The Film Industry and DVDs

In 2002 the worldwide Home Entertainment business, encompassing video and DVD, was
worth $46 billion dollars globally (split - video $20 billion; DVD $26 billion), which made it
as valuable as the entire music industry. Some $15.9 billion (35%) of this total was
accounted for by the international market (including the UK), with the US accounting for the
other $30 million. It is expected to grow to $62 billion by 2006, of which video will account
for just $6 billion, and DVD $56 billion. The international market is projected to slightly
increase its share to around 38% of the total ($23.4 billion).

The key international markets Home Entertainment are the UK, Japan, France and Germany
which between them account for more than 60% of international revenues and reflects the
higher penetration of sales of DVD players in these territories: in the UK in 2003 44% of
households have DVD players (or other hardware that can play DVDs) and this is set to rise
to 114% by 2006 - ie. an average of more than one player per household.

The Home Entertainment business is now worth twice as much to the studios as their cinema
business although commercial success at the Box Office is still crucial to making money in
DVD sales.

The rental proportion of this market in 2002 was around 30% and this is expected to fall to
20% by 2006. The studios are keen to continue to support the rental business because it
brings them higher margins than retail, but it does appear now to be in decline. In the UK the
market is fragmented, with one major player (Blockbuster) generally dominating the large
number of smaller outlets. The rental window is already closing, with DVD releases
happening nearer and nearer to the rental release date, and in an increasing number of
instances, the studios are going day and date with retail and rental.

 The DVD market is expected to continue to achieve dramatic growth over the next
few years. Pressure on retail prices, however, will mean that the total value of the
business may eventually start to fall even though sales volumes will still be growing.
 Windows of exploitation will close over time in an effort to ward off the impact of
piracy and to improve cash flows to the studios.
 By 2008, every household in the UK will have at least 1 DVD player
 Good extra features are becoming increasingly important as a means of selling DVDs
and maintaining margins.
Issues for DVDs in the early 21st Century
Windows of Exploitation - In 2001, the average timetable for roll out of a film from
theatrical release to free television was around 30 months. In 2008, this has shrunk to as little
as 20 - 24 months. All other revenue opportunities have shrunk:

 Video Rental - 2001: 6 months 2008: 4 months

 Video Retail - 2001: 12 months 2008: 4-8 months
 Pay per View - 2001: 18 months 2008: 7-12 months
 Pay TV - 2001: 24 months 2008: 10-18 months

This change in pattern is partly to combat the effects of piracy which is proving to be a huge
problem in certain territories, but also to boost the studios' cash flow by reducing the amount
of time it takes for them to see revenues from further along the value chain.
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‘Fast Burn’ Sales - 50% of new DVD sales are generated in the first month of release.
Getting the in-store point of sale materials and displays right is crucial to the studios if they
want to maximise sales of their top titles.

Release Days - Traditionally new videos and DVDs have been released on a Monday.
Distributors are now looking to move key releases to a Thursday or Friday to make best use
of their major marketing campaigns immediately before the heaviest buying days (50% of
DVD sales take place on Friday and Saturday).

Pricing - DVD retail prices are falling much faster than was the case with CDs. In the UK,
CD prices fell 13% in the first 6 years after their introduction; DVD prices have fallen by
19% in just three years. This is the result of some aggressive market by the majors who have
priced very aggressively to boost sales and consumer behaviour: research suggests that a
40% drop in retail price can lead to a 3,4 or 5 times lift in unit sales. To maintain their
profits, the studios will have to reduce their costs of sales by reducing the additional cost of
marketing DVDs by reducing the gap between cinema and DVD release - or develop more
premium priced products by improving the extras supplied on the disc.

DVD Extras - Extra features on DVDs are becoming increasingly important to differentiate
products in the market and to generate premium pricing. Reviews of DVDs often focus on
the extras and consumers are increasingly expecting them - research has shown that the
presence of good quality extras increases the consumer's intention to buy the disc. To ensure
top quality extras, it is essential to plan their content at the film's pre-production stage and
get endorsement for them from the producer and director of the film. Additional footage
might need to be shot on set or produced during post-production. Finished bonus material
needs to be delivered before the film's theatrical release so that it can be factored into the
DVD's release schedule.

Piracy - The MPAA estimates that piracy is currently running at 20% of the total DVD
market and is likely to get worse with the increased domestic take up of broadband. The
studios are considering technical solutions to help combat this problem but their main
weapon may be closing exploitation windows to reduce the time available for pirated copies
to circulate.

Marketing - Mobile Phone Campaigns - There are 290 million mobile phone users in
Europe - 100 million of whom are under 25. This makes text-based campaigns ideal for
movies that are aimed at the younger market. Online Campaigns - People spend
approximately twice as much time online each day as they do reading a newspaper. £7
billion of transactions are carried out on the internet each year (excluding pornography) and
DVDs are the most popular item purchased online. Many DVD buyers do their research
online even if they buy through traditional outlets.

And in the future…

Digital Delivery

There is little doubt that at some point in the future, all films will be distributed and screened
digitally. The big question is when this revolution will take place. The digital roll-out will
involve a huge capital investment and, although the benefits will be enjoyed by both
exhibitors and distributors, it is not yet clear who will pay for the necessary investment.

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There are also still issues to be resolved over security - with piracy an increasing problem,
the transmission mechanism for the digital output will need to be 100% secure. The different
methods of transmission available - satellite, cable and data file - will have to be assessed
against this criterion but also for their ease of delivery and relative costs.

Day and Date Distribution

With the various exploitation windows closing, there is an increasing trend towards films
being released internationally on the same day as (or close to) their North American release.
This has the advantages of reducing the opportunities for piracy; enabling marketing
campaigns from the US to roll over into other territories; and allowing earlier exploitation of
other windows. On the other hand, day and date releasing requires more prints and means
that marketing spend must be committed internationally before the studio knows how the
film has played in the US. It also reduces the time that the distributors have for sorting out
dubbing, classification and other issues in each territory and makes it less likely that the
talent will be available to promote it in as many markets. In practice, decisions on release
pattern will continue to be taken on a film by film basis, with release dates generally moving
closer to the initial US release.

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