Double Slump Gives Video Industry Pause

Some movie theater patrons have taken to shouting “Video!” during previews of films they deem unworthy of spending $7.50 on.

Unfortunately for the video industry, Mr. and Ms. Loudmouth haven’t actually been showing up at the video store. For the first half of 1997, video rentals and sales were both down, the first time they have slumped in tandem. For January through June this year versus the same period last year, rentals were down by more than 8%, according to VSDA VidTrac. Sales were down 4%, according to Videoscan.

Though rentals have fallen before (in 1995, though not as badly), and it’s no secret that retailers such as Blockbuster are suffering, the newer “sell-through” market--videos priced low to sell directly to consumers--has always been seen as a bright spot. Now it looks as though it too has flattened.

As the Video Software Dealers Assn. convention--the industry’s biggest annual event--kicks off in Las Vegas today, the weak numbers will be a major subject of discussion. Video executives generally are blaming the slump on a lack of big titles; they’re predicting a major upswing later this year. But they’re also looking for new ways to create a steadier stream of product.

Says Jeff Eves, president of the VSDA: “It’s been a damn rough first half, there’s no denying it. But I think there is light at the end of the tunnel, starting in the third quarter, which is upon us now.”

Eves contends the main problem is the product. “This year we had eight titles come into the home video market that did $30 million or more at the box office. Last year there were 16,” he says.

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But as a representative of video retailers, Eves also says there are other problems that may be affecting the numbers. “Because of all the increased advertising today for expanded pay-per-view and satellite systems, many consumers today no longer understand that video is the first place a movie comes after its theatrical run.”

This issue of “windows”--the amount of time video retailers get to exclusively sell a movie before it goes to television and other exhibition forms--is expected to be a hot topic at the VSDA convention, along with the general slump in business.

But windows don’t have as much effect on the children’s video sell-through market, which Walt Disney Co. has traditionally dominated. Here again, executives are blaming a lack of strong titles.

“It’s a matter of product flow,” says Louis Feola, president of Universal Home Video. After a great first half in 1996--with releases including family hits “Babe” and “Balto”--Universal’s first-half 1997 business, along with that of Disney, Fox and other companies, fell off markedly.

Universal and Disney have become leaders in creating mostly animated titles that get released on video, bypassing theaters. Universal has released four animated “Land Before Time” sequels direct to video, with a fifth due in the fall. An animated “Hercules and Xena” video--an extension of Universal Television’s live-action shows--is also due in the fall. In addition to providing a steady stream of product, such titles tend to be perennial sellers.

Columbia TriStar Home Video President Benjamin Feingold says his company should soon announce its entry into direct-to-video. Columbia TriStar’s sell-through business was up for the first half of 1997 on the strength of such family titles as “Matilda” and “Fly Away Home.”

Meanwhile, 20th Century Fox Home Entertainment is also getting ready to make the leap. In August, Fox will release an animated/live-action “prequel” to “Casper,” the 1995 theatrical release from Universal.

Such releases as “Independence Day” and the “Star Wars” trilogy propelled Fox’s sell-through business last year. The company is likely to dominate third-quarter 1997 sell-through with its release of the “Star Wars Special Edition” set (the revamped trilogy that was released theatrically this year).

Jeff Yapp, president of Fox video, also expects the video business to shoot up in the fourth quarter, when this summer’s blockbusters (real or would-be) start hitting stores.

“It’ll be the first time you’ll have a lot of pictures that had $20-million, $30-million ad campaigns and weren’t in the theaters that long,” says Yapp. “I think it will be good for the video industry; people will have a number of movies they want to see on video, that are top of mind.”

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Even so, the video industry is becoming painfully aware that it has become a mature business and may have to look for new solutions to regain its momentum.

Overbuilding has dealt a blow to video specialty stores, particularly Blockbuster. Says Derek Baine, an analyst with Carmel, Calif.-based media research firm Paul Kagan Associates: “There are too many stores. It’s exactly what happened two years ago with the music industry. The Wherehouse, Blockbuster Music, Musicland . . . everyone was building stores.

“Then all of a sudden, to everyone’s horror, the music business went sour. Blockbuster retreated, the Wherehouse filed for bankruptcy, Musicland is having a lot of trouble.”

Baine says the most rosy estimates for VHS sell-through growth are now a small 5% per year. The digital videodisc (DVD) is one thing that may radically improve that number, should all the studios get on board and consumers embrace it.

Currently, Time Warner, MGM, New Line Cinema, Columbia TriStar, PolyGram, Live Entertainment and several smaller firms are in DVD. Universal, Disney, 20th Century Fox and Paramount are still holdouts, voicing concerns over cost, format and piracy issues.

Since their introduction in April, 162,000 DVD movies have been sold, according to Videoscan. That’s only several weeks’ worth of sales in seven top U.S. markets; on Tuesday, Warner (which also distributes MGM, New Line and HBO titles) announced it will roll out national distribution in the fall.

Paul Kagan Associates recently predicted the DVD players will penetrate about 50% of the U.S. market within a decade. The current figure for VCRs, by comparison, is about 90%, so the VHS format is not going away any time soon. But DVD offers the studios both the same kind of replacement market that music companies tapped into with the introduction of the compact disc, and the same higher margins that the record companies got on CDs versus vinyl.

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But as the state of the music business shows, nothing is forever. Video executives say they’re competing for limited free time, against compelling new distractions such as video games and the Internet (which lures away mostly high-propensity moviegoers).

Like all entertainment companies, video firms are looking to overseas markets while continuing to work on building steady business domestically.

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The Big Hits Got Smaller

Sales of top titles have fallen off the most so far this year, with total sales for the top 10 down 27% from the first half of 1996. Small, non-charting titles were up nearly 7%, an indication of a product glut. Top-selling titles, first-half 1997 versus first-half 1996, in millions of units:

As of June 29, 1997

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Sales Movie (studio) (millions) 1. Bambi (Disney) 3.5 2. Space Jam (Warner) 3.0 3. The Hunchback of Notre Dame (Disney) 2.7 4. 101 Dalmatians (Disney) 2.7 5. Jerry Maguire (Columbia TriStar) 1.9 6. Matilda (Columbia TriStar) 1.1 7. Fly Away Home (Columbia TriStar) 1.1 8. Harriet the Spy (Paramount) 0.8 9. The Land Before Time IV (Universal) 0.8 10. Toy Story (Disney) 0.8 Total top 10 18.3

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As of June 30, 1996

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Sales Movie (studio) (millions) 1. Babe (Universal) 5.3 2. Pocahontas (Disney) 4.6 3. The Aristocats (Disney) 3.0 4. The Many Adventures of Winnie the Pooh (Disney) 2.3 5. Jumanji (Columbia TriStar) 2.2 6. Waiting to Exhale (20th Century Fox) 2.1 7. The Indian in the Cupboard (Columbia TriStar) 2.0 8. Ace Ventura: When Nature Calls (Warner) 1.6 9. It Takes Two (Warner) 1.1 10. Star Trek 7: Generations (Paramount) 1.0 Total top 10 25.2

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Source: Videoscan

Note: Does not include sales at discount retailers such as Wal-Mart, supermarkets, drugstores and other nontraditional video retailers, which may represent more than half of overall video sales.