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Six Reasons Why DVDs Still Make Money -- And Won't Die Anytime Soon
During earnings season this spring, media company chiefs all touted quarterly growth in digital rentals and sales of movies and TV shows. They paused only briefly to shovel more dirt on the grave of the other part of the multi-billion-dollar home entertainment market: those so-last-decade little discs known as DVDs.
“It is definitely a more challenged business in terms of … the sell-through and rental of physical goods,” said Disney Chairman and CEO Bob Iger during a typical conference call with analysts in May. “But it’s been growing nicely on the digital front and I think that bodes well for the future.” Other executives simply ignored Wall Street’s questions about hard goods and rhapsodized about how the ones and zeroes were finally bringing in long-promised bucks.
Refreshingly forward-thinking for an industry not known for being so? Eminently logical given the explosion of digital platforms in recent years? Perhaps. But this stance is also disingenuous given that physical goods still make up about two-thirds of major studios’ total home entertainment revenue. Perhaps it’s simple human nature — few executives, especially those in an industry built on razzle-dazzle, enjoy dwelling on decaying parts of their business. They’d rather talk about the wave of tomorrow, regardless of how big or genuine the swell.
The decline of the DVD, let’s not sugarcoat it, has been significant. According to annual figures released in January by industry trade group the Digital Entertainment Group (note the name), overall home entertainment revenue grew 0.2% in 2012, surpassing $18 billion. Physical disc sales have fallen by about 30% since their 2004 peak, to some 700 million units, but the revenue picture has remained stable (with more than a decade of consecutive annual tallies of $18 billion-plus, the DEG says). The reason is diversification. Consumers remain hungry for content, but are finding more and more avenues to it — electronic sell-through (EST), subscription video-on-demand (SVOD) or transactional VOD has all amounted to the same pie, just sliced into more pieces. But the DVD is no more dead than the single-screen movie theatre or the network sitcom or the hardcover book — other former cash cows that now play a diminished but still vital role in the ecosystem.
I am here to say it is premature to pen the obituary of the oft-maligned DVD, onetime redeemer of flops, makers of careers and buoy of Hollywood during a meteoric 1999-2004 heyday. This wafer-thin, pocket-sized, data-rich slice of entertainment defies the usual narrative of obsolescence. It does not compare with the fraying, un-uploadable VHS tape or the cartoonishly oversized laserdisc. Unhip as it may be to point out, the humble disc serves a useful — and, yes, lucrative –purpose. After checking in with a range of industry leaders (not all of whom wanted to be identified given how their bosses characterize the marketplace) and putting my own thoughts together after covering the industry since the boom began, I am prepared to now make the optimistic case for the DVD. Not a bullish case in the sense of growth, clearly, but a prediction that these little silver objects will continue to matter to media companies for many years to come.
“In any forecast, physical goods will remain the largest piece,” Bill Clark, president of Anchor Bay Entertainment, told me. “It’s a very important revenue stream. There is no indication that digital is going to surpass physical. We need to grow the entire pie.”
Here are a handful of reasons, nearly a decade after the peak of DVD sales, why the physical slice of the pie will stay substantial:
1) Kids need it — Summer vacation season is well under way, and millions of parents are relearning this basic early childhood precept. Until automakers figure out how to make vehicles rolling wi-fi hotspots, airlines open the throttle on in-flight bandwidth, and online outlets decrease download times, watching movie and TV content on disc will remain the best way to travel. Plus, even at home, bonus features add more value to kids titles, as does packaging. It may be true that mobile devices and tablets are being used by kids at younger and younger ages, and that Netflix streaming has eroded linear viewing of Nickelodeon and other kids channels. But when it comes to home entertainment and long-term usage, DVD is simply a better value. Having shelled out three times for my kids to watch Parental Guidance on a tablet and home screen, I say bring on the Blu-ray (and hope it doesn’t get scratched).
2) The industry’s own marketing says so – UltraViolet, a cloud technology embraced by a broad consortium of distributors (notable holdouts include Disney), is selling the concept of multi-platform content access. That means if you buy a disc, you also get to access the digital copy, a “combo-pack” strategy that is now an industry cornerstone. The tables could soon turn, but the disc will stay in the picture. “In the future, you’re going to buy a digital copy and then get the disc as another way to view the content,” predicts Victor Elizalde, head of VIVA Pictures and a former studio exec.
3) Specialization favors it — Beyond the DEG data there are myriad distributors trafficking in a range of areas from sports to music to fitness to spiritualism — vast realms where the marketing opportunities and venues may be greater for physical discs than digital files. It’s easier to sell an official championship team DVD at supermarkets, gas stations and other retail outlets, for example, than an official championship download.
4) Blu-ray still the best viewing experience – For cinephiles or even anyone inclined in that direction, HD content viewed on the finest Retina tablet display or LCD flat screen can’t come close to a Blu-ray. Gaming platforms, such as the upcoming PlayStation 4 or just-released X-box, will continue to drive significant Blu-ray business. The rollout of Blu-ray has been a bit of a New Coke experience for Hollywood but after the smoke and disappointment has cleared it remains a superior format attracting all of the top content producers. “Working closely with the DEG, we’ll be launching a consumer awareness campaign about the merits of Blu-ray and UltraViolet,” says Anchor Bay’s Clark. “A lot of consumers don’t fully understand it.”
5) It’s the collector’s choice – If you were baffled by the format wars of a decade ago pitting Sony’s Blu-ray against Toshiba’s HD-DVD, the confusion around cloud storage is exponentially greater. The notion of a “digital storage locker,” as easily managed as one’s iTunes music library or Netflix account, has long been promoted by Hollywood (hence, UltraViolet). But there are an array of factors that will keep this concept from taking over and dominating. One is bandwidth — cloud DVRs are just now rolling out from MSOs like Comcast, and already there are questions about the cost and feasibility of bandwidth and storage. Old-school DVD collecting, while it involved an initial pricetag, didn’t get progressively more expensive the more you bought. Also, many players are cashing in on the demand for popular shows by creating packaging that lures hardcore fans. AMC’s blockbuster series Walking Dead sold out its run of 35,000 packages designed by McFarlane Toys. The price of this boxed set: $100. That’s a couple extra million right off the top.
6) For a lot of Americans, it ain’t broke – The media/industry narrative around the death of DVD and supremacy of digital doesn’t match the reality of most U.S. markets outside of New York, L.A., San Francisco and a small handful of other enclaves. Battered by recession and indifferent to aesthetics or the futuristic potential of cloud storage, they are happy to rent cheap discs from Redbox (whose kiosks outnumber McDonald’s and Starbucks outlets combined). As one major studio home entertainment confided to me, “There are a lot of Topeka, Kansases out there. And that’s a business we still need to be in.”