipeline.”
Innovating for the Future
Meanwhile, in the industry’s continued quest to enhance the consumer viewing experience, 3D for the home virtually disappeared from sight. Instead, studios and consumer electronics manufacturers rallied behind the new kid in town: 4K Ultra HD, with four times the resolution of high definition. The Consumer Electronics Association (CEA) predicts unit shipments of 4K UHD displays will total 800,000 by the end of this year, a 517% spike over 2013 unit shipments.
“The combination of both 4K and HDR (high dynamic range) will be a leap forward in terms of quality versus the formats of the past,” said Warner’s Ron Sanders. “This is a step change improvement to the consumer, much like the change from VHS to DVD was. It’s revolutionary versus evolutionary.”
Twentieth Century Fox Home Entertainment president Mike Dunn in September attended the Internationale Funkausstellung Berlin (IFA), the world’s leading trade show for consumer electronics and home appliances, to announce a partnership with Samsung Electronics through the Fox Innovation Lab.
Part of the lab’s mission is to build a digital bridge between content and consumer electronics, including producing devices with enough storage capable of UHD playback. One of the challenges with UHD, Dunn said, is to find efficient and fast ways to move these bulky UHD files around from, say, a TV to a tablet. To further this mission, 20th Century Fox is urging CE companies to implement Secure Content Storage Association (SCSA) technology, and will only make its UHD content – which includes such summer blockbusters as “Dawn of the Planet of the Apes” and “X-Men: Days of Future Past” – available to companies, like Samsung, that commit to this technology.
SCSA was founded in early 2012 by 20th Century Fox Home Entertainment, Warner Bros. Home Entertainment, SanDisk Corporation, Western Digital and CRI.
At the IFA press conference announcing the partnership with Samsung, Dunn said SCSA technology promises to “liberate high-quality content for consumers, allowing them to move it easily from device to device.”
Perhaps the most aggressive studio in the UHD arena is Sony Pictures, which now offers more than 165 films and TV episodes in 4K for either rental or purchase.
But the 4K Ultra HD juggernaut won’t really begin to hit its stride until next year. Revenue from 4K Ultra HD displays is projected to exceed $5 billion in 2015. A 4K Blu-ray Disc standard should be available for licensing to manufacturers early next year, with players and discs hitting the market in time for the 2015 holiday season. And both Netflix and Amazon are expected to step up their 4K streaming menus as more content becomes available.
“We are really bullish on the potential of 4K Ultra HD,” said Rich Berger, SVP of worldwide digital strategy and advanced platforms for Sony Pictures Home Entertainment. “Owning a movie in 4K Ultra HD is the ultimate in video quality for fans. We look forward to continuing to lead the industry by working with our digital distribution partners to make our ever-increasing 4K catalog available to consumers.”