By Ronald Grover The story about the continuing slump at the box office is getting old. After 19 weeks of faltering ticket sales, the market seems to be creeping out of its death spiral with a modest hike following the arrival of Fox's Fantastic Four film. But a new story is picking up steam in Hollywood -- the once red-hot DVD market is cooling off faster than the moguls might have expected only months back.
Pixar (PXR) announced on June 30 that DVD sales for its blockbuster hit The Incredibles weren't as strong as anticipated. And on July 11, DreamWorks Animation (DWA) cut its earnings for the year, citing lower-than-expected worldwide DVD sales for Shrek 2, one of the biggest box-office hits of all time (see BW Online, 7/11/05, "A Scary Picture at DreamWorks").
CD PRECEDENTS. Industry folks have all kinds of excuses, some of which are even valid. With more than 80% of U.S. households now owning DVD players, growth was destined to slow down. Annual sales of DVDs are $18 billion, so the single-digit growth now being discussed isn't shabby. There's too much inventory -- read: old TV titles -- cluttering the market. And some moguls say with the box office in a funk, there aren't many hits to drive sales -- a situation they insist will change as soon as folks start getting jazzed by Hollywood movies again (as if that were easy).
But consumers have a funny way of figuring out the market ahead of the experts, as was clear from the stream of e-mail I got in response to a story I wrote recently about the DVD market (see BW, 7/1/04, "End of the DVD Party?"). Readers were all too happy to tell me why they're not buying DVDs in the same numbers as before.
It's all very reminiscent of five or so years back, when consumers first started complaining about CDs and revealed why they were buying less. Back then, they got turned onto free online songs and forced the music industry to revamp its distribution strategy -- including cutting the price of some CDs and embracing downloads.
So listen up, Hollywood. This time it's your audience talking.
HOME-THEATER IMPACT. Price was mentioned a lot. Danni Phillips, who's just the kind of customer that Hollywood no doubt wants to clone, e-mailed from Canada to say she owns "hundreds and hundreds of videos" and buys "many, many other DVDs," hanging onto some and giving others away as gifts. But she says she's cutting back because "it ain't cheap, sports fans." Philips also believes there are "lots of others who would willingly cough up the required loot to purchase what's being offered if the prices were more realistic."
Hollywood moguls are quick to say discounters such as Wal-Mart (WMT) and Best Buy (BBY) usually offer cheaper DVDs. But note to Tinseltown: If real movie lovers like Danni Phillips feel like they're getting pinched by DVDs' high cost, you have a problem. Maybe a few years back, price wasn't much of an issue. Folks got hooked on DVDs' crisp picture and ease of use. But today, lots of alternatives exist, such as "cheap DVD rentals, TiVo, and excellent video games," wrote Robbie Jena.
And then there's the dreaded home theater. While one might think that improved sales of big-screen TVs would mean more DVDs being sold, it isn't necessarily so. Everything -- even the most mundane network show -- seems more impressive on a giant screen. And such equipment make home viewing more of a group event, wrote Frances Dupuis. Family and friends sometimes gather in front of her family's giant projection screen to share videos. "If one of our group has it," she e-mailed, "then the rest don't buy it."
NET FREEBIES. Hollywood is clearly getting caught in the vise of higher prices and cheaper alternatives. The average price of a DVD may be falling -- it's around $21.15, down from $25.52 back in 1992, according to industry newsletter The DVD Release Report -- but chalk that up to the flood of old movies, one-time TV hits, and other product that studios are releasing these days, often at discount prices.
For a new release such as Fox's Robots, which comes out as a two-disk set on Sept. 27, prepare to pay $29.98. Overall, The DVD Release Report's numbers show that the retail price for DVDs of new movies has been creeping up steadily for the last five years.
What other industry would raise prices in the face of competition? The music labels realized too late that their customers were feeling burned by high CD prices when there were cheaper -- as in free -- alternatives such as Napster.
O.K., it takes far longer to download a movie than a song, and the feds are catching up with some of the most egregious pirates, but plenty of folks are still firing up their computers to download flicks. "Downloaded copies are free and not much worse than DVDs," wrote one e-mailer whose first name is Jon.
GUT-CHECK TIME. Moreover, Hollywood is angering some consumers with its longstanding practice of releasing multiple -- but not necessarily all that different -- versions of the same movie. How many people who already own a movie are really going to spend another $30 or so just to get a few more extras and a fancier box?
Geoff Glave e-mailed that he bought a DVD of The Bourne Identity and then a month later saw a "Special Edition" version at his local store with added bonus features. "If the studios would stop irritating customers like me (and my friends) with this business practice, we'd purchase more DVDs," Glave wrote. "But for now, we wait."
So here's a question for any movie moguls who may be reading: Do you really need a wholesale price of $12 for each DVD that hits the retail aisle, especially when it costs only costs $2 to press and package a DVD? That's a pretty fat margin. Sure, DVDs' huge profit margins can help offset the high cost of making films and help alleviate the risks of less-than-certain box-office prospects. But it's time for a gut check, and my gut tells me prices are too high.
HEED CONSUMERS. Is Tinseltown listening? Amy Jo Smith, executive director of the Digital Entertainment Group, a trade group that represents studios, music labels, and electronics makers, says studios take frequent consumer surveys and that satisfaction is still high. She says my e-mail sampling is too small.
I agree. No one ever said reader response is scientific or statistically valid. But if people are moved to write in about what bugs them, they deserve to have their complaints aired. So, Hollywood, pay attention to these consumers. They may not know how to make films or nurture stars, but they help pay your bills. Grover is BusinessWeek's Los Angeles bureau chief