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Author:  Peter Smith President International Home Entertainment, Universal Pictures International  

Background to the Home Entertainment market

The Home Entertainment business encompasses video and DVD in both rental and sell-through markets. The business was worth $46 billion dollars globally in 2002 (split video $20 billion; DVD $26 billion), which makes it approximately as valuable as the entire music industry. Some $15.9 billion (35%) of this total was accounted for by the International market, with US Domestic accounting for the other $30 million. It is expected to grow to $62 billion by 2006, of which video will account for just $6 billion, with the International market growing slightly to around 38% of the total ($23.4 billion). The Home Entertainment business is now worth twice as much to the studios as their theatrical business (although success at the Box Office is still crucial to driving revenues right along the value chain.

The rental proportion of this market in 2002 was around 30% and this is expected to fall to 20% by 2006. The studios are keen to continue to support the rental business because it brings them higher margins than sell-through, but it does appear now to be in decline. In most territories the market is fragmented, with one major player (Blockbuster) generally dominating the large number of smaller outlets. The rental window is already closing, with sell-through releases happening nearer and nearer to the rental release date, and in an increasing number of instances, the studios are going day and date with retail and rental.

The key international markets for Home Entertainment are Japan, the UK, France and Germany which between them account for more than 60% of international revenues. This reflects the higher penetration of sales of DVD players in these territories: in the UK in 2003 44% of households have DVD players (or other hardware that can play DVDs) and this is set to rise to 114% by 2006 - ie. an average of more than one player per household. Take up of DVD players around the world has been much faster than for video or CD players.

Issues for the Industry

i) Windows of Exploitation

In 2001, the average timetable for roll out of a film from theatrical release to free television was around 30 months. In 2003, this could shrink to as little as 20 - 24 months:

Theatrical - 2001: 0 months 2003: 0 months
Video Rental - 2001: 6 months 2003: 4 months
Video Retail - 2001: 12 months 2003: 4-8 months
Pay per View - 2001: 18 months 2003: 7-12 months
Pay TV - 2001: 24 months 2003: 10-18 months
Free TV - 2001: 30 months 2003: 20-24 months

This change in pattern is partly to combat the effects of piracy which is proving to be a huge problem in certain territories, but also to boost the studios' cash flow by reducing the amount of time it takes for them to see revenues from further along the value chain.

ii) Pricing

DVD retail prices are falling much faster than was the case with CDs. In the US, CD prices fell 15% in the first 6 years after their introduction; DVD prices have fallen by 33% in just three years. (Comparable figures for the UK are 13% for CDs and 19% for DVDs.) This is the result of some aggressive market behaviour by the majors who have priced very aggressively to boost sales and consumer behaviour: research suggests that a 40% drop in retail price can lead to a 3,4 or 5 times lift in unit sales. Retailer behaviour has had less of an impact - although internet retailers are discounting very aggressively, they still only command a small share of the market. It is estimated that, despite continuing healthy growth in unit sales, the overall value of the market will fall by 2005 because of the reduction in prices. To maintain their margins, the studios will have to reduce their costs of sales - for example, by reducing the additional cost of marketing DVDs by reducing the window between theatrical and DVD release - or develop more premium priced products by improving the extras supplied on the disc.

iii) Piracy

The MPAA estimates that piracy is currently running at 20% of the total Home Entertainment market and is likely to get worse with the increased domestic take up of broadband. The studios are considering technical solutions to help combat this problem but their main weapon may be closing exploitation windows to reduce the time available for pirated copies to circulate.

iv) Video on Demand

At one time this was seen as a major issue for the Home Entertainment sector but it has been slow to roll out and is not now considered a significant threat to their market.

v) DVD Extras

Extra features on DVDs are becoming increasingly important to differentiate products in the market and to generate premium pricing. Reviews of DVDs often focus on the extras and consumers are increasingly expecting them - research has shown that the presence of good quality extras increases the consumer's intention to buy the disc. To ensure top quality extras, it is essential to plan their content at the film's pre-production stage and get endorsement for them from the producer and director of the film. Additional footage might need to be shot on set or produced during post-production. Finished bonus material needs to be delivered before the film's theatrical release so that it can be factored into the DVD's release schedule.

vi) Legal Issues

The European Commission and the Australian Government are currently looking into DVD zoning (through which discs are released in certain territories ahead of others) to assess whether it is compatible with their competition laws. In fact, the gaps between releases in different zones are already closing because of worries over piracy and the availability of multi-zone players. The studios are also currently talking to the Commission about the VAT rating for DVDs in Europe.

New Marketing Initiatives

i) Fast Burn Sales

50% of new DVD sales are generated in the first month of release. Getting the in-store point of sale materials and displays right is crucial to the studios if they want to maximise sales of their top titles.

ii) Release Dates

Traditionally new videos and DVDs have been released on a Monday. Distributors are now looking to move key releases to a Thursday or Friday to make best use of their major marketing campaigns immediately before the heaviest buying days (50% of DVD sales take place on Friday and Saturday).

iii) Mobile Phone Campaigns

There are 290 million mobile phone users in Europe - 100 million of whom are under 25. This makes text-based campaigns ideal for movies that are aimed at the younger market.

iv) Online Campaigns

People spend approximately twice as much time online each day as they do reading a newspaper. £7 billion of transactions are carried out on the internet each year (excluding pornography) and DVDs are the most popular item purchased online. Many DVD buyers do their research online even if they buy through traditional outlets.

v) Superbit and Flexplay

These are two new formats for Home Entertainment being developed by the studios. Superbit gives a better picture but the discs do not carry any extras. Flexplay is a low cost unit (retailing at around $4) which will be encoded to give it a limited play time - of about 36 hours - before it becomes unusable. It is too early yet to say whether either of these formats will have a significant market.

Top Tips

• Cinema is a worldwide business but it is essentially run from Hollywood. To be successful, British producers must develop good relationships with the key people in Hollywood.
• The Home Entertainment market is expected to continue to achieve dramatic growth over the next few years.
• Pressure on retail prices, however, will mean that the total value of the business may eventually start to fall even though sales volumes will still be growing.
• Windows of exploitation will close over time in an effort to ward off the impact of piracy and to improve cash flows to the studios.
• By 2006, every household in the UK will have 1.14 DVD players!
• Good extra features are becoming increasingly important as a means of selling DVDs and maintaining margins.