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Business looking up for Q3

Suppliers anticipate better fourth quarter

By Jennifer Netherby -- Video Business, 10/9/2006

OCT. 9 | Traditional packaged home entertainment began to quicken its pace in the third quarter, with consumer spending on rentals and purchases of all formats edging up 1% to $14.7 billion for the first nine months of the year, according to Video Business research.

Studios are optimistic the market will pick up even more in the last three months of the year, fueled by a fourth-quarter slate that includes Mission: Impossible III, Cars, The Da Vinci Code, Ice Age: The Meltdown, Superman Returns, Pirates of the Caribbean: Dead Man’s Chest and Over the Hedge.

Studios and retailers last week reported that the quarter got off to its fastest start in several years with the Oct. 3 releases of 20th Century Fox Home Entertainment’s X-Men: The Last Stand and Buena Vista Worldwide Home Entertainment’s The Little Mermaid selling as much as $80 million combined on their first day in stores.

Sales of all formats—including DVD, VHS, PlayStation Portable movies and high-definition discs—were flat at $9.1 billion through Sept. 16, and studios reported a more stable market after a volatile 2005. DVD sales were actually up 2%, according to several studios, while the VHS format, continuing its slow death, dragged the market down with sales off 55% to 65%. Meanwhile, rental, which has been in a slow decline for the last several years, rebounded 1.7% to $5.6 billion during the first nine months.

“I think if the third quarter is any indicator, the fourth quarter has a lot of potential,” said Lori MacPherson, general manager of North America for Buena Vista Worldwide Home Entertainment. “The market overall should be very healthy, because there are a lot of releases competing for consumer attention.”

A year ago, studios were bracing themselves as DVD sales softened and consumers cut back their disposable spending.

“Last summer was a tremendous shock to all of the entertainment industries because of all of these radically increased gas prices,” Universal Studios Home Entertainment president Craig Kornblau said. “This year, clearly gas prices are back up, but it seems like we’re past that sticker shock scenario of last year.”

Segment stories

Although studios said the overall market has stabilized, the picture blurs when you dig down into the different segments.

New release unit sales held steady, but Warner Home Video, Paramount Home Entertainment and Sony Pictures Home Entertainment said overall new release revenue was slightly off due to increased price competition among retailers.

Individual titles such as Paramount’s Failure to Launch and Sony’s The Benchwarmers did better than expected. But lower than expected sales on Warner’s V for Vendetta and Poseidon caused some retailers to wonder whether the young, male demographic is cutting back on DVD purchases, WHV president Ron Sanders said.

“There’s a little bit of worry,” Sanders said. “We’re looking into why that is. There’s a lot of competition for the young male’s time with the Internet, game formats, YouTube, MySpace.”

Retail shelf space remains crowded and some expect it to tighten even more in the coming months as retailers carve out space for HD DVD and Blu-ray Disc releases.

“It’s still really crowded, and for the foreseeable future, I think it’s gonna stay that way,” Lionsgate president Steve Beeks said. “The theatrical business is getting very crowded. Studios are having a tough time having movies stand out. It’s flowing through to home entertainment.”

Genius Products CEO Trevor Drinkwater said it has been tougher to get placement at retail for smaller titles, and he expects there might be some pricing pressure on new releases in the fourth quarter with growth flat and retailers competing for market share.

“It’s increasingly getting more and more difficult if you don’t have critical mass, if you don’t have good titles to walk into retail with,” he said.

Nearly every studio reported that catalog sales were up in the third quarter despite some of the toughest pricing pressure.

Sony reported a dramatic 35% growth in its catalog business.

“I think it’s really kind of the benefit that we got from the MGM relationship,” SPHE worldwide chief David Bishop said. “Having that additional MGM library made the company think about library in a way that it never did.”

(The MGM catalog has since shifted distribution to Fox. Similarly, DreamWorks is now distributed by new parent, Paramount, leaving longtime distributor Universal.)

Rental rebound

Rental also rebounded after years of slow declines.

“Overall, we’re hearing positive things with companies like Netflix,” said Paramount worldwide home entertainment president Kelley Avery. “We’re hearing the business has been stronger in the rural markets, the Movie Gallery arena.”

On the sell-through side of the business, Fox executive VP and general manager Simon Swart said studios and retailers will have to get smarter in how they market their releases now that the disc business isn’t growing like it once was.

“Everybody can easily lower prices, but that’s not really being smarter,” Swart said. “I think the category has a tremendous amount of room for creativity and innovation. We’ve still got one of the hottest categories in the industry. It’s still one of the coolest, most fun categories out there. The challenge we have is to keep it relevant and exciting.”

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