Year in Home Entertainment: ‘Despicable Me 2' May Help Lift Biz to Slight Gain

Year in Home Entertainment: 'Despicable Me 2' May Help Lift Biz to Slight Gain

Industry on track to grow slightly in 2013, thanks to cloud technology and earlier releases

The worst may finally be over for Hollywood's home entertainment chieftains, who are holding their breath that their business will end the year up slightly – or, in worst case, flat with 2012.

That may not sound like much of an accomplishment until you consider the music and publishing businesses: Both have yet to recover from Internet disruption and the recession.

Studio executives have reason for their optimism. Home entertainment spending was running slightly ahead of last year through the third quarter, before summer hits such as  ”Fast & Furious 6” arrived for sale. The industry is particularly bullish that this year's results will exceed those of 2012, after Tuesday's announcement that “Despicable Me 2” grossed $80 million during its first week on-sale via DVD, Blu-Ray and digital copies. That was the most money any film has generated on these platforms over the last three years.

It's not just Gru and those adorable Minions that have people reaching for their wallets. Consumers are showing a growing interest in purchasing digital copies of their favorite movies. For the first time, digital sales of films and television shows will top $1 billion.

“They finally seem to be cracking the nut on electronic sell-through and that's the only way to make up for all that lost revenue,” Tom Adams, a home entertainment analyst at IHS Screen Digest, told TheWrap. “Modest declines represent a small victory for the studios. We don't see that happening in music or publishing, which have been devastated by the internet economy.”

Also read: How ‘Epic’ Digital Sales Are Bolstering the Sagging Home Entertainment Biz

While customers are not collecting movies with the avidity that they once snapped up DVDs, studio executives argue that the business has finally made a successful case for buying digital copies of movies, instead of just streaming them.

“It's very exciting for the industry, because not only does that offset the decline in physical discs, but electronic sell through is at a size and scale where it's becoming a meaningful source of revenues,” said Ronald Saunders, president of Warner Bros. Home Entertainment Distribution.

Digital sales are essential to righting an industry that was knocked off course by the economic down turn and the rise of cheaper entertainment options such as Redbox and Netflix. Although Blu-ray has seen modest growth, and should rise by nearly 10 percent this year, it has not filled the hole left by the collapse of the DVD market.

Last year, the market finished the year virtually flat at $18 billion — a 21 percent drop from the $21.8 billion in consumer spending it enjoyed at its 2004 peak. Still, analysts say that compared with other media sectors that have been buffeted by the digital revolution, the movie business has emerged from the technological bedlam, bruised but not fatally wounded.

Also read: ‘Despicable Me 2' Set a Record for First-Week Sales on DVD, Blu-Ray and Digital

Tony Wible, an analyst with Janney Montgomery Scott, told TheWrap that he was bullish on studios in part because of their ability to staunch home entertainment declines. “The DVD market stabilizing is huge,” he said. “The bleeding is subsiding.”

Through the third quarter of 2013, home entertainment spending hit $12.6 billion, up 1.4 percent from the year-ago period, and the industry is expected to remain flat or to increase by a few percentage points this year, according to home entertainment executives surveyed by TheWrap.

“We have some major titles coming to market and that should bode well for having a big finish,” said Amy Jo Smith, head of the studio-backed Digital Entertainment Group. Studios rely on holiday sales to fatten their coffers, often squeezing big summer movies into stores to entice last minute shoppers.

A combination of factors are contributing to the turnaround, executives said. Among them, a decision by the major studios to release new films digitally two to four weeks before they hit store shelves and the embrace of a sexier name for the product, Digital HD.

“The digital business is just starting to become mainstream,” Mike Dunn, 20th Century Fox Home Entertainment president, said.

He maintains that Digital HD is more user friendly than the old name, EST or electronic sell through.”Now that all the studios have rallied around the name, it will begin to sink in,” he said.

Also read: Why VOD's Popularity Is a Mixed Blessing for Indie Film

During the most recent fiscal quarter, electronic sales of films, which studios like Fox and Sony have made a point of emphasizing in home entertainment ads, rose 46 percent to $273 million.

By releasing titles ahead of their disc debuts, Fox has seen electronic sales triple and quadruple. Likewise Paramount reports that it had the biggest digital seller in its history when it opted to release “Star Trek: Into Darkness” on internet platforms three weeks before it hit stores. To drive interest, the studio offered digital extras such as commentary from director J.J. Abrams and making-of features.

“One of the things that drove DVD and Blu-ray sales were extras,” Dennis Maguire, Paramount Pictures president of worldwide home media distribution, said. “The idea they were getting more for their money resonated with consumers. Sometime movies have to get cut to get into theaters and there's all this additional footage; we have to look at ways to use that digitally.”

Comcast Cable's decision to sell, as well as rent movies, to its 21 million subscribers could also provide a lucrative outlet for studios. Among the major studios, only Universal, Fox and Lionsgate have signed up to sell films, but most other players are sniffing around the offering. Initial numbers have been promising, studios say.

“If you look at the user interface, they created a nice clean look and just turned on what is in essentially a buy button,” Jim Packer, Lionsgate's president of worldwide television and digital distribution, said. “They didn't do it with a lot of fanfare, press or publicity, but what we saw was people were willing to buy movies from Comcast.”

UltraViolet, the studio-back cloud ecosystem that allows users to watch films and shows on multiple devices, has also picked up steam after a slow start. The service has been embraced by retailers such as Target Ticket and Vudu and has seen the number of accounts increase to more than 14 million, up from 8 million as the year dawned.

Also read: Music Sales Grow for First Time in 12 Years, Study Finds

“There's a growing comfort now that there's a cloud technology backing up that purchases that when you buy things digitally it's there to stay,” David Bishop, outgoing president of Sony Pictures Home Entertainment, said. “We're really encouraged at the traction that we're getting within those accounts, where we're seeing dramatic increases in the collections that people are building.”

Studios have also begun to partner with exhibitors on programs such as Supertickets, which allow moviegoers to buy digital copies of films such as “Anchorman 2: The Legend Continues” and “World War Z” at the same time they buy tickets. These programs have eased tensions between studios and theater owners about shrinking home entertainment release windows.

“Exhibitors have seen past the idea that people won't go to a theater if you're promoting the video release,” Maguire said. “We worked hand in glove with exhibitors on Supertickets and I think the days where they would try to restrict our ability to talk to the same consumers are gone.”

It's early and studios have yet to release results from the all-in-one ticket experiments, but they say that the numbers are significant enough to warrant more packaged deals in the future. The possibility of piggybacking on the theatrical release advertising campaigns as a way of generating excitement around a film rather than having to wait three months to sell audiences on the same piece of entertainment all over again is irresistible.

“When the credits are rolling and an audience member pulls out their smart phone, that's when we should be pushing a digital copy,” Dunn said. “When the enthusiasm is high, that's the path to a purchase.”