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DVD Sales On the Rise

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LOS ANGELES When 2006 began, fearful studio executives were still reeling with the first down sales year in DVD history. They were anxiously looking for salvation, and hoping to find it in high-definition discs, digital downloads or perhaps a combination of the two.

The next generation of software did launch in 2006, regrettably with two incompatible formats, first HD-DVD in April and then Blu-ray in June. Digital downloading began as well, with all the big Hollywood studios aggressively selling their hot new releases on Movielink, CinemaNow, Apple's iTunes and other services. Studio executives even coined a new term, "electronic sell-through," or EST, for the lucrative business model.

But in the end, none of these technological marvels really mattered. High-def discs still are a blip on the sales radar, and digital downloads are even less of a blip. What saved the day for home entertainment was an unexpected resurgence in the DVD market, fueled by a powerful slate of summer theatricals.

Good box office still drives video sales, as it has since this business was launched nearly 30 years ago. Or, as New Line Home Entertainment president Stephen Einhorn said, "At the end of the day, home entertainment is still a new release-driven business."

Or, as Kelley Avery, president of worldwide home entertainment at Paramount Pictures, put it, "Contrary to popular belief, reports of the decline of DVD have been exaggerated."

"What we're looking at is a market that is up slightly from last year, overall," Sony Pictures Home Entertainment president David Bishop said. "But if you break down the components, we're projecting DVD sales to be up 3 percent, year-over-year, and rentals to be up about 12 percent. What drags the industry down to a flat or slightly up basis is that VHS sales and rentals are virtually going away."

Other studio presidents agree. The year is expected to again finish more or less flat, but this time no one's running for the hills. It's become clear now that the home entertainment business has entered the mature phase, and the Great Slowdown of 2005 was due more to a weak box office (which traditionally precedes a down video market), as well as a dramatic drop in videocassette sales and rentals, than anything else.

"Everyone's feeling pretty good," 20th Century Fox Home Entertainment president Mike Dunn said. "Thanks to the fourth quarter, the year may wind up in positive territory, and a big reason is the strong slate of summer theatricals—as well as TV-DVD and some really strong catalog titles and promotions."

"Notwithstanding last year's disparaging headlines regarding declining box office and DVD sales, 2006 ticket sales and DVD purchases proved that the public actively enjoys moviegoing and the in-home DVD experience despite the proliferation of other entertainment alternatives," Genius Products CEO Trevor Drinkwater said.

Much of the cheery-eyed optimism floating around the studio DVD divisions stems from the fact that the industry has just come off an exceptionally strong fourth quarter. Things got off to a good start when 20th Century Fox's X-Men: The Last Stand and Buena Vista's The Little Mermaid Platinum Edition generated $80 million in consumer spending in a single day. Further triumphs came as the quarter progressed, culminating this month when Buena Vista's Pirates of the Caribbean: Dead Man's Chest sold 10.5 million DVDs its first week in stores, putting it on track to become the top-selling live-action DVD ever.

"A couple of interesting things happened in the fourth quarter," Warner Home Video president Ron Sanders said. "You had some very strong theatricals that performed very well across the board, and you also had the additional benefit of TV-DVD continuing to have a huge upside, year-over-year. All of this pointed to a very healthy category."

"The consumer is the ultimate arbiter of what moves in the marketplace," Buena Vista Home Entertainment general manager North America Lori MacPherson said. "And when good entertainment is released to the home entertainment market, the consumer responds."

The fourth-quarter DVD sales rally was probably the biggest home entertainment story of 2006, even though it didn't make the biggest headlines. That honor went to the launch of the two high-def disc formats and the flurry of major studio deals with digital downloading services.

On the packaged-media front, the launch of two rival, incompatible formats was a major disappointment. But the real culprit, and the reason software sales have been anemic (fewer than 10,000 units of even a really big title are typical), wasn't so much a lack of a unified standard. It was the fact that consumer electronics manufacturers really dropped the ball, with a series of delays that really pinged adoption rates. The HD-DVD camp never got beyond two Toshiba models, including an entry-level model retailing for $499, while only at the end of the year did Blu-ray get additional players to join the $999 Samsung unit that arrived in stores in late June.

"Everyone was disappointed in the quantity [of players] that came out of the electronics companies," Sanders said. "But what is encouraging is that the attach rate of the software was amazingly high. On average, consumers bought 28 to 30 movies per set-top box, and that's just below what it was for DVD in the same time frame."

Digital downloads, simmering on the back burner for several years, also had their official coming out in April when five of the six major studios began selling downloads of their movies over the Internet, through services Movielink and CinemaNow. New releases went out day-and-date with the DVDs. Holdout Disney soon joined the party, and by year's end, the two dedicated download services were joined by a wide variety of others, including Apple's iTunes, Amazon.com and file-swapping service BitTorrent. The only hitch was that in most cases downloaded movies could not be burned to standard DVDs for easy transport into the living room.

"We determined that there is consumer interest in the ability to download content digitally," Sanders said. "What is unclear is how big the economic potential is and what platforms will ultimately win out. But every studio wants to place a lot of bets, so we are leading consumer trends instead of following them, as the music industry did."

Genius' Drinkwater sees a common thread: A desire by content providers to obtain "more control of how their products are marketed and distributed."