Kate Bulkley, Media Analyst.

DVDs force the movie business to rewrite its rules

By Kate Bulkley

Financial Times

Jan 19, 2004

Fans who packed UK cinemas to see Johnny Depp's Pirates Of The Caribbean in August could buy the DVD less than four months later. The gap between watching a movie on the big and the small screen has never been so short. It is now weeks rather than months. And, according to some industry chiefs, the delay could one day disappear altogether.

This could be highly lucrative, but is so far-reaching that most studio executives don't want to broach the subject, even privately. To understand why, it is necessary to look at the system oiling the wheels of the $67bn global cinema, DVD and video industry.

Film sales rely on a series of separate opportunities for movie studios and their distribution partners to earn money. Traditionally, the full process has taken at least a couple of years. The first take comes from cinema tickets. Six to 12 months later there is video rental. Following another similar period, a title will be available for sale on video (known as sell-through).

This is then followed by sales to television pay-per-view (PPV) providers, where viewers pay to watch an individual movie; sales to pay-TV channels (where they watch it in return for a monthly channel subscription); and, finally, sales to free-to-air broadcasters such as ITV or the BBC. Six principal "windows" to exploit, six opportunities to earn cash.

The industry has always managed to incorporate technology such as satellite distribution or digital television profitably into the system, and to create new business units to sit alongside rather than in place of existing ones - and each new development has always increased the total revenue.

But two things have arisen to challenge the status quo. First, piracy - using the internet to send counterfeit copies of movies around the world almost instantly - has increased the dangers of staggering film releases by territory and by format. Second, and more importantly, the DVD medium has proven so much more successful than predicted that it threatens to disrupt the carefully set boundaries of the windows system.

Take Finding Nemo, the animation movie from Pixar and Disney. In the period between its US cinema release on May 30, 2003, and its US release on video and DVD on November 4, the movie took $340m at the US box-office, according to California-based Adams Media Research.

Disney and Pixar are estimated to have taken $156m of this figure, making the release a smash by anyone's standards. But Adams estimates that in a little more than two months the filmmakers earned a staggering $459m from Finding Nemo's US DVD/video release (mostly DVDs) with an estimated 27m copies of the DVD or video being shipped to outlets for sale or rent.

The higher margins, rapid payback and longer shelf-life of the DVD explain why many in Hollywood are keen that shoppers should be able to buy a DVD at the earliest opportunity - even if that means doing away with some of the traditional release windows. In mass-market retailers, the studios have found willing partners of scale - with similar ambitions.

Michael Ryan, chairman of the American Film Marketing Association (AFMA) which represents independent movie studios, says: "The DVD people rule the roost because for eight or nine out of 10 movies made, DVD sales is what is paying the bills, not the box-office. This is considered by the theatrical snobs at the studios to be akin to the tail wagging the dog, but that's the truth of the business today."

In the US, 2002 revenue from DVD/VHS video sales and rental accounted for 62 per cent of the total domestic income of the major studios, according to consultancy Screen Digest. Of that, as much as fourth-fifths is estimated to come from the sale of DVDs alone. Meanwhile, in Europe, 49 per cent of the studios' total revenues were derived from DVD/VHS sales and rental in 2002, and the percentage is rising as DVD player penetration grows. Screen Digest estimates that 45 per cent of UK TV households had a DVD player by the end of 2003. That is 11.4m homes, compared with about 3m just two years earlier. And these figures exclude games consoles or PCs on which DVDs can also be played.

"None of us has seen anything like this before," says Helen Davis Jayalath, senior analyst at Screen Digest. "The VCR took a hell of a long time to get established. DVD has done it almost overnight."

If DVD is the new cash engine, then adapting the system around it makes sense. John McMahon, senior executive vice-president and MD Europe at Sony Pictures Television International, says: "The ultimate advantage is to start realising the revenue from the various windows earlier."

And, aside from cash generation, there are other benefits. "The sooner you're on the street with the movie DVD the less opportunity there is for the pirates," says Alan Flitcroft of Ernst & Young.

With such a strong head of steam behind the arguments for early DVD release dates, why not lose the traditional rental window? Last year Warner Bros seized this opportunity in the UK and several other European countries.

It decided that customers should be able either to buy or rent a DVD/video from the same date. The move provoked huge complaints from the video chains, which saw only a loss in their rental revenues. In effect, the separate rental window vanished. A short-lived boycott of Warner movies by Viacom's Blockbuster division followed. But, given the popularity of the biggest hits from the Warner stable, including the Harry Potter and Rings movies, it was a fight the retailers could never win. And where Warner led, the other studios have followed.

But the fall-out from the disappearance of the separate DVD/VHS rental window does not end with rental distributors. In the UK, BSkyB has recognised that, in order to compete and piggyback off cinema premiere marketing, it has to get movies on to its PPV schedule earlier too. In the US, the PPV window opens 45 to 90 days after DVD/video, whereas in Europe the delay can be as much as six months.

Universal, Dreamworks and Disney have all shortened the window on PPV from six to three to four months for several of their recent movies - giving the pay-TV company earlier access to movies such as Chicago, Catch Me if You Can and 8-Mile. To remain attractive to the studios, which have often complained over falling buy-rates on PPV services, BSkyB and its peers internationally have to work hard to improve their marketing and packaging of films - and a high-profile Sky movie channel campaign is currently under way.

Stewart Till

Stewart Till

"There is a delicate balance between bringing the windows forward and cannibalising the later windows," says Stewart Till, chairman of UIP International, which distributes films from Universal, Dreamworks and Paramount outside the US. "The earlier you move the window up the more people will pay, but you also run the risk of cannibalising the other windows that follow."

Sony's McMahon says: "I'm one of those who believes that ultimately everything will be available at a price. So, if you want to see it at home when it is at the theatres you can, but it will be a premium price. So 8 at the theatre or 30 at home on a one-time, pay-per-view basis. But this is a way off, first because technology may not be there and [because] this is a very controversial issue."

Two years ago Warner Bros named one man - Josh Berger - to head all its various UK businesses, including theatrical, home video, TV, online, consumer products and the UK theatres' business. Berger declined to be interviewed, but observers say Warner's experiment has had mixed results.

"We are all very silo-ised between theatrical, home entertainment and TV," admits McMahon. "But as the technology evolves, the windows will evolve and the structures around that will need to evolve too."

Meanwhile, although it is in its infancy, and still beset by piracy fears, the internet could, in theory at least, become an even faster turnaround medium than DVD, with almost all the studios already linked to broadband download websites. If it flourishes, another change will be here to stay.


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