Although it has been recently revealed in the press that studios and producers have been getting kickbacks in the form of revenue and stock options from video rental companies for the last 10 YEARS, they failed to inform SAG. And not only are Studios racking in BILLIONS from sales and rentals they are even sharing in LATE FEES!
Now, if you think that this revenue sharing only amounts to chump change for the studios, read on.
“The studios virtually gave major rental chains — such as Blockbuster, Hollywood Video and Movie Gallery — their most popular hit movies on CONSIGNMENT*, deferring their monetary compensation until after the video had run its rental course. Then the two would split the rental revenue on a 60-40 basis, with the studios receiving the lion’s share of money. The tapes and, eventually DVD discs, were then sold on the used market a month or two after release for $5-$15 with those profits then split on a 50-50 basis between the studios and the rental chains.”
According to a declaration made by Jo Sisson, Associate director of SAG’s residual department in the Bower/Wilson “Pisano, Conflict of Interest” suit that information didn’t come to light until April of 2004.
Ms. Sisson states,
“Sometime during the beginning of 2004, I became aware of the fact that Netflix might have entered into financial arrangements with distributors by which Netflix was transferring Netflix stock to those distributors as a partial payment for DVDS!”
“Although documents pertaining to home video, including REVENUE SHARING AGREEMENTS, have been requested by auditors, Universal has NOT YET PROVIDED THOSE DOCUMENTS TO AUDITORS!”
Let’s make sure that the AMPTP is honoring the current agreement before we rush to sign off on a NEW AGREEMENT!
It would seem to the Ol’ Watchdog that we would be in a much better negotiating position to get OUR FAIR SHARE OF DVD BILLIONS if we could GET THE GOODS ON THESE GUYS!
Mr. Pisano/Mr. Hessinger, and SAG/AFTRA committee members STOP THE NEGOITATIONS–
A.L. Miller SW Editor & Chief
Yikes! The next thing you know the “go-along-to-get-alongs” on the committee will want us to give up some of our residuals!
2004 home video wrap
Sales and rentals of DVD and VHS piled up $29.95 in revenues.
By Brett Sporich
Now that more than 75% of North American households own at least one DVD player, home video generated about $25.95 billion in total consumer spending from the sales and rental of movies on DVD and VHS last year, according to an independent survey conducted by The Hollywood Reporter.
That compares with a North American (U.S. and Canada) boxoffice take that industry sources estimate as high as $10.2 billion for the year. The Hollywood Reporter has projected 2004 U.S.-only boxoffice at $9.53 billion (HR 1/3). Canada’s theatrical boxoffice on average is about 7% of the U.S. total, giving credence to the $10.2 billion North American estimate. The MPAA usually announces its tabulation of U.S. boxoffice figures in March at ShoWest.
Consumers spent about $22.5 billion buying and renting home videos during 2003, making it a phenomenal year of growth for the home video industry (HR 1/6/04).
Of the $25.95 billion generated from sales and rental of home video product last year, about $16 billion came from DVD sales. That compares with $14.3 billion in DVD software sales during 2003 (HR 1/6/04).
Meanwhile, total consumer spending on the sale and rental of movies on VHS fell more than 50% last year, generating about $3.3 billion compared with about $6.5 billion raised during 2003 and relegating the elderly format to a mere 1.3% of the overall annual home video market.
Perhaps the most controversial outcome during the year was the decline of movie rentals on both DVD and VHS by a staggering 11%, from about $9.8 billion realized in 2003 to about $8.8 billion, according to home video industry analyst Tom Adams, author of “The Future of Video Rental: A Strategic Analysis.”
Adams and his associates at Adams Media Research have long been considered to be the most credible video industry analysts by the preponderance of Hollywood’s major studio chiefs. Adams’ most recent accounting of the home video rental business comes on the heels of several Wall Street analysts’ claims that the rental industry was virtually flat last year, losing a mere 0.4% in annual consumer spending.
Adams’ 11% estimated decline flies in the face of the most recent Wall Street analysis and those of rental industry reporting stalwart Vidtrak as well as the nation’s top video rental chains like Blockbuster, which initially reported that revenues from video rentals were down about 4%-6% last year and, later, revised its estimate to 0.4%, saying that it hadn’t taken into account the online video rental subscription business, led by Netflix.
“Fools’ names and fools’ faces,” said one major Hollywood studio chief regarding Wall Street analysts’ rental revenue estimates. With the nation’s second-largest rental chain, Hollywood Video, on the auction block and Nos. 1 and 3 rental chains Blockbuster and Movie Gallery, respectively, vying to acquire Hollywood Video, no one on Hollywood’s movie supply side is going to come out from behind the curtain and publicly say that video rental is on its death bed, but “anyone who knows anything knows that to be true,” the studio chief said, speaking on condition of anonymity.
In addition, the burgeoning consumer phenomenon of DVD movie trading is expected to add to the rapid decline of the video rental industry this year and beyond. Movie trading refers to consumers purchasing movies on DVD and, after watching them, trading them in at retail or rental stores for cash or store credit, giving consumers the opportunity to recoup a portion of their original investment while providing store owners with low-cost, previously viewed DVDs that they can then re-sell at a profit not shared by the studios.
Until last year, movie trading was only done by a handful of retailers and a minuscule number of savvy consumers. But that has changed exponentially during the past year, with mainstream North American consumers beginning to adopt the cost-saving practice.
Those retailers that participate in movie trading estimate the overall value of the business at $1 billion last year. Those same retailers expect that gross value figure to more than double this year as major rental chains like Blockbuster increase promotions of movie trading schemes that offer their customers $5 store credit for each used DVD that they bring in to any location nationwide.
The anticipated increase in mainstream consumer awareness of DVD movie trading effectively circumvents additional profits returning to Hollywood’s major studios in the form of rental revenue. In addition, the reduction of late fees recently initiated by Blockbuster, combined with the reduction and/or elimination of late fees by online subscription rental services like industry leader Netflix, is expected to hit the studios hard in the pocketbook.
For nearly a decade, late fees have accounted for as much as 10% of a studio’s net rental revenue take and 15% of Blockbuster’s gross revenue, according to several major Hollywood studio financial executives and Blockbuster’s Securities and Exchange Commission financial reports.
That said, studios like last year’s market-share leader Warner Home Video have been largely unaffected by movie trading because they moved early on toward discounting the wholesale and retail price of movies on DVD in order to effectively marginalize the rental industry by reducing the price-point of new, recent and catalog movies on home video to $10-$17 and even as little as $5 in the popular discount “dump bins” at such national retailers as Wal-Mart and Target.
Former WHV president and DVD pioneer Warren Lieberfarb has said that he and a select few top Hollywood studio executives created the popular rental revenue-sharing model in the U.S. during the late 1990s in order to boost consumer awareness of home video with the ultimate goal of moving consumers away from their VCRs and toward DVD, though a number of Wall Street analysts have credited that plan to Blockbuster chief John Antioco.
The rental revenue-sharing business model, adopted in large part in 2000, gave major video rental chains in the United States ability to stock hundreds of new releases on store shelves without having to pay an average of $40 per unit upfront.
The studios virtually gave major rental chains — such as Blockbuster, Hollywood Video and Movie Gallery — their most popular hit movies on consignment, deferring their monetary compensation until after the video had run its rental course. Then the two would split the rental revenue on a 60-40 basis, with the studios receiving the lion’s share of money. The tapes and, eventually DVD discs, were then sold on the used market a month or two after release for $5-$15 with those profits then split on a 50-50 basis between the studios and the rental chains.
This revenue-sharing paradigm shift in the rental industry so angered small mom-and-pop video rental store owners (who were effectively locked out of equivalent revenue-sharing agreements) that they filed several class-action state and federal anti-trust lawsuits, some of which are still pending in court.
Once DVD hardware market penetration reached about 50 million players in U.S. households by 2002, WHV and other major Hollywood studios began ratcheting down their rental revenue-sharing participation, while aggressively discounting the wholesale and retail price of movies on DVD.
The new popularity of DVD combined with low-priced hit new releases and classic catalog product energized consumer spending on home videos, resulting in a national average household buy rate of 15 DVDs a year at an estimated price point of $19 or more each. That consumer action translated into triple-digit revenue gains at the studios. At the same time, the paradigm shift had reduced in-store foot traffic at video rental outlets nationwide, taking a huge bite out of gross consumer spending on movie rentals, ultimately resulting in drastic declines in net profits for the nation’s largest rental chains, as has been reflected in those same rental chains’ financial filings with the SEC each year since early 2002.
However, the DVD buying boom is now showing signs of slowing as well, with last year’s annual buy rate dipping to about eight to 10 DVDs per household. Most industry analysts and Hollywood’s top studio chiefs expect this decline to continue this year and beyond, a key reason the home video industry is focused on the rollout of high-definition DVD, scheduled for the fourth quarter of this year and ramping up rapidly next year.
That said, 2004 was the year for franchise films in the home video industry. Films released on home video last year in the “Shrek,” “The Lord of the Rings,” “Harry Potter,” “Spider-Man” and “Bourne Identity” franchises were an unprecedented boon for Hollywood’s studios and DVD retailers, generating hundreds of millions of dollars each.
DreamWorks Home Entertainment’s November release of “Shrek 2,” for example, was the industry’s No. 1 video release, selling a total of 24.2 million combined DVD and VHS units to both retail and rental stores across North America, realizing about $458 million in total consumer spending, according to DreamWorks executives. The film’s North American boxoffice last year was $436.5 million (HR 1/3). “Shrek 2″ generated about $44 million in gross rental consumer spending alone, according to DHE executives.
The popularity of “Shrek 2″ also had the affect of boosting sales of the original “Shrek” home video to 5.6 million combined DVD and VHS units, making it the top-selling catalog title of last year, according to DHE chief executive Kelly Avery and confirmed by other industry sources.
“2004 was our best year in the history of DreamWorks Home Entertainment,” Avery said. “We believe that our share of the home video market increased dramatically last year, from about 3% to 5%.”
Avery said DHE’s total revenue from home video reached $1.239 billion last year, with DVD sales accounting for $1.014 billion, representing a 73% increase compared with 2003. And the entire “Shrek” franchise has grossed about $1.6 billion in total consumer spending during the past three years, making it the fastest-growing home video franchise in the history of the industry, Avery said.
New Line Home Entertainment’s “The Lord of the Rings” franchise was the industry’s second-best performing home video last year, with “The Lord of the Rings: The Return of the King” generating more than $415 million in total retail and rental consumer spending, according to NLHE’s sister studio and distributor Warner Home Video along with several other industry sources.
WHV’s “Harry Potter” franchise generated more than $350 million in retail and rental revenue with last year’s release of “Harry Potter and the Prisoner of Azkaban,” according to WHV and additional industry sources. Sony Pictures Home Entertainment’s “Spider-Man” franchise also scored big last year, with “Spider-Man 2″ generating more than $260 million in rental and retail revenue, according to SPHE and additional industry sources.
Universal Studios Home Entertainment’s “American Pie,” “Meet the Parents” and “Bourne Identity” franchises were a boon to the studio, with “The Bourne Supremacy” selling more than 5 million combined DVD and VHD units last year — boosting sales of “The Bourne Identity” to 1.2 million combined DVD and VHS units during the fourth quarter of 2004, according to USHE and other industry sources.
While 20th Century Fox Home Entertainment didn’t have any franchise titles last year, the studio still increased home video sales by about 2.8% to about $3.6 billion, according to Fox executives and additional industry sources. A significant proportion of Fox’s growth can be attributed to its leading role in the TV-to-DVD market, which grew on an industrywide basis by more than 50%, from an industrywide estimate of about $800 million in 2003 to more than $1.7 billion last year, according to several industry sources.
When it came to the performance of Hollywood’s mini-major studios, like Lions Gate, DVD sales and rental revenue boosted their bottom lines by as much as 20%, largely because of the overall industry’s annual growth of DVD rental, which increased by about 40% last year, even though the combined DVD and VHS rental revenue take was down by 11%.
Looking forward, most home video industry analysts and major Hollywood studio chiefs are counting on the introduction of high-definition DVD to fuel DVD sales in what has become a maturing market.
With increased DVD movie trading circumventing the studio’s retail and rental business models, industry observers believe that next year could be the year that Hollywood’s major studios will move aggressively toward video-on-demand, taking unprecedented action to collapse the home video industry’s sacred first-to-market sales and rental window and providing cable and satellite delivery channels an equal playing field for the first time ever, giving them their long-awaited day in the sun.