Gary Dretzka
Noah Forrest
Leonard Klady
David Poland
Douglas Pratt
Ray Pride

LAS VEGAS – After eight years of spectacular growth, the sky-rocketing business of renting and selling DVD products has cooled its jets and made a soft-landing back on Earth. In its annual state-of-the-industry report, issued over hors d'oeuvres Thursday night in a Bellagio Hotel ballroom, the Digital Entertainment Group announced that consumer spending for DVDs was up merely 8 percent from last year’s numbers.

Not bad, by most standards, but the same Chicken Littles who hyperventilated over sluggish ticket sales for theatrical films in 2005 – declaring the movie industry to be in a “slump,” without offering much beyond raw domestic box-office numbers as proof – have already begun using the report to question the future of DVD. If the sky over Hollywood is falling, however, it won’t be because the public has grown tired of the movies, music and television delivered on those shiny little discs.

Indeed, retail sales of DVDs grew 5 percent to $16.3 billion in 2005, with unit sales up 10 percent over 2004. Consumers also spent $6.5 billion renting DVDs, an increase of 14 percent.

The damning statistic that’s found its way into the business reports of the cable news shows is the one that indicates the growth of the entire home-video industry was “relatively flat” year-over-year. After combining sales and rentals of DVD and VHS products, the tally was $24.3 billion. This represented a loss of $200 million, all of which can be attributed to the phasing out of the old cassette-based technology.

According to figures compiled by the DEG, some 37 million DVD players were sold to U.S. consumers in 2005. Nearly 17 million DVD players were shipped in the fourth quarter, alone. How many of these appliances were purchased as replacement or additional devices, of course, remains unknown.

The DEG estimates that more than 164 million DVD players have been sold to consumers, since 1997. When taking into account DVD-capable video-game consoles and PCs, the number of households with the capability of playing DVDs now is at 89 million. Of these, less than 20 million rely solely on the "set-top box in the living room" model.

By comparison, domestic box-office returns for 2005 were down roughly 5 percent from 2004, to about $8.9 million (the MPAA won’t release its numbers until March). Individual ticket sales are expected to show a decline of around 7 percent, as well.

Clearly, if Hollywood isn’t making its nut at the front entrance, what money comes in through the back door is more than enough to keep southern California Mercedes dealers in clover. Neither do the numbers announced at the International Consumer Electronics Show reflect income from foreign markets.

Expectations of Wall Street analysts, studio executives and media observers have become such that anything under double-digit growth across-the-board is cause for alarm. Better to save the wrinkled brows for Uncle Sam’s ability to afford a two-front war, hurricane relief and ballooning energy costs, while simultaneously cutting the taxes of the country’s wealthiest citizens. Congress would kill to have Hollywood’s problems, right now.

The reasons cited for the slowing of growth in the DVD marketplace, according to DEG officials, has more to do with cut-throat pricing practices than any lack of enthusiasm among consumers. While ticket prices continue to climb, the cost of owning and renting DVDs (the format was originally intended as a sell-through medium) declines, as do prices for playback units.

The biggest question mark on the horizon comes in the form of the consumers’ willingness to embrace higher-resolution hardware and software, especially in the face of a vexing format war. Controversy surrounding the long-delayed introduction of HD-DVD and BluRay technology doesn’t bode well for a successful launce, when hi-res products finally hit the marketplace, perhaps as early as March.

The exhibition floor of CES was awash in video monitors demonstrating the outstanding visual quality and special interactive features of both formats. These improvements leave no question that either format would advance the medium aesthetically and provide hours of pleasure to consumers.

Retailers, however, fear that their customers will be turned off by the studios’ inability to agree on a single format, and confusion over which movies will be on what format will trump the benefits of an extensive marketing campaign. Thursday night, at the DEG reception, representatives of Target and Best Buy urged manufacturers and studios to make the process as painless as possible for the public. (The DEG has pledged its support for just such an educative effort.)

Even though the added interactive features and brilliant look speak for themselves, hi-def won’t be easy to shove down the throats of consumers. Sure, the advanced playback units also will be capable of showing standard DVDs – it’s called, “backward compatibility” – one hi-def format won’t work in the other’s appliances. With prices expected to range from $400 to $1,200 per unit, consumers will hardly be in the mood for another Beta-VHS stand-off.

When the products begin appearing in March and April, there likely won’t be more than a couple of dozen titles available, anyway. More will come, in a hurry, but consumer fear of contracting the dreaded “buyers remorse” could stall the kind of volcanic growth expected by cheerleaders for the consumer-electronics industry.

If sales aren’t through the roof early, analysts will kick the format around like they did King Kong, which didn’t perform up to their expectations on opening weekend. If this multibillion-dollar technology becomes the victim of bad media mojo, a “slump” would be the least of its investors’ problems.

January 6, 2006
- Gary Dretzka

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