Home entertainment: new formats, old habits
The lucrative movie rental and retail business is under siege; with increased broadband access, piracy may soon be as ubiquitous as the PC in Australian homes. Of course, industry has a plan. Laine Lister writes.
To say that the home entertainment industry has hit a hurdle on the path to profits would be something of an understatement.
While consumers have spent big on HD screens and sound systems, they have become less extravagant in their game and movie purchases. In addition, file-sharing websites are more prolific than ever before.
It’s an unhappy combination that has dawned on industry that the situation isn’t going to improve without fundamental changes to the way it delivers movies. Having learned from the mistakes of the music world – which was long in denial of the volume of illegal downloads – movie distributors are on the front foot to counteract consumer lifestyle changes. Some are exploring digital copy – a portable version of a film that can be transferred to portable devices, others are using day-and-date video-on-demand and many are establishing in-house units to tailor digital release strategies for their titles.
The good news is that it’s working. DVD and Blu-ray retail sales have already reached $1.2 billion in value (and over 63.6m units) this year with several months spending including the Christmas period still to be accounted for. That’s a growth in value of 3.27 percent since 2008, when consumers clocked up $1.1 billion, according to market research firm GFK Retail and Technology Australia statistics.
The market value was $1.0 billion in 2007, less in 2006, $0.9 billion; a trend in the right direction for the home entertainment industry.
An Encore poll of distributors and rental operators has also revealed slow but steady growth in sales/rentals across the board for the 2009 calendar year.
Roadshow Home Entertainment sales grew by 1.2 percent (MAT) during the period, and while it’s not the double digit growth it’s used to, the distributor has been resilient, given the shaky economic climate.
Brandon Hill, Roadshow’s group sales director for Australia and New Zealand Home Entertainment, says: “In the DVD category we haven’t seen the same double digit growth that we have over the last couple of years. If you look back from November of last year, consumer spend has certainly been affected by the global market”.
The same was true at Twentieth Century Fox Home Entertainment, when Encore spoke with managing director Chris Dunn.
“We’re still seeing healthy numbers flowing through. Naturally, sales move around with the slate, but we’re still happy with how things are going,” he says.
The exception to the rule was Victorian-based distributor Umbrella Entertainment, which tracked 10 percent growth in overall sales in the last 12 months by generating new revenues from old titles.
“In the DVD market, our strength is our library/catalogue,” says managing director Jeff Harrison.
It’s little wonder that British ITV Studios signed a deal with Australia’s Beyond Entertainment last month to bring a portfolio of its digitally restored feature films to Australia and New Zealand to cash in on the lucrative market. Those titles will be available on Blu-ray. At the time, Beyond Entertainment general manager Phil Maddison said in a statement: “Demand for classic and cult feature films continues to be strong in the home entertainment market particularly with the solid growth in the household penetration of Blu-ray compatible devices and HD displays”.
STILL RENTING
From a rental perspective, the shift in consumer viewing habits has been barely perceptible, according to Keran Wicks, chief executive of Network Video and board member of the Australian Video Rental Retailers Association (AVRRA).
“What we’re finding is that people are bringing all the new technologies and the new ways to consume movies into their existing movie habits,” she says.
“The high-end users consume in every way; they’ve got Foxtel, they go to the movies, they download, they’re on iTunes, they rent as well and they buy. We’re sure that will continue,” she explains.
Like all the video stores, Network Video has re-jigged its offering to keep in kilter with consumer appetites. Naturally, most of the old VHS tapes have been replaced by DVD and now Blu-ray has been encompassed into the mix. The result? Australians are still renting, Wicks insists.
“AVRRA has produced a white paper [released in November 2009] that showed this year is 4 to 6 percent up on last year and we’re projecting the same growth for next year,” she says.
The future of the rental stores will lie in their ability to innovate and stay relevant to the market, says Umbrella’s Harrison.
“These proprietors run their operations well and cater for their customers’ needs. I think their future in the medium term is certainly secure,” he says.
Fox’s Dunn agrees: “There will always be a place for the rental stores”.
“We love to shop, we love to browse and the rental store is part of our shopping habit. I’m certain there will be many changes to us as shoppers and as long as the rental store evolves with us, I’m certain there will be a place for them,” he says.
VALUE OF CONVENIENCE
An emergence of online home entertainment services, including QuickFlix and Telstra’s Big Pond Movies, has seen operators in this space profiting from customer demand for convenience and low cost. Boasting free home delivery, no return dates or late fees, a larger catalogue of films than most rental stores (QuickFlix has over 37,000 titles) and the convenience of shopping at home, these rental sites are proving popular with consumers.
For instance, QuickFlix delivers over a million DVDs each year and claims to have doubled its subscriber base in two years.
Last month it added a sixth Australian distribution hub at Hobart, Tasmania, which coincidentally will be first state to upgrade to high speed broadband under the National Broadband Network initiative.
Also cashing in on the convenience trend is Australia’s movie vending machine company, Oovie (formally Instant DVD). It’s a network of automated DVD machines placed in heavy traffic areas such as supermarkets and shopping centres. A customer uses a touch screen to select a new release from the machine’s 300 discs, deposits $2.99 (per night of hire) by credit card before it dispenses the film through a slot.
RFID-tagged (radio frequency identification) movies can then be returned to any one of the network’s 80 (soon to be 200) lime green machines in Sydney and Melbourne. And Oovie’s ‘just-keep-it’ policy means that each day’s rental accumulates to an outright purchase at a total cost of $36 to the consumer.
“Far less than 1 percent of our customers buy DVDs from keeping them for the two weeks. The average time people rent our movies is very close to one day, so the great majority of our customers are renting overnight for $2.99 and bringing them back the next day,” says Oovie co-founder Ian O’Rourke.
The machines are updated weekly with new titles and each ‘kiosk’ is mapped and loaded with movies designed to suit the renting demographic of the area.
“It’s matched to a particular area, so there might be up to 15 copies of a particular new release [at one point] and as time goes by we’ll reduce that down to as little as one copy,” he says.
The Australian company was established in 2004/05 by O’Rourke and business partner Andrew Evetts, and acquired by the Hoyts group in October this year. With only 10 staffers and the remainder of operations outsourced to an aggregator; a machine maintenance firm and the re-stockers responsible for filling Cadbury and Nestle vending machines; Oovie is turning a tidy profit, according to O’Rourke.
“We have a much lower cost base [than rental stores], our machines are very busy and they are turning over every day – the movies are out a lot of the time,” he insists.
“It plays on the value of price and convenience – we have the best value rentals at $2.99 and we’re in the most convenient locations that our customers are already visiting,” he adds.
DOUBLE-EDGED SWORD
It’s a rare bird these days that doesn’t feel a little belt-tightening, what with the recession, currency fluctuations, and the rising cost of living. And it’s the growing demand for low cost and convenience that is driving consumers online.
Just about any movie can be found and downloaded– legally or not – by simply typing the title into the search field of a peer-to-peer file-sharing site.
For the most part, distributors are embracing (legal) downloads as a new platform to connect with consumers, and most are investing heavily to capitalise on the changing landscape.
“From a Roadshow perspective, we’d be open to any and every piece of technology that comes our way, we always see it with interest,” Hill says.
At Fox, Digital Copy (DC) has been applied to each of its key releases for the final quarter of the year, including its biggest hits of 2009, Ice Age: Dawn of the Dinosaurs, Night at the Museum: Battle of the Smithsonian and X-Men Origins: Wolverine. The distributor is absorbing additional costs.
“Digital Copy is a fantastic and legal way for consumers to enjoy their favourite titles anywhere they like and without horrendous download charges or hours of waiting,” says Dunn.
To activate the DC, a consumer enters a code online that unlocks the file and allows them to transfer the film in minutes to their PC or portable device.
Many of the distributors are exploring other legal download options. But for every legally downloaded video file, there are five illegally downloaded ones, according to findings made by US consumer and retail information company, the NPD Group.
It found that nine in 10 legal movie downloads took place on Apple’s iTunes Store, and that 60 percent of illegally downloaded files were of ‘adult only’ content.
But until the Government rolls out its planned $44 billion investment in the broadband network, and the speed and cost of the internet improves, downloads will
not replace the physical medium.
“The infrastructure has a long way to go before we are anywhere near a reality in terms of [legal downloads] being mainstream,” says Hill.
Dunn adds: “Blu-ray files are massive. A Blu-ray disc contains up to 50GB of data versus 9GB on a DVD. Even with compressing, a HD title will take up around 4.5Gb, that’s a lot to transfer over Australia’s slow and expensive broadband network”.
“But at the same time data requirement of future technology, such as 3D, will ensure that there will be a place for the physical medium,” he adds.
DVD VERSUS BLU-RAY
For now, however, DVD is still the major format consumed at both a rental and retail level, and will be for many years to come, says Network Video’s Wicks.
Blu-ray on the other hand, accounts for only 1.7 percent of the total volume of discs sold in Australia. This compares with DVD’s 98.3 percent market share, says Roadshow’s Hill.
However, it is progressing as a format and hardware penetration rates have escalated from 2 percent in early 2008, to 5 percent by the end of that year, and are now sitting at around 7.8 percent, according to Hill’s figures.
It’s a case of supply and demand for distributors of Blu-ray (so named for the blue laser used to read the discs).
“It’s still early days [for Blu-ray production] and it’s difficult for anyone to get economies of scale when [the number of discs manufactured] is that small,” he says.
Wicks puts it like this: “Blu-ray is an evolution not a revolution. DVD over VHS was a revolution – you’d never seen anything like it; everybody was frenetically getting into DVDs whereas it’s a slower uptake with Blu-ray. Evolutions take a little longer.”
This year, Sony and Santa are set to be the unlikely creative partners in driving Blu-ray penetration rates. Sony, with its bundle deals and newer, more affordable slimline Playstation 3 (with Blu-ray capability) is gearing the technology towards Christmas shoppers.
That, plus more competitive pricing on the Blu-ray disc itself it expected to promote significant growth in the sector.
“The other thing we have to keep doing is educating the market and there’s a working committee in the DVD industry promoting the benefits of Blu-ray,” Hill says.
Network Video’s Wicks has similar expectations for Blu-ray’s summer sales.
“We’ll see a bit of a swing shift this year and you’ll be able to get far more product next year; we’ll probably see double digit penetration figures,” she says.
Distributors’ abandonment of special features on DVD for Blu-ray is another tactic employed to drive Bluray uptake. Australia and X-Men Origins: Wolverine were loaded with featurettes and other extras on Blu-ray, but their DVD versions were rather anemic in comparison.
Has the strategy worked?
Fox’s Dunn says that with each new release he has witnessed increased conversion to Blu-ray.
“20 percent of X-Men Origins: Wolverine sales, for example, were on Blu-ray. Sure, we’re loading up the Blu-ray discs with extra features, but Blu-ray is the premium product,” he says.
Like Umbrella Entertainment, Fox is generating new income from its older titles on Blu-Ray. In November, it relaunched Braveheart (1995) and Fight Club (1999) on Blu-ray with enhanced visual and audio quality, new features and Blu-ray Live capability (internet connectivity that provides access to further web-based special features).
“I don’t think the fans will be too disgruntled [about DVD abandonment of special extras], rather enthused about the new format,” Dunn says.
As for renters, a film’s special extras are not the motivating factor to hire a movie, says Wicks.
“The vast majority, and I mean 99 percent of our customers, just rent for the movie and we’re certainly not seeing a trend that’s driving them to buy Blu-ray for the special features,” says Wicks.
As for the remaining 1 percent, it’s most often the ‘high-end’ consumers watching a film with director’s commentary, and laughing through the deleted scenes, she says.
Serhat Caradee, director of Cedar Boys, counts himself in that statistic and insists that special extras help secure his purchases.
“As a filmmaker with an interest in the craft I love hearing other filmmakers speak about their work and the process of making films,” he says.
Cedar Boys was released on DVD and Blu-ray on December 9 and both formats are loaded with special features.
For Caradee and many smaller budget filmmakers, home entertainment sales are largely compensating for a lacklustre box office result.
“The theatrical market is tough at the moment – tougher than it’s ever been,” Caradee says.
“One thing that we’re really hoping is that we’re going to be able to start returning some money to our investors, and of course ancillary sales like DVD can really add a significant boost to a low budget film’s ability to recoup,” he adds.
For some of his peers, direct-to-DVD release is losing its former stigma. It’s even becoming the preferred release strategy over pursuing a cinema release for some, particularly in the case of films that have a very niche audience.
“The consumer is a lot smarter now in realising we don’t have the number of screens in Australia that they do overseas,” says Wicks.
“We go out of our way to promote them and make sure consumers know ‘here’s a good movie you’ve never heard of’ and they do phenomenally well,” she says.
Happily, all distribution channels are working in unison to ensure the entertainment industry continues to grow in 2010, fuelled by a strong summer slate.
As Wicks says: “A great theatrical slate leads to a great rental slate, which leads to a great retail slate as people consume more. It’s a good news story”.
