DVD-In-Depth

The DVD industry is coming off a banner year. Analysts say 2000 was the year when DVD's success–from software to hardware sales–outpaced even the most rosy expectations.

The Consumer Electronics Association (CEA) revised its hardware sales projections upwards, proudly noting that as the year closed, 8.2 million DVD players were shipped to dealers, with more than 6.7 million units expected to reach American households. The DVD player was listed as the No. 1 gift item desired this past Christmas and it was ranked in the top 10 online purchases for 2000, according to the CEA.

In January 2000, the DVD Entertainment Group predicted that by the end of the year, there would be an installed base of 12 million DVD players in U.S. households. The finally tally: 13 million players.

Meanwhile, on the software side, the DVD Entertainment Group estimates that more than 230 million DVD units were shipped to the marketplace, generating upwards of $4.5 billion in revenue.

For 2001, the prognosis of the industry–from a wide range of analysts, experts and studio executives–is that DVD will continue to enjoy unsurpassed growth and success as it moves squarely into the mainstream.

Analysts now predict that by next year, DVD will surpass VHS for the first time in sellthrough. By 2004, it will surpass VHS on the rental counter as well.

HARDWARE

More than 20 million DVD players are expected to find homes in 2001, according to analyst Tom Adams of Adams Media Research. That's more than twice as many players as were sold in 2000, when sales really began to soar The year 1999 ended with total sales for the year of 3.5 million players.

A significant factor in the rampant growth of DVD player sales in 2000 was the rapid decline in player prices. By Christmas of 2000, player prices were seen below $99 at such mass merchants as Circuit City and Best Buy. The median price for players is hovering below $200 at stores everywhere–even grocery markets like Von's and Ralphs.

Analyst Tom Edwards of NPD Intelect, which tracks hardware prices, says the average selling price of a set-top DVD player as of October 2000 was $227.19, down from $287 at the end of 1999.

"It's a commodity business that is driving the pricing down," Edwards says.

In 2001, player prices are expected to fall even lower, although the decline isn't expected to be as significant as it was last year.

"I think it will come down a little bit. I think you'll continue to see $98 players," Edwards maintains.

The most dramatic change in DVD hardware will be in special features, Edwards says.

He cites the carousel-type slots so common with today's multi-disc CD players. Edwards predicts the near future will see players with room for as many as 300 DVDs.

"You can have a video jukebox with movies," Edwards says, but he maintains that for the mass market, "you'll still see a lot of mid-range players" as the norm.

Furthering DVD's acceptance this year, especially on the hardware side, will be the influx of such secondary DVD players like the PlayStation 2 and computers with DVD-ROM capabilities.

The 3 million PlayStation 2 units sold worldwide in 2000 will introduce a whole new generation to DVD.

"It did have that experience in Japan [where it was introduced six months earlier than here]," Edwards. He notes that in Japan, the arrival of PlayStation 2 led to a boost in sales of both DVD player and television sets.

The DVD Entertainment Group also predicts that many DVD players will be sold to households that already own one player–a trend mirroring that of the VCR in the early days.

"As DVD continues to accelerate in the mass market, we'll see homes starting to get second players and the entire family will enjoy both the player and movies," says executive director Amy Jo Donner. "In the fifth year of the VCR, only 8 million units total were sold and it wasn't until later that [it became common to have double-player families]."

SOFTWARE

Content is king, they say. And in DVD software, content continues to be a driving force in the popularity of the format.

In 2000, 230 million software units were shipped into the marketplace. More than 300 million units are expected to be sold through to consumers by the end of 2001, says analyst Adams.

"There's no reason [DVD] wouldn't be ubiquitous," he says.

The early adopters of DVD–young adults and affluent men–were drawn to the action genre which played well on the format. But in 2000, DVD went mainstream, as witnessed by the broadening of genres available on the format as well as the demand for more selection. For example, some of the best-selling movies on DVD last year were The Princess Bride, Princess Mononoke, The Sound of Music, and Chicken Run–not exactly Terminator fare.

The high popularity of children's animated classics from Disney, such as Toy Story 2 and Tarzan, add more proof that DVD is becoming a family affair.

SPECIAL FEATURES

Perhaps the most significant trend in content, experts say, was the creation of special, or "value-added," features.

"They're an absolute requirement to do big numbers on DVD," says Universal Studios Home Video president Craig Kornblau.

"That's something you can't get [on video] or network-delivered versions of movies," adds Adams.

In fact, a survey by Twentieth Century Fox Home Entertainment revealed that 40 percent of DVD buyers base their purchases on the quality and quantity of special features.

"The consumer is so wowed by the product," says the DVD Entertainment Group's Donner, adding that these extras are what compels consumers to buy and collect DVDs rather than rent the VHS counterparts.

In 2000, most studios pushed the envelope in creating these mega-discs.

Ironically, some of the most groundbreaking special features have come from two studios that weren't aboard the DVD bandwagon when it launched in 1997: Buena Vista Home Entertainment and Fox Home Entertainment.

It wasn't until 1999 that Buena Vista first began issuing some of its classics on DVD, and then only a handful of stripped-down versions.

"We adopted a kind of wait-and-see approach," says Bob Chapek, president of Buena Vista Home Entertainment. "We weren't sure it wasn't going to be another laserdisc."

The initial nine releases were basically digital copies of their VHS sisters, without a plethora of extras. But that all changed with 1999's Tarzan. And it was followed in 2000 with Toy Story 2 and Fantasia 2000–discs Chapek says set a new standard for special features. The "ultimate edition" sets contain two movies–Toy Story and Toy Story 2, Fantasia and Fantasia 2000–and a third disc consisting of only special features.

"The sophistication of our DVDs have gone from possibly being behind the format to being one of the leaders," Chapek says.

Virtually each new disc Buena Vista releases meets that goal. For example, Fantasia 2000 boasts of 11 hours of extra programming.

"There's something for everyone," Chapek says, mentioning the studio's attempt to focus on both ends of the spectrum: the DVD fan and the family market.

With Toy Story 2, which was digitally created for theatrical release, Buena Vista found itself in a whole new world when it was time to produce the DVD.

"The actual quality of the program is better than what [viewers] saw in theaters," Chapek says.

Last year, Fox Home Entertainment introduced its Five Star line, the Cadillacs of the studio's DVD releases. The first two films in the line were The Sound of Music and Independence Day, and they each got the full VIP treatment, from special packaging to hours upon hours of extras.

In addition to the Five Star lineup, Fox in 2000 released feature-packed versions of The Abyss, Fight Club and X-Men–best-sellers on many sales tracking lists.

"It's not just a question of loading up features on the disc, it's understanding what the property is all about and how to handle it," says Peter Staddon, senior v.p. of marketing for Fox.

The studio implemented this mentality with releases such as Fight Club and The Rocky Horror Picture Show.

"There's an understanding about the tone and how the movie is treated," Staddon says. "The supplemental materials reflect what the movie is trying to say."

Older catalog titles, such as Cleopatra, which will be released on disc next year, are also privvy to such treatment even if not a wealth of extra material is available.

"It doesn't mean we can't do a great special edition," Staddon says.

Fox is also known for talking to its DVD audience to discover what's wanted. For example, for Big Trouble in Little China, Fox executives turned to the Internet and found a huge fan base for the movie.

"Once you start talking to people, the possibilities open up," Staddon says.

Other studios also had big DVD years in 2000. Warner Home Video continued its leadership role, both in mining its catalog and in premiering new releases the same day on VHS and DVD.

The company has a personal stake in DVD–its president, Warren Lieberfarb, is widely hailed as the "father of DVD," thanks to his early vision (Lieberfarb was talking about movies on disc since the 1980s).

"We've been involved since day one," says Steve Nickerson, v.p. of marketing for DVD at Warner. "We have been the studio since the beginning."

Starting with Free Willy, The Fugitive and Goodfellas, Warner hit the street running in March 1997. It began to split its new release schedule, issuing half catalog titles, half new releases. To satisfy those early adopters and movie collectors way back when, library titles were a must, says Mike Radiloff, director of DVD marketing.

Warner was the first studio to release a "virtual theater" when it created the ever-popular The Matrix. It was the first movie with a DVD-ROM component containing a scene-by-scene commentary with the directors.

"To take the experience of watching a movie and taking it to another level [is surreal]," Radiloff says.

Even key retailers agree that the special features are what tantalizes consumers.

"We believe special features are one of the reasons consumers are spending more time watching movies after their DVD machine purchase as before," says Mark Wattles, chairman and c.e.o. at Hollywood Entertainment Corp.

This year, special features are expected to take on an even more vital role in DVD's success rate.

"There are a lot of things we can do now–we can get creative," says Warner's Nickerson. "It gives us the ability to give the consumer a different product than what was seen in theaters."

Indeed–while filming their movies, a growing number of directors, cast, crew and producers are already thinking about the DVD. They're saving extra film footage, taping commentaries on the set and developing assorted other extras for later use, say industry insiders. Even outtakes and old storyboards are highlights on DVD reels.

Many of director Jerry Bruckheimer's movies have benefitted from his extensive DVD involvement, Chapek says.

"With his partnership, I think we can be assured that any Jerry Bruckheimer film will be a phenomenon on DVD," Chapek maintains.

Warner Bros. is currently in production with The Matrix sequels, which "are being developed with the knowledge that there's a market for the [future] DVDs," says Nickerson.

Also in 2001, other titles in the works include a special-edition Terminator and When Harry Met Sally as well as a classic–The Greatest Story Ever Told, all from MGM Home Entertainment. A special "branded collection" of MGM DVD titles will also be introduced by the studio, grouping films by genres including avant garde, Western legends and "midnight movies."

"We've devised the branded collections to maximize the [salability] of these titles," says Allyssa DelPiano, director of marketing.

Fox "is going back to our crown jewels," with three past heavyweights getting the DVD VIP treatment in the first part of 2001: Cleopatra, The French Connection and Diehard, says Mike Dunn, Fox's executive v.p.

The former, a four-hour epic that in today's dollars ($270 million) is the most expensive movie ever made, will include extensive historical material and vintage behind-the-scenes footage.

"There's a lot of history, a lot of film lore, attached to Cleopatra," Dunn says.

The cheerleader flick Bring It On, which Universal will release Jan. 23, will include 10 deleted scenes, a home movie about the filming of the car wash scene, and nearly 300 "pop-up" facts about cheerleading and the production of the movie.

And while Charlie's Angels is still generating big bucks in theaters, Columbia TriStar Home Video's Marshall Forster, senior sales v.p., said work on the DVD has already begun.

"We're already looking at deleted scenes for possible inclusion," he says. "There's a growing demand for this type of entertainment.

"The consumer demands it and, at this point, expects it."

Fox's Staddon agrees, saying that in 2000, the creative community really began to take an interest in DVD and, in many cases, actually started planning for the DVD while the theatrical film was still in production.

He expects this trend to continue, and even accelerate, in 2001.

"You start working on DVDs when the movie is still in production, and you have so much more material to access," he says.

Release schedules

Several studios significantly upped their release schedules of DVD software in 2000. This year, an even bigger boost is expected, especially in the first few months of the year when consumers need new movies to play on all those new, Christmas-given DVD players.

MGM Home Entertainment has already taken the lead in this arena, announcing a few months ago that it intends to triple its DVD release slate in 2001 to upwards of 400 titles.

"Our goal is to bring the highest-quality picture and sound to the consumer," DelPiano says. "We're always trying to step up and provide the cutting-edge entertainment experience. We're trying to grow our special editions [now]."

In 2000, 19 special editions were released from MGM, from Spinal Tap to the "James Bond" series.

"Consumers have been really satisfied with the features we put on our discs," she says.

Price Stability

The average price point for DVD software hasn't gone up, and isn't really expected to rise in 2001, says Ralph Tribbey, Video Store Magazine's DVD editor and editor of the DVD Report.

"In fact, DVD pricing since the format's launch in March 1997 through December 2000 has remained remarkably stable," Tribbey says.

This means that the dramatic growth in household penetration for the format has not been fueled by slashing prices of the software to promote growth.

"The industry is simply not substituting low-priced DVD releases for low-priced VHS releases," Tribbey says.

While 2000 saw a dip in new release pricing versus that of 1999, it was slight overall and still ahead of the debut year of 1997. The average price of all new DVD releases stands at $25.69, Tribbey says.

"Also, the number of DVD titles being price-promoted has been overwhelmed by the number of new releases reaching the market each year," he says. For example, 3,622 new DVD titles were released in 2000 with an average price of $25.44.

There are more 7,000 DVD titles that have yet to be repriced.

"This overhang could have a major impact upon DVD pricing in 2001," Tribbey says. "With a critical mass of catalog at hand, coupled with a significant installed base of DVD households, the stage could be set for a significant restructuring in the pricing of existing DVD catalog."

Rental vs. Sellthrough

Throughout 2001, studios are expected to continue experimenting with ways to reduce the effects of cannibalization in the rental market.

From the start, DVD was positioned as a sellthrough item, but when the launch didn't move as fast as many insiders hoped–thanks in large part to the emergence of the pay-per-play variant Divx and its brief, but heavy-handed, push into the rental market–studios grudgingly helped nurture a DVD rental business.

Today, DVD rentals are a booming business that by most accounts generate approximately 8 percent of total video rental revenues. Independent retailers, in particular, have beefed up their DVD inventories as an affordable way to build copy depth.

But that affordability has the studios clearly worried. As more and more DVDs replace VHS cassettes in rental stores, studios are fearful their revenue stream from rental titles will be significantly reduced. They still get about $40 a pop from each rental-priced cassette they sell, and substituting a $15 wholesale disc simply won't fly, at least not for long, some executives say.

"Rental revenues are very important and we need to protect them," says Fox's Staddon says.

And yet a broadscale price increase is out of the question. Sellthrough continues to be the bread-and-butter of DVD, and studios are reluctant to tamper with a successful model. They also don't want to risk angering the big DVD sellers, like Best Buy, that helped build the DVD market in the first place.

As the new year begins, there is much uncertainty about exactly what the studios should, and can, do.

Some studios are toying with holding back the DVD by a week or so to provide a brief VHS rental "window." Universal Studios did this in the fall of 2000 with U-571 and two other titles, followed by Fox in December with Big Momma's House and again in January with Me, Myself and Irene.

Staddon says Fox is still waiting to see the results before determining the future of delayed releases. But he does believe that, industry-wide, more studios will try to do that as a way to protect their VHS rental dollars.

"If they don't do that, they will try something else," he says.

Another option studios are exploring is revenue-sharing. Warner's Warren Lieberfarb has gone on record to say that he believes revenue-sharing will ultimately be applied to DVD as well as VHS, and just recently NetFlix, the online DVD rental shop, signed DVD revenue-sharing deals with Warner and Columbia TriStar Home Video.

Fox's Staddon says he's not sure about revenue-sharing for DVD. He won't rule it out, but "there are a lot of hurdles" to leap before anything like that can come into play permanently. He predicts the industry as a whole will be grappling with this issue all throughout 2001.

Ultimately, some studio executives predict a two-tiered pricing structure mirroring that of VHS, although they concede the market will have to become a lot bigger than it is today.

Even then, many experts question whether DVD will ever follow the VHS model due to studios' reluctance to tamper with the successful sales model.

"If it ain't broke, don't fix it," says one studio executive.