Hollywood's Home Entertainment Problem

Shoppers may be snapping up Harry Potter box sets for stocking stuffers, but that's not enough to stop the dizzying decline in DVD sales.

Simon Dawson | Bloomberg | Getty Images

Hollywood has a problem: home entertainment sales -- both DVDs and digital downloads -- dropped 13 percent in the first three quarters of the year. Consumers actually spent more overall in the third quarter on home entertainment.

The problem is that they're shifting from high margin purchases to low margin subscription services, which showed 19 percent growth in the first three quarters, and kiosk rentals, which showed 34 percent growth.

Studios all agree that they want to convince consumers to *buy* rather than rent, they just can't agree on how to go about doing that, especially when it comes to timing.

Sony's betting the earlier the better -- it recently started selling digital movie downloads two weeks before DVDs hit stores and it slashed digital prices by two dollars. Sony's first test with "Bad Teacher" was a huge success: John Calkins, Sony Pictures Entertainment's EVP of Global and Digital says that offering digital downloads before other home entertainment options lifted digital sales 25 percent, shifting the revenue mix towards ownership. The idea is to release the home entertainment option closer to the theatrical release's marketing blitz. Plus, it encourages consumers eager to watch a movie at home to try the still new digital purchase option.

But market share leader Warner Brothers is taking a different tactic to protect sales-- it's focusing on delaying rentals. It is negotiating to double the amount of time between when its DVDs go on sale and when Redbox and Netflix can rent them from 28 to 60 days. Right now Warner Brothers refuses to sell discs to Blockbuster, because the chain wouldn't agree to wait 28 days before renting.

And Warner Brothers believes that making purchases more appealing isn't just about timing-- it's counting on the cloud to increase the value proposition of ownership. Warners is the only studio that's released discs in Ultra-Violet, the services that gives consumers access to anything they've bought from anywhere.

Studios divergent approaches is confusing, and potentially problematic. If consumers don't know where and when they'll be able to find movies they actually want to buy, they're likely to turn to their Netflix or Amazon Prime subscriptions to quickly and easily stream a second choice. Forrester Media Analyst James McQuivey says the crucial thing for the future of home entertainment is making purchases so easy and accessible, consumers won't think twice.

And that hinges on how many companies get on board with the cloud-- and I don't just mean studios, but retailers like Apple , Amazon, Google , and even WalMart . If everyone agrees to make purchased movies available anywhere, that'll be a game-changer for what Hollywood calls the "digital sell-through" model.

While studios await retailers' cloud-based digital movie stores, there's another looming question. What will happen to the highest margin rental option -- premium video-on-demand? This spring DirecTV experimented with thirty dollar movie rentals as little as sixty days after a theatrical release. Four studios were on board -- Sony, Universal, Fox , and Warner Brothers -- but theater chains weren't too pleased, and we haven't seen any broad video-on-demand tests since then. In fact, Universal's attempt to offer 'Tower Heist' on premium video-on-demand drew such backlash from theaters, the studio cancelled the test. The studios agree that for premium video-on-demand to work, all the studios have to be on board to prevent theaters' retaliation. While we're sure to see more movement in this arena, for now at least, none of the studios are willing to risk jeopardizing the theatrical window.

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