Home video revenue stops falling

Hollywood’s era of plummeting home entertainment revenue is finally over.

After seven straight years of falling returns driven by the collapse of DVD sales, Americans in 2012 spent more money watching movies at home than they did the previous year, according to data to be released Tuesday.

The 0.23% rise, to just over $18 billion, is tiny, and it’s a sign more that the business is “stabilizing” than that it’s booming again, in the words of Craig Kornblau, Universal Studios’ home entertainment president.

But after years of decline that saw annual revenue drop $4 billion between 2004 and 2011, it indicates that studios’ digital strategy is starting to pay off.

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“What we have finally seen in 2012 is that some of the newer businesses [are] offsetting declines in the DVD business,” said Ron Sanders, Warner Bros.’ home video president. “That’s critical because whether or not our film business is profitable depends on how well it does on the home entertainment side.”

More than half of a typical movie’s revenue comes from the home entertainment market. Rapid declines in that category over the last seven years have led studios to lay off thousands of employees, slash deals with producers and make fewer films.

To be sure, 2012 did not come close to the glory days of the mid-2000s, when even box-office turkeys turned profits thanks to consumers snapping up DVDs from the checkout line at Target or Best Buy. Budgets remain tight across Hollywood, and many doubt that new technology will prompt another gold rush.

“Consumers are choosing different ways to watch our product, and we’re not going to see any one of them go back to historical levels,” said Dennis Maguire, Paramount Pictures’ home entertainment president. “But we’re going to look at all the different ways we deliver our entertainment and therefore different ways to measure success.”

For years, studio business executives have hoped that new ways to download and stream movies from the Internet would make up for declining interest in watching them on discs.

That finally happened in 2012, as the rapidly growing number of televisions connected to the Internet and the widespread adoption of tablets and smartphones gave consumers reason to buy or rent from Netflix Inc., Apple Inc.’s iTunes and Amazon.com Inc.

Over the last several years, while sales of DVDs fell, the only growth categories were those that generate the least profit for studios: inexpensive rentals from Netflix and Redbox.

In 2012, spending on DVD subscriptions dropped 28%, while the growth of kiosk rentals was 16% compared with 31% in 2011, according to the Digital Entertainment Group, an industry trade association.

More profitable digital movie purchases, meanwhile, shot up 35%, more than triple the growth rate of the category in 2011.

“The operating margins for studios are growing even faster than the overall home entertainment business, thanks to Blu-ray and digital, which are growing dramatically,” Lionsgate President Steve Beeks said.

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Spending on high-definition Blu-ray discs, which generate larger profits for studios than standard DVDs, rose 10% in 2012. That’s half as much as the category’s 20% rise in 2011 but still significant at a time when sales of standard DVDs remain in free fall (the Digital Entertainment Group declined to specify how much DVD revenue dropped last year).

During the fourth quarter, total home entertainment spending dropped 1.5%, driven by slowdowns in the growth of Redbox kiosk rentals and Netflix online subscription streaming.

Online purchases of digital copies jumped 50% that quarter. But those purchases accounted for only about 5% of overall home entertainment spending.

To grow that number further, studios and electronics manufacturers are expected to announce plans at the Consumer Electronics Show in Las Vegas this week to promote Ultraviolet, a technology that allows consumers to store digital copies of movies in the cloud.

It’s one of several steps that movie makers are taking to reduce reluctance among less tech-savvy consumers to buy and watch movies online. Wal-Mart Stores Inc.’s online movie store Vudu and Best Buy Co.’s CinemaNow have recently announced plans to charge consumers only $2 to convert DVDs they own into digital Ultraviolet copies from their home computers. Previously that could be done only at Wal-Mart locations, an offering that didn’t prove too popular.

Studios are also likely to accelerate a trend that started last year in which movies are offered for sale online before they can be bought on DVD, a strategy meant to encourage fans to go digital.

“This is the era of experimentation,” Kornblau said. “We’ll all be experimenting with timing and pricing to try and goose consumers’ interest in growing digital libraries.”

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