The US Home Entertainment Market

Author: Marshall Forster EVP Home Entertainment - North America, Columbia Trista

The Importance of the Home Entertainment Market

The home entertainment sector is now one of the driving forces of the American film industry. The incredible growth in DVD sales and rentals over the past few years has increased revenues from this market to the extent that they now far exceed theatrical box office revenues for the studios. Consumer spending on home entertainment has grown from around $15 billion in 1996 to a projected $24.2 billion in 2003, and is expected to reach $28 billion in 2005. The growth of the sector has enabled the studios to generate ongoing revenues from their film libraries and gives extended life to the income flows from current titles. The market is predictably strong for the big box office hits but, in percentage terms, is more significant for smaller films which can generate more income from DVD rental and retail than they take theatrically. The rapid growth in DVD sales has also given greater exposure to art house and foreign language titles.

Exploitation Windows in the US

The current windows for exploitation of a film in the various markets are as follows:

    * Theatrical Non-theatrical (eg. Airlines) -12 - 14 weeks after theatrical release

    * Home Entertainment - 14 - 16 weeks after theatrical release

    * Pay Per View Television -18 - 22 weeks after theatrical release

    * Cable Television - 6 months to 1 year after theatrical release

    * Network Television - 1 year after theatrical release

The home entertainment window has crept up over the past few years to a point where some films are being released on video as soon as 12 weeks after its' theatrical run. Although this accelerated window is not the standard for all releases, it has enabled the studios to benefit from the currency of the film's theatrical marketing campaign when they begin their marketing push for the DVD and VHS. Additionally, the movement of the release window gives greater flexibility for the studio find the best timing for placement into a crowded retail sector. The window between VHS/DVD rental and retail has already closed to zero in most cases, with films being released simultaneously into both markets.

The Composition of the Home Entertainment Market

The overall value of the home entertainment market in the US in 2002 was approximately $22 billion. DVD has already replaced VHS as the major medium in the market and it is projected that VHS will be completely obsolete within the next three years. In the sell through market, DVD already accounts for more than 80% of the market and is rapidly overhauling VHS in the rental market as well.

The breakdown of the Home Entertainment market, by share of total revenues, in 2002 was as follows:

    * Mass market stores (eg Walmart) - 47.5% Electronic Stores - 18.2%

    * Other (including Wholesalers) - 12%

    * Rental retail (eg. Blockbuster) - 10.2%

    * Clubs - 7.6%

    * Music retailers - 4.5%

Source Alexander and Associates

The studios distribute directly to almost all of these sectors, with wholesalers acting as an intermediary only in respect of the smaller retailers. Within the mass market, the largest stores can represent more valuable "territories" for the studios than any individual international market.

The studios' respective market shares in 2002 were as follows:

    * Warner Bros - rental 20.8% - sell-thru 22.2% Buena Vista - rental 16.5% - sell-thru16.6%

    * Columbia - rental 14.2% - sell-thru 11.1%

    * Universal - rental 13.3% - sell-thru 10.4%

    * Fox - rental 11.0% - sell-thru 9.9%

    * Paramount - rental 10.2% - sell-thru 6.9%

    * MGM - rental 5.9% - sell-thru 6.1%

    * Other (incl. Sports, kids) rental - 8.2% - sell-thru16.9%

Current Strategies in the Home Entertainment Market

In the rental sector, the studios are working closely with the rental companies to increase sales and revenues. One strategy is to share revenues with the rental retailer across a package of products and they are also giving better deals in return for the retailer taking more copies of each title. Rental retailers are also benefiting from day and date pricing of DVDs which means that they can acquire titles for the same price as they are sold to the sell-through retail sector.

In the sell-through sector, studios are benefiting from direct relationships with the major retailers. Direct to store programmes have streamlined distribution operations and simultaneously increased volumes. To a greater extent, VMI (vendor managed inventory) programmes which enables studios to monitor and replenish daily retail point of sale purchases, maximises their ability to maintain optimal in-store stock levels. and helps them to ensure that each title will be available 99% of the time. Furthermore, VMI programmes have given the studios valuable insight into consumer purchasing habits which, in turn, has provided the opportunity for customised title assortments at the retailer and/or regional level. In addition to the above, the movement of a film's video release window closer to the end of its theatrical run permits the studio and the retailer to capitalise on the awareness created by bigger theatrical advertising campaigns.

The Future of Home Entertainment

The recent success within this market already reflects the rapid take up of DVD players and second generation gaming consoles that can play DVDs. The forthcoming third generation gaming platforms will build on this relationship encouraging still greater co-operation between the hardware and software suppliers as they strive for new and exciting ways of developing the format. In contrast to VHS, which was originally built on a rental model, DVD is seen as essentially a retail proposition and this retail-oriented approach will be developed further in the future. A major reason for people to buy DVDs is for their additional content, and the studios will continue to develop these features, increasingly drawing on their film libraries to provide new material. There will also be a shift to high-definition DVD, bringing even better quality images and increased capacity to carry additional information and interactive features. The new software will also include improved copy protection systems to reduce the opportunities for illegal copying of disks.

Top Tips

    * The rapid growth in the take up of DVD, combined with the home theatre phenomenon, has elevated the importance of home entertainment to studios' revenues. Potential revenues from this source are now factored in when studios make decisions on new films.

    * Consumer spending on home entertainment has grown from around $15 billion in 1996 to a projected $24.2 billion in 2003, and should reach $28 billion in 2005.

    * The home entertainment window is likely to move forward to around 12 weeks from the film's initial release, with films being released simultaneously into the rental and retail markets.

    * The future will see the development of high-definition DVD, with even better quality images and increased capacity to carry additional information and interactive features