All flows from theatrical
March 6, 2008

MPAA, setting the stage for this week’s ShoWest convention of theater operators in Las Vegas, last week released its annual report on the state of the theatrical market, which showed domestic box-office revenue rose 5.4% to $9.63 billion. That’s the largest gain since 2002.

DVD revenue, meanwhile, fell 3.1% to $22.9 billion.

With windows compressing, the two revenue streams are tied ever more closely together, with many of the same titles (including Top 5 box-office performers Spider-Man 3, Shrek the Third, Transformers, Pirates: At World’s End and Harry Potter and the Order of the Phoenix) released in theaters and on DVD during the same calendar year and DVD marketing drafting off theatrical expenditures. The difference, however, is price.

While ticket prices rose 5%, enabling theaters to boost revenue on flat admissions of 1.4 billion, DVD prices continue to decline. Both segments are mature, but theaters in recent years have been able to nudge ticket prices higher by improving the moviegoing experience with improved seating, projection, concessions and other amenities. DVD, meanwhile, has not had anything new to bring to the party ... until now.

As the home entertainment business begins its transition to Blu-ray, prices will be higher, at $30 to $40 per disc, compared to $15 to $25 for standard new releases. Even if a small percentage of DVD sales are replaced with Blu-ray, it’s possible home entertainment revenue will grown, even on flat units.

Meanwhile, windows—theatrical to DVD and BD, to PPV/VOD, to premium cable, to broadcast—will continue to close, and new forms of distribution will spring up, as studios try to recoup their rising costs as fast as possible. (While the average production and marketing costs for a major studio film rose 6.3% to $106.6 million, the costs for films from studio subsidiaries and specialty divisions grew a far steeper 54.2%, to $74.8 million.)

Possibly mitigating retailers’ risk from sliding windows, however, is that fact that the studios are releasing fewer films (179, or 30% of all theatrical releases, in 2007, compared to 203, or 34%, in 2006) and indie films carry a different set of economics.

Finally, MPAA reports that contrary to conventional wisdom, the heaviest moviegoers tend to pay for more home entertainment than lighter moviegoers. Moviegoers who owned or subscribed to more than five technologies, were likely to be heavier media users overall. For instance, 88% subscribe to PPV/VOD, 75% have digital cable, 71% use a DVD rental service and 36% download movies. So more downloads don’t necessarily mean fewer DVDs.

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