June 6 , 2005

Why isn't anyone writing about the slowdown of DVD sales of theatrical-release movies? The DreamWorks misstep aside, the expansion of the marketplace that added more than a third to overall revenues to the bottom line of the movie business in the last five years is changing... and not nearly as treacherously at the box office as at the DVD store. As we move to the PPV/Tivo/iPod model for home entertainment, the new business will be replacing DVD sales, not really expanding the market... which is no small part of the reason why everyone is dragging their feet.

When the price of a rental and the price of "ownership" are the same, since you can burn a DVD off your Tivo or, ultimately, have thousands of movies saved to a hard drive the size of your clock radio, how will the industry account for the $3.00 it gets to split up for each buying family versus the $15.00 now? There will still be a retailer, in that distribution outlets (cable, satellite, internet) will still have a fiscal interest. But just looking at studio's returns on DVD sales, you're looking at cutting what is now the DVD sell-through market by two-thirds. That's four or five billion dollars a year that is poised to vanish... not just drop... literally vanish forever and ever. That makes the piracy issue look tiny in comparison, though it is critical to lay the groundwork to inspire audience loyalty to paying something for their filmed entertainment.

In the film business, movies are the bait for the new technologies (as in television, sports are). When DVD sell-through started, it was the big movies that got big numbers. But the business really took off when the habit of purchasing stabilized and even average movies became DVD cash cows in Home Entertainment. There are, obviously, variations on the theme. But studios can now project DVD revenue out pretty accurately as they always have domestic theatrical.

The new hope is HD-DVD, but I think it will be a disaster for the studios. A lot of people have overestimated the strength of the appetite for DVD buying. Yes, people replaced video with DVD, just as they replaced their audio tapes and records with CDs. But those were paradigm shifts. Higher quality is not a paradigm shift... it is an indulgence.

People will want to watch the best quality of home entertainment possible, no doubt. But first, they'll need new TVs. The price point is dropping under $1000 for HD televisions... so in the next few years, that will start moving forward in earnest as people replace TVs and the delivery systems for cable and satellite simplify and become less cost prohibitive. Then the price of accessory equipment (Tivos, DVD players, etc) needs to come within 20% or so of the current, very cheap accessories already on the market. At that point, HD DVDs will start getting purchased... as long as the premium on them is no more than 10% or so. But how many people will actually replace an already-owned DVD with a HD DVD? I would argue, not many.

And as that market comes within range of actually being viable, will there be direct competition from cable and satellite by then? And with similar quality available for a third of the purchase price and cheap technology to save these films on hard drives or DVDs, how many people will be interested in paying a higher price simply for DVD extras? I would argue, not many.

So unless the film business is able to stop consumer progress - and this is nothing like the push to replace projectors in cinemas, since the value for the public is perceptibly minimal - the industry is all but guaranteed to lose billions in revenue in the next five years.

Don't get me wrong. It's great news for the niche business. Their revenues will increase as distribution gets simpler and broader. But while 10% of the industry will be giddy, the other 90% will be trying to sell their houses in Aspen. A true sea change is going to occur... unless the five multi-majors can slow it.

But here is the biggest "problem." The more the multi-majors try to slow it, the more likely piracy will spread. And that is where the analogy to the record business becomes significant. What drove the Napsterization of the record biz wasn't the natural urge of teens to steal. What drove it most significantly was the record business' unwillingness to acknowledge that a paradigm shift (tape and "wax" to CD) was not a license for them to steal. This was followed by another tangential shift - to the option of sharing digitized music - that allowed consumers to say, "no" to the abusive pricing while still enjoying their music.

Note that there is no paradigm shift here that involves people not listening to music on their car radios or with headsets or in their homes. This is similar to the film world, in which people have not stopped going to theaters or watching at home. And I would argue, they won't.

But if the technology to burn DVDs and to keep films on hard drives continues to become more accessible and inexpensive and the industry does not acknowledge this will rethought price points, there is an even bigger problem potentially. The lost of 20% of the industry's revenue stream could become more like 40% if people start to feel justified in oversharing their film entertainment assets and "piracy" becomes perceived as fair use for films too.

And if that happens, the devaluation of the theatrical experience, in the media and at studios, will be a real problem, as domestic theatrical will quickly come back to being a full third of revenues and worldwide theatrical (including domestic) could account for as much as 75% of the filmed entertainment revenue. For me, this is clearly another reason why the industry must rebuild the tradition of second run theatrical as an additional source of revenue as well as for the purpose of keeping the theatrical experience vibrant and cost competitive.

We in the media want to believe that the movies can be made better... that quality can change the paradigm shift. But chasing that that is a fool's errand. And I'm not saying that because "the world has changed and there's no going back... just deal with the future." I'm saying that because a percentage of all art always has been shit and always will be shit. If you forced the film business to make only 10 movies a year and picked only the "best" filmmakers to make those 10 movies, I have no doubt that half of them would still be crap... and half of that crap (those 2 or 3 films) would make draw the highest percentage of the moviegoing audience.

Louis Mayer was right... Art For Art's Sake. It's not how he ran his business. But like "In God We Trust," it was a lovely distraction from the truth. The full quote was "Art For Art's Sake... And Give Me Some Pulpy Crap From Major Stars Who Can Keep My Girlfriends In Mink While You Jerk Around With That Barton Fink Feeling."

Frankly, I have scared myself in writing this column today because the clarity of this inevitability combined with the fact that I had never really thought of it so simply before is upsetting. No one in Hollywood wants to give up their job being overpaid and indulged. Yet, a lot of blood is going to be spilt as this next seismic shift happens. And sitting here, as I try to figure out why I am wrong and how the industry can retain this 20% of its revenue base... I can't see an answer.

If the dinosaurs didn't die, we wouldn't be here... certainly not here in L.A. driving cars and watching movies. So I guess it's not all bad.

E-ME. Next year, today will be 6/6/6.