Consumer spending down for '05

Warner still tops in market share

By Scott Hettrick -- Video Business, 12/30/2005

DEC. 29 | For the first time in more than a quarter of a century, consumer spending on home video declined this year.

Preliminary projections for overall spending on the purchase and rental of DVDs and videocassettes in the U.S. for the 52 weeks ending this Sunday, Jan. 1, indicate a tiny percentage drop of about 1% from the $24.1 billion last year to less than $24 billion this year, according to research by Video Business.

Among the factors for the overall decline:

• the continued collapse of VHS—down roughly 60% this year to about $1.5 billion, or just 6% of the overall home video market.
• a 4% decline in the overall $7.7 billion rental market, which has been sliding since its peak of $8.4 billion in 2001.
• rapidly falling DVD retail prices—unit sales are up but at prices as low as $1 to $5 per DVD.
• the continued growth of time-hog TV DVDs that keep consumers satisfied longer between purchases.
• top titles not reaching the same heights—only one title reached more than $230 million in 2005 vs. three last year, two of which exceeded $300 million.
• a dearth of major theatrical hits from several studios.

Despite the overall decline in revenue, spending on all DVDs was up nearly 10% on an enormous base of more than $22 billion. The market for the DVD format stood at just $6 billion as recently as 2001. Although the less than 10% growth rate in 2005 is only about one-third of the more than 28% gain in DVD revenue in 2004, most studios enjoyed notable home video revenue increases this year.

Final results including the Christmas and New Year’s weekends will not be tallied until mid-January, but there were no major new releases during the period that would exceed or even match the performance of holiday releases in 2004.

Top execs from several studios had, until the last couple weeks, fiercely and publicly defended their optimistic projections of a huge fourth-quarter turnaround for the industry overall—the biggest ever, according to some—that would result in an overall gain for the year of as much as $1 billion, an annualized lift of about 5%.

But harsh reality began to set in as the summer’s top theatrical grossers, including Charlie and the Chocolate Factory ($207 million in theaters) underperformed on DVD, and none of the biggest box-office performers, including Star Wars: Episode III—Revenge of the Sith ($380 million) and War of the Worlds ($234 million) have generated more than 50% to 60% of their theatrical gross on DVD so far.

In the past, consumer spending on DVDs of the top summer theatrical hits typically reached 65% to 85% of box office grosses in the first few weeks of release.

Almost all execs reluctantly now concede that the fourth quarter will neither save the year nor even exceed spending during the same period in 2004.

But as studios come to grips with the fact that the fate of their industry will not be all that different from their brethren in the theatrical market, which is down even more significantly and could not be saved by King Kong and a flood of other holiday releases, most have much to be pleased with and to build on as they prepare for a 2006 that will see the anxiously awaited debut of two new high-definition home video disc formats.

Warner Home Video has strengthened its market share dominance to about 21% with its powerhouse catalog and consistent string of new releases, led in the fourth quarter by the surprising opening week and legs of Batman Begins, which will generate about 90% of its $205 million box office gross on DVD; The Polar Express, which will soon match its $165 million box office on DVD; and the studio’s even more surprising February release from sister New Line Home Entertainment, The Notebook, which has more than doubled its $81 million box office gross on DVD.

Despite Buena Vista Home Entertainment’s projected decline of at least 6% due primarily to a weak slate of theatrical films capped by a vacuum of summer animated or live-action blockbusters to distribute on DVD this holiday season, the Mouse House remains in a fairly strong but distant second place finish with about 16%.

That performance rests primarily on the strength of two releases in the first half of the year that held up as the industry’s two top performers for all of 2005: The Incredibles, at a whopping $355 million, generated nearly $95 million (35%) more in home video spending than its box office gross; and National Treasure, the top rental title of the year with about $75 million of its total of approximately $230 million, about 50% more than it made in theaters.

Although Paramount Home Entertainment and Lionsgate each enjoyed the biggest percentage gains in revenue this year and Sony Pictures Home Entertainment saw a slight increase to approximately 13% with the addition of MGM Home Entertainment distribution for the second half of the year, the real market share horse race is for third place.

20th Century Fox Home Entertainment, which was consistently strong from wire to wire in 2005, and Universal Studios Home Entertainment, which also suffered from a dearth of theatrical hits and is about to lose 5% of its market share as DreamWorks Home Entertainment moves over to Paramount Home Entertainment, are in a virtual dead-heat near 14%.

Fox was strongest in 2005 in the sales market, led by the new Star Wars movie, Revenge of the Sith, one of six home video titles to generate more than $200 million this year, as well as carryover sales of last year’s Star Wars Trilogy, over-achievers such as Napoleon Dynamite early in the year, a steady stream of TV product all year long led by The Simpsons and an original DVD movie version of The Family Guy and a string of theatrical hits late in the year from Mr. & Mrs. Smith and Fantastic Four to the animated Robots.

Universal started out strong with three titles in the first four months that wound up among the Top 10 for the year—Meet the Fockers, Ray and DreamWorks’ Shark Tale—and then suffered a weak middle of the year before finishing strong with DreamWorks’ Top 5 finisher Madagascar, mid-December release The 40-Year-Old Virgin (nearly 5 million copies sold in the first two weeks) and more than 1 million copies sold of this week’s original DVD movie American Pie: Band Camp.

Without a Spider-Man movie, Sony ran its June release Hitch to the Top 10 for the year, with DVD revenue that matched its theatrical gross, and a variety of programming including subsequent seasons of Seinfeld and original DVD movies in genres ranging from action and thrillers to the Christian movie Left Behind 3.