DVD drop pales in comparison to market

Q3 sales declined 3.5%, but studios optimistic for holidays

By Susanne Ault -- Video Business, 10/17/2008

OCT. 20 | Consumer spending on sales and rentals of home entertainment softened in the third quarter but by an encouragingly modest amount, given the dark economic environment, according to studio executives.

Year-to-date through Sept. 28, sell-through spending on all formats slipped 3.5% from the same 2007 frame to $8.58 billion, according to Video Business research. Disc rentals dropped 1.2% to $5.66 billion, according to VB research and Rentrak. Taken together, the entire industry fell 2.4% to $14.25 billion. (Click for the Top 20 DVD sellers and Top 20 DVD renters.)

The declines were driven by DVD sell-through, which was off by about 6%, according to some studios. Blu-ray Disc sales, in contrast, grew 200% to nearly 300% from a small base, according to studio estimates.

Blu-ray revenue and unit sales are each pacing 200% over last year, according to Sony Pictures Home Entertainment. Several executives at different studios said they expect the new format’s growth to be strong enough in the fourth quarter to pull rental and sales for the full year even with 2007, despite economic challenges.

“Considering the bad economic news that is all around us, Blu-ray sales continue to grow at a phenomenal rate,” Sony worldwide president David Bishop said. “You cannot find any consumer electronics product or new delivery system that is performing at that percentage growth rate.”

Despite nationwide signs of consumer softness, including September retail sales that fell by their largest monthly amount in three years, according to the U.S. Commerce Dept., Bishop and other executives continue to bet that Blu-ray title revenue will reach $1 billion by year’s end.

Target is among retailers devoting significantly more room to the format in recent weeks at the same time of this overall retail slide.

“It’s the primary growth for the DVD category, and retailers are stepping up to take leadership positions because they don’t want to fall behind,” Universal Studios Home Entertainment president Craig Kornblau said. “As related to sales, a disproportionate amount of space is going to Blu-ray, but [stores] want to make a bold statement to their customers.”

Paramount Home Entertainment worldwide president Kelley Avery said she is pleased with both new and catalog Blu-ray releases. One of the year’s heftiest films, Paramount’s $318 million-grossing Iron Man, sold more than 500,000 units on Blu-ray in its first week in stores. To date, the studio’s Sept. 2 Blu-ray release of Transformers has sold more than 200,000 units, which is respectable considering the studio had already released the title last year on rival high-def format HD DVD.

Iron Man sold 7.2 million units in its first week on sale in North America, according to the studio, to make it the top debut of the year. But Iron Man’s Sept. 30 street date put it just past the close of third-quarter tracking.

“I think there are good signs in our category despite the fact that other consumer goods are having a difficult go at it,” Avery said. “You’re seeing rising costs on so many other consumer goods, but DVD pricing is stable. It’s a great value, and a form of escapism during a time when people are hearing a lot of bad economic news.”

Avery added, “We are cautiously optimistic about the year. It’s hard to say what impact the economy will have on the business. But we could be flat, to a point or two one way or the other.”

Lionsgate president and chief operating officer Steve Beeks agreed with Avery’s end-of-year assessment, noting as proof that combined DVD/Blu-ray spending in the first two weeks of the fourth quarter is 2% over the same 2007 period.

“Tough recessionary times [could] keep people from buying the hardware,” said Beeks. “Prices are coming down, but that is the only question mark. But if we don’t get to $1 billion [in Blu-ray title sales], we will get close.”

On average, Lionsgate titles are currently selling 10% to 20% of their copies on Blu-ray. Last year at this time, Lionsgate’s Blu-ray portion totaled 5%.

Aside from Blu-ray specifically, studios also found pockets of overall strength in their third-quarter releases. Lionsgate’s Forbidden Kingdom and The Bank Job have generated sales totaling 120% and 170% of their theatrical box office, respectively.

Keeping with budget-conscious times, Sony’s 21, Vantage Point and Made of Honor captured 15% more rental revenue than comparable titles would typically secure, according to the studio.

Additionally, Sony’s Starship Troopers 3: Marauder outsold the franchise’s second made-for-disc installment.

Universal’s second season of Heroes, hampered with fewer episodes because of the screenwriters’ strike, has nevertheless sold more than 1 million units, commendably about 90% of its first season, added Kornblau.

“In this tough economy, consumers might cut out restaurants and babysitters, like they’ve done in past recessions,” said Kornblau. “But I see DVDs fly off shelves this fourth quarter. They are great value to the family.”

Some studios also began to talk about digital downloads as one of the factors they look at when judging the success of a title in the home entertainment window.

Lionsgate’s Beeks estimated that industrywide download/streaming revenue will total $1 billion, matching Blu-ray’s expected achievement, at the end of the year.

Universal began including download revenue into its assessment of titles’ performance starting with Sept. 9 release Baby Mama, Kornblau said. Lionsgate similarly began accounting for download activity earlier this year.

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