Dvd, New Tech Continued Climb

In a year when DVD sales continued to soar, video executives spoke as often about emerging technologies as they did about best-selling titles. Among the industry catchwords of 2003 were "high-definition" (HD), "EZ-Ds" and "video-on-demand" (VOD).

The industry was also abuzz over the numerous executive changeovers that took place at such companies as Warner Home Video (WHV), Paramount Home Entertainment and Twentieth Century Fox Home Entertainment. And the year-end merging of the two largest independents, Lions Gate Home Entertainment and Artisan Home Entertainment, may create a new industry powerhouse in 2004.

Mass merchants continued to reap sales rewards in 2003, while specialty chains had to grapple with ways to compete against lowball DVD prices at the large chains. All retailers faced a ban on advance screening copies of DVDs imposed by Universal Studios Home Video in an effort to fight piracy. They also contended with purchasing and promotional issues that arose as the window between theatrical and home video release dates became ever smaller.

BANNER YEAR

The past year also brought increased hardware and software sales and several notable milestones.

Titles from Walt Disney Home Entertainment, and its distributing label, Buena Vista Home Entertainment, dominated the 2003 video charts. "Finding Nemo" is No. 1 on the Top DVD Sales chart, "Lilo & Stitch" leads Top VHS Sales and "101 Dalmatians II: Patch's London Adventure" is No. 1 on the Top Kid Video recap.

"When I think of the past year, I think of how strong and vibrant this industry is," says Bo Andersen, president of the Video Software Dealers Assn. (VSDA). "The video industry is Hollywood's cash cow and its biggest driver."

Bob Chapek, president of Buena Vista Home Entertainment and the Digital Entertainment Group (DEG), adds, "This year has been a pinnacle one for the home entertainment industry, with DVD really coming of age. We have seen tremendous market growth with DVD penetration and record sales in astronomical numbers. Consumers have fully embraced the DVD format and have become sophisticated enthusiasts appreciating the value-added materials technology allows us to create."

Indeed, in fourth-quarter 2003, Disney/Pixar's feature-laden "Finding Nemo" set a first-day, first-week and overall DVD sales record, according to Buena Vista. The title sold 8 million combined units on its first day, 17 million combined units in its first week and a total of 15 million DVDs in its first 12 days on sale, breaking a raft of industry records.

WHV's "The Matrix Reloaded" sold about 4 million combined units on its first day on sale, according to retailers. Universal's "2 Fast 2 Furious" sold more than 4 million combined units in its first week, and "Scarface—Anniversary Edition" sold more than 2 million DVD units in its first week, according to the studio.

Sales of theatrical catalog product and TV series on DVD were particularly noteworthy.

" 'Scarface' is now the [biggest-selling] R-rated catalog title on DVD," says Craig Kornblau, president of Universal's home video arm. "That is spectacular when you consider it is a 20-year-old title."

WHV executive VP/GM Ron Sanders says that consumers are buying DVD catalog at the same rates that they were in 2002 and 2001, when DVD penetration was lower.

"That is a major headline for the industry," he notes. "There's [also] been explosive growth with TV [series] on DVD. We have had very strong success with titles like 'Smallville,' 'The West Wing' and 'Friends.' "

STRONG FROM THE START

From the beginning of the year, software and hardware numbers were impressive. In first-quarter 2003, a record 232 million DVDs shipped to retail—a 93% increase over first-quarter 2002, according to the DEG.

The first quarter also experienced a 24% increase in hardware player sales, compared with first-quarter 2002, with 4.4 million sold, according to the Consumer Electronics Assn. More than 43 million households had a DVD player by the end of the first quarter.

In the third quarter, 215 million DVDs shipped to retail, which the DEG reported was a 40% increase over 2002's third quarter. Additionally, the CEA says that more than 6.4 million DVD players were sold in the third quarter, an increase of about 37% over third-quarter 2002. The DEG estimated that more than half of U.S. homes would have a DVD player by year's end.

Rentals continued to flourish. In the first quarter, the VSDA reported record rental revenue, attributing it to the DVD format. Combined spending on VHS and DVD rentals totaled $2.34 billion, an 8% increase over first-quarter 2002. The previous first-quarter record occurred in 2001, when $2.26 billion in rental revenue was generated.

The DVD format accounted for 49% of rental revenue in the first quarter, compared with 26% of rental revenue in first-quarter 2002. Total spending on DVD rentals increased 83% over first-quarter 2002. Spending on VHS rentals dropped 23% compared with the same quarter in the previous year.

The VSDA further reported that DVD rental units overtook VHS rentals for the first time in the week ended June 15. Consumers rented 27.7 million DVDs that week, compared with 27.3 million VHS cassettes.

"This was the year in which DVD became the predominant medium in the market," says Steve Beeks, president of Artisan Home Entertainment. "Every studio is going to be trying to project when we are going to get to the point where DVD is 90% of the market. VHS inventories are going to be a big issue going forward."

Many studios, however, are continuing to support VHS in particular categories.

"VHS is and will remain viable for some time in the children's and fitness categories," says Dan Gurlitz, VP of video and GM for Koch Vision and Koch Lorber. "One of the interesting things that happened in 2003 was to watch the deterioration of VHS rental pricing. I think that that actually is going to keep VHS alive a little longer."

ON TO THE NEXT GENERATION

Despite consumers' obvious love for videos and DVDs in particular, industry executives spoke often about the next generation of video technology.

Throughout the year, the five different options for HD DVDs were debated. The two blue-laser formats are Blu-ray—backed by 10 manufacturers, including Sony, Panasonic and Pioneer—and the advanced optical disc (backed by Toshiba and NEC). Red-laser options include MPEG 4, Microsoft's Windows Media 9 and Pixonics' backward-compatible solution.

Columbia TriStar Home Entertainment, for example, is backing Blu-ray. Artisan Home Entertainment released "Standing in the Shadows of Motown" and "Terminator 2—Extreme DVD" with a Windows Media 9 HD option.

"We have always seen ourselves as one of the leaders in promoting new technology," Artisan's Beeks says. "We believe that Windows Media 9 is a healthy competitor to any high-definition medium."

Other studios are not throwing their hats into the HD ring quite yet.

"There seems to be a lot of confusion as the formats and standards get ironed out," WHV's Sanders says. "The fear is that too much talk about these issues may hurt the sale of standard DVD."

Many studios are starting to determine when they introduce HD into the marketplace. Estimates ranged from as early as 2005 to the more realistic 2007. Launching a studio-wide program, like with the concerted introduction of DVD, was another topic of discussion.

"The strategic issue is, When is it necessary for us to introduce high-def to the marketplace in order to key in current consumers engaged in our product instead of looking at other options?" asks Stephen Einhorn, president/COO of New Line Home Entertainment.

Last year, Buena Vista tested the market for limited-play DVDs, called EZ-Ds. The discs, created by Flexplay Technologies, are playable for only 48 hours once they are removed from their packaging. EZ-Ds gradually turn from red to black and become unreadable by DVD players. Used EZ-Ds are recyclable.

Buena Vista offered EZ-D versions of eight of its video releases in select test markets in August. They were touted as a convenient alternative to renting DVDs, though most retailers believe that the rental process is sound and that EZ-Ds will only confuse consumers while the DVD format is still growing.

Some have also said that the discs revisited the failed concept of Divx, limited-play DVD discs that were introduced in the late '90s.

VIDEO ON DEMAND GETS NOTICED

Video-on-demand services drew more studio interest in 2003. The leading online service, Movielink, launched in November 2002 as a joint venture among MGM, Paramount, Sony, Universal and Warner.

Disney's Moviebeam VOD service launched in October. Unlike online sites, this service allows users to download movies to a set-top box.

Though majors strongly support VOD, many think it is only a side option for consumers right now. "It is so early for video-on-demand," Sanders says.

At the studios, the beginning of 2003 brought flux in the executive suites. At WHV, its veteran president, Warren Lieberfarb, known as "the father of DVD," was let go at the end of 2002 and replaced in January by one of the company's executive VPs, James Cardwell.

Twenty-year veteran Eric Doctorow also left his position as president of Paramount's home video division. Former WHV executive Tom Lesinski was appointed head of the company's worldwide division, while Meagan Burrows was promoted to the new position of domestic president.

Fox president Patricia Wyatt stepped down in December to pursue other interests. The company's former executive VP of sales and marketing, Mike Dunn, was named as her replacement.

In other major studio news of 2003, Lions Gate and Artisan, the two largest independents, announced a merger. Though the impact of this deal was unknown by year's end, as it closed in mid-December, it was expected to have a positive effect on both companies' current and future video releases.

RETAIL: SUCCESS & STRUGGLES

In 2003, retailers reaped the rewards of top video sales, though they were grappling with numerous issues of their own.

Lowball pricing by such mass-merchant chains as Best Buy, Target and Wal-Mart drove business away from specialty retailers.

The studios' strategy of shortening the theatrical-to-video release-window made it more difficult for retailers to order and promote video product. Films used to arrive on video about six months after their theatrical release. Now a three- to five-month window is standard. With these smaller windows, studios hope to take more advantage of theatrical marketing dollars and of higher consumer awareness.

In November, Universal became the first home video company to completely ban DVD screeners for retailers in an effort to thwart piracy. Retailers, surprised that they were targeted as potential pirates by the studio, countered that this could affect how they order Universal product.

The major retail stories of 2003 included the continued success of online rental company Netflix and the launch of Wal-Mart's competitive online service.

In June, New Jersey company Multi-Format sent retailers and studios numerous letters claiming that they now need a license to continue making and selling DVDs. Multi-Format says it holds the patent on this process. Studios and retailers are still unsure about the legitimacy of the claim.

In a competitive rental market, Blockbuster faced a $120 million lawsuit from Buena Vista regarding VHS revenue-sharing payments. The day after Buena Vista filed the suit, the retailer displayed Buena Vista's "Signs" four days before the title's street date. At the time, Blockbuster said there was no correlation between the events and that it was responding to other retail street-date violators.

An antitrust lawsuit against Blockbuster and five major studios was dismissed in February. A group of independent retailers had filed the suit, alleging that it had been excluded from revenue-sharing agreements. The suit was thrown out because of insufficient evidence.