We've Got Hollywood Covered

Home Entertainment Poised to Grow After 5-Year Losing Streak

There are signs the home entertainment industry may be figuring out how to make people buy digital copies of movies

After five years of decline, the battered home-entertainment industry is seeing some daylight.

Not only has the bleeding stopped, but the overall market for everything from DVDs to streaming to sales of iTunes copies of movies and TV shows is expected to grow by 5 percent to roughly $18.7 billion, according to projections by IHS Screen Digest. If those estimates hold, that will be the best number for the home entertainment business since 2009.

Getty Images"It's been a great year for the industry," Steve Beeks, co-chief operating officer of Lionsgate, told TheWrap. "We're seeing renewed growth and strength across all fronts, and consumer spending is up across the board."

Indeed, a strong finish over the holidays could see the once demoralized sector start the new year with a huge injection of confidence. In particular, there is mounting optimism that customers are beginning to embrace purchasing electronic copies of films — just as they had once lovingly stocked DVD and Blu-ray libraries.

So is this what recovery looks like, or was there simply nowhere lower for the movie business to sink?

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Though studio executives prefer to accentuate the positive, not everyone believes that the projections indicate the industry has figured out how to thrive in the digital age.

"We finally hit a bottom," Michael Pachter, an analyst at Wedbush Securities, said. "It's sort of like GDP going down. It doesn't go down forever."

Others acknowledge that while the boom times may be over, the industry is lucky to have come out relatively unscathed by the tectonic shifts in media consumption over the last decade. They acknowledge that it has been a precipitous fall from a peak of  $21.8 billion in consumer spending in 2004 — but they insist these projections indicate the home-entertainment industry will not be reduced to the rubble that has become the newspaper or music businesses, which wasted time fighting off the digital age.

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"Hitting bottom at $18.7 billion is not chump change," Tom Adams, an analyst at IHS Screen Digest, said. "If that's the bottom, that’s really, really good news."

Executives say that rather than one silver bullet, the industry is benefiting from incremental increases from several different sectors across an ever-expanding home-entertainment landscape. Gone are the days when the DVD business was the industry's major moneymaking behemoth, but in its place has emerged a hydra of daunting intricacy.

"The business has gotten more complex, more fragmented to the point where a number of new distribution channels are proliferating," David Bishop, president of Sony Pictures Home Entertainment, said. "These digital options were nonexistent before, but they are now beginning to help stabilize our industry."

No one thing has emerged to take DVD's place, but these various digital distribution platforms have matured to the point where they are helping to cushion the blow from disc sales' decline.

For now, studio executives are publicly bullish about the future of physical media, pointing to the steady growth of Blu-ray sales, but the long term future of the industry will have to be digital.

Getty ImagesTo that end, there are a number of signs that an older form of media is doing a skilled job of navigating the internet era. Industry executives maintain that they are finally getting people to be more comfortable with the idea of not simply renting, but purchasing electronic copies of movies. Electronic sales of movies and shows are expected to hit nearly $1 billion, up more than 40 percent from $679 million the previous year, according to IHS Screen Digest. Also showing healthy growth are digital rentals, which are projected to increase nearly 50 percent to $422 million, and digital subscription video-on-demand, which is expected to more than double to $2.4 billion.

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"The way we see it, with more than 82 million consumers now accessing digital movie content, we’ve reached a tipping point where we’ve moved beyond early adoption to mainstream acceptance," Mary Daily, president and chief marketing officer of worldwide marketing at 20th Century Fox Home Entertainment, said.

Moreover, the industry believes that after a slow-start, UltraViolet, a cloud-based video format that allows users to access movies across multiple devices, is gaining traction with consumers. Thanks in large part to its adoption by Walmart's video service Vudu, UltraViolet will end the year with roughly 7 million accounts, far better than the fewer than 1 million accounts it boasted roughly 12 months ago.

Currently all of the major studios save Disney have endorsed the platform and released UltraViolet-compatible titles. Executives say privately that at least one other major retailer will begin offering UltraViolet by the end of the first quarter of next year.

"When a consumer goes around DVD and Blu-ray shelves in four or five big retailers, they're seeing UltraViolet enabled titles from several studios," said Mark Teitell, general manager and executive director of the consortium behind UltraViolet, the Digital Entertainment Content Ecosystem. "That's a subtle, but important way to grow the perception that this is for real and that anything you buy in the cloud is here to stay."

More importantly, this Christmas season they seem to be understanding the UltraViolet principle — a far cry from last year. To help raise that awareness, UltraViolet's backers will launch a campaign that will talk up the benefits of digital ownership in conjunction with the Consumer Electronics Show (CES) in January.

Beyond addressing consumers' desire to access content on mobile devices and tablets, industry executives believe they have designed more innovative ways to present movies to a tech-savvy crowd. They have begun to experiment with special, digital-only features, such as allowing users to access an actor's IMDB profile while a film is in progress or presenting scroll-through rough CGI cuts alongside a finished scene.

But studios believe they're only scratching the surface. In particular, they argue that more needs to be done to connect movies to social media platforms like Facebook and Twitter.

"We need to give consumers compelling and fun options like the ability to share clips — and to not only see the movies that their friends like but to also share their opinions and recommendations," Bishop said. "There is a lot of innovation that needs to be developed to make digital ownership better and to make movies fit the medium."

Besides interactive bells and whistles, digital platforms and video-on-demand have emerged as the safest ways to experiment with release windows. For smaller films, that has often meant offering movies like the legal thriller "Arbitrage" on VOD or iTunes on the same day they hit theaters.

For tentpole movies, that has largely entailed releasing films digitally between two to three weeks before discs hit store shelves, an approach 20th Century Fox recently tried with "Prometheus."

There are limits to how bold studios can be in this arena, of course. Theater owners threatened boycotts when studios tried to release major movies early on home entertainment, maintaining that the standard should be that theatrical releases should only hit those platforms 90 days after their debut.

Still, there are signs that going early is paying off. "Arbitrage," for instance is poised to make $12 million from VOD and digital release, a substantial number for a dark, independent drama that cost $15 million to make. Moreover, releasing a major movie like "Ted" or "The Amazing Spider-Man" early, lifts the contribution of a film's electronic sales from an average of 3 percent to 12 percent of overall purchases, an executive told TheWrap.

"We have to continue to experiment and find the right model for each picture," Beeks said. "Sometimes it's early [electronic sell-through] and sometimes it's releasing a movie on the same day as theatrical, but consumers will pay a premium for that access." 

The biggest challenge facing the industry may not be about early release dates or nifty apps, however. Analysts say the movie business must simultaneously anticipate and respond to a rapidly changing digital landscape while also acknowledging that movie lovers' appetite for buying movies may never reach the intensity it did in the early aughts.

The recession may be over, but when disc sales plummeted in the midst of the financial chaos, it may have exposed a more troubling problem.

"The question was how much was it people just scared to death and losing jobs and how much  was it a loss of interest in owning movies,"  Adams said. "In retrospect, maybe people realized they were buying more DVDs than they needed to."

For now, at least, they're spending more than they did last year.