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Industry steady at half-way point

UPDATE: VB research shows sales dipped but rentals picking up

By Jennifer Netherby -- Video Business, 7/7/2006

JULY 7 | The home entertainment market steadied itself in the first half of the year, regaining traction that was lost beginning in 2005. For 2006, consumer spending was flat at $10.2 billion through June 18, according to Video Business research.

Sales of all formats slipped about 1% to $6.5 billion during the first half, according to VB research, largely on the continuing decline in the near-dead VHS format. But rental nudged up 1% to $3.7 million, according to Rentrak Home Video Essentials.

“The reality is, we’re in a flat market,” Sony Pictures Home Entertainment president David Bishop summed up. “No industry can continue to grow at double-digit growth. It’s still a dynamic and profitable business. We’re simply at a plateau rather than at a rapid growth [incline] of the last several years.”

The industry finds itself on solid ground as studios look forward to the fourth-quarter DVD release of such box-office blockbusters as Ice Age: The Meltdown, The Da Vinci Code and X-Men: The Last Stand and the growth of high-definition formats in 2007. For now, executives say, the current market has at least returned to some predictability.

“We expected it to be tougher; that’s not happening,” said Matt Lasorsa, New Line Home Entertainment executive VP of marketing.

Even with flattened sales, Universal Studios Home Entertainment’s Craig Kornblau notes DVD is still bigger than the theatrical, videogame or music business. “Our business remains extremely robust,” Kornblau said.

Buena Vista Home Entertainment’s The Chronicles of Narnia: The Lion, the Witch and the Wardrobe was the top seller for the first half and one of five Buena Vista releases in the Top 10. Warner Home Video’s Harry Potter and the Goblet of Fire came in a close second, followed by Universal’s King Kong at No. 3.

Potter’s magic and Warner’s vast library helped the studio retain its market lead, with an 18.7% share in the first half.

Studio shares are poised for their biggest shift in some time in the third quarter, with distribution of DreamWorks titles moving to its new parent, Paramount Home Entertainment, from Universal, and MGM Home Entertainment’s titles shifting from its co-owner, Sony, to 20th Century Fox Home Entertainment.

Both DreamWorks and MGM have potentially strong performances ahead, with DreamWorks due to release Over the Hedge in the fourth quarter and MGM sitting on a major catalog repromotion of its James Bond movies timed to coincide with Casino Royale and a new Rocky movie.

Despite the overall rebound in the first half, studio execs noted there were some soft spots, singling out the new release business, which by some accounts dropped by as much as 6%.

“New release in general seems hit and miss,” Warner president Ron Sanders said. “The marketplace seems to be holding steady, but week to week, it’s tenuous whether titles will overperform or underperform.”

Lionsgate had a strong first half with Best Picture winner Crash getting a new boost through Oscar season and strong sales of Saw II and Waiting. But president Steve Beeks said the company’s gains partly came from intense focus on business fundamentals, such as keeping movies in stock at stores.

“Because of all of the talk about the demise of the DVD business, that has caused us to bear down and focus on the fundamentals,” Beeks said. “Like replenishment; it makes a big difference if you’re 99% in stock vs. 97%.”

The biggest releases all hit before Easter, leading to strong growth in the first four months, which slowed in May and June.

“Things really slowed down after Easter,” Fox president Mike Dunn noted. He blamed the downturn partly on the release slate and partly the economy. “Ten percent of the consumer marketplace is still having a difficult time with gas prices.”

On the other hand, catalog sales, which worried many execs earlier in the year due to falling prices at retail, were actually up in the first half of the year. Paramount reported catalog sales up 12%, above the industry average.

“It’s still very competitive,” Sony’s Bishop said, but he foresees a bottoming out on prices. “I really get the sense that people are starting to look for better ways to promote the catalog rather than just dropping the price.”

TV also was a strong growth driver in the first half, with Fox, Paramount and Sony all reporting double-digit gains in the genre.

Many are eagerly awaiting the second half of the year when the summer’s so far strong theatrical slate will reach DVD.

“The good news is that the theatrical box office is up this year,” Paramount worldwide president Kelley Avery said, predicting that the video business would be at least flat for the year. “We as studios have not realized the benefit of all these big movies that have come out at the box office.”

And with the market now mature, it’s the movies that are driving sales rather than new DVD customers, which pushed disc sales to new heights in earlier years.

While the last 20% of DVD adopters are entering the market, they aren’t buying like earlier adopters, dragging down overall buy rates. “They’re declining very slightly, nothing to give anxiety,” Buena Vista’s VP of marketing Lori MacPherson said.

Execs say in 2007, the two high-def formats will start reaching the broader market, kickstarting a new wave of growth. Studios expect high-def sales to account for less than 1% of overall DVD sales this year.

Download sales also aren’t expected to have a big impact on sales for some time, and when they do, execs are optimistic it will be an additive rather than a DVD killer.

“We believe we can have our cake and eat it too,” Lionsgate’s Beeks said. “We believe that we can have healthy and robust packaged goods business as well as electronic delivery. There’s no reason to believe our conventional retail partners will suffer.”

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