The Big Picture

Patrick Goldstein and James Rainey
on entertainment and media

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DVD collapse: How is it transforming the movie business?

If box office is booming, why are so many top studio executives brooding about the future of the movie business? Let's just say that in today's increasingly complex film world, the cinema gods giveth at almost exactly the same time as they taketh away. The studio bosses who should be celebrating the unprecedented upswing in moviegoing at theaters--with theater box office up roughly 15% this year--have been getting a big dose of bad news from the other end of the food chain. DVD revenues have cratered in the past six or so months, dropping off (depending upon whose figures you trust) as much as 15% to 18% overall.

What's really scary for studio executives is that DVD sales, which have traditionally represented the biggest chunk of pure profits in the business, have long been the real safety net when it came to greenlighting movies. In the past, if you had an action film that made $150 million in domestic theatrical box office, you could relatively accurately predict what that movie would make in DVD sales. But in recent months, studios have been alarmed to discover that there is often a dramatic fluctuation between box-office revenues and DVD performance, with the highest erosion often coming from the highest-grossing films.

Even more alarming, especially for studios who've thrived on seducing moviegoers into seeing mediocre product, is the realization that audiences are becoming more quality conscious. In the past, if a forgettable action film hit pay dirt at the box office, it would perform correspondingly well in DVD, allowing studios in greenlight meetings to provide a conversion rate--i.e. that if a movie of a certain genre made $100 million in the theaters, that would equal X millions of units in DVD. But judging from recent DVD sales figures, films that had poor word-of-mouth--signaling significant audience dissatisfaction--were underperforming in DVD, even if they had enjoyed lofty box-office numbers.

The example that made the biggest impact in studio circles involved "Iron Man" and "Indiana Jones and the Kingdom of the Crystal Skull." The two films, released within weeks of each other last summer, did almost the exact same amount of business in their U.S. theatrical runs--roughly $318 million. But when they arrived on DVD, "Iron Man," the film that performed far better in exit polls (not to mention with critics), easily outperformed "Indiana Jones," whose DVD numbers were far lower than expected. Among the big-grossing summer films, "Hancock" was also a poor performer (in terms of box office vs. DVD numbers), while the DVD numbers for such well-liked family films as "Wall-E" and "Madagascar: Escape 2 Africa" held up far better.

Needless to say, this volatility in the high-rent district has inspired something of a mild panic in studio executive suites. For years, DVD profitability basically mopped up the industry's sins and clinkers. If studios lose their DVD margins, they essentially lose their margin for error.

"This has become a major issue for the movie business," says Sony Chairman and CEO Michael Lynton. "Over the past decade, the DVD business has been perhaps the most important profit center for the industry. But now it isn't just contracting -- it's become more volatile and unpredictable than it used to be. And that very volatility is what makes your decision-making more difficult, because when you don't really know why a lot of titles aren't performing, the only rational response is to become more cautious when you're deciding what movies to make."

Lynton isn't pushing the panic button. He cautions that the DVD business isn't going away tomorrow, especially with Sony having made a big bet on the Blu-ray format. He adds that "not taking risks can itself be risky behavior. It's just that our inability to have confidence in how a particular movie might perform is a whole new ingredient that everyone in the industry is struggling with."

I know what you're thinking. You're dying to know which movies are performing the worst of all? Keep reading:

Although studios are extremely secretive with DVD numbers, especially the figures involving conversion rates, I was able to study one studio list of the films that performed the worst, in terms of conversion from box office to DVD. It was a long list. Films that fared poorly included a host of year-end releases whose DVDs arrived this spring. They included such box-office hits as "Quantum of Solace," "Yes Man," "Seven Pounds" and "Saw V." The list also included a huge number of adult-oriented awards-season films, from "The Reader" and "Milk" to the Oscar winner itself, "Slumdog Millionaire."

To understand what this all means is to first understand how complicated it is to interpret the numbers from the DVD end of the business. For example, did "Slumdog Millionaire" have a disappointing showing in DVD because everyone who really wanted to see the film had gone to a theater? Or did it perform poorly because Wal-Mart, by far the biggest single outlet for DVD sales, especially with the demise of more upscale retail outlets like Circuit City, is not a hospitable home for an exotic specialty film? Even top-ranking studio executives admit that much of the DVD business is a mystery to them. I was on the phone with one high-level executive who insisted that the DVD business was down only 10% to 12% until he grabbed hold of a new study on his desk, skimmed the cover sheet and said, "Hmmm, I take that back -- this study says it's down 18%."

The problem is that studios have invested years in obfuscating their DVD profits, fearful that A-list actors and filmmakers would get wind of how much money was pouring in and want a bigger piece of the action. By Sunday, everyone knows what movies made in theaters -- it's a carefully monitored cash business. DVD has little of that transparency, especially with some DVDs being rentals, while others are sell-through purchases, making the numbers more difficult to quantify. When studios announce their opening day DVD numbers, they aren't actual sales figures--the numbers represent the amount of DVDs shipped to stores. The DVDs that don't sell get shipped back to the studio. The industry abounds with stories of studios who have warehouses full to the ceiling with DVDs that went unsold and were shipped back, left to rot in storage. 

Secrecy is still the order of the day. DVD numbers are so well hidden that when one studio chief was preparing a budget estimate for a British period project, he asked his home video people how many DVDs Focus Features had actually sold of "Atonement." He still doesn't know -- nobody in home video could come up with a good answer.

No one has any real answers about the DVD downturn either. Obviously the country's economic woes have played a role. The DVD business has long ago lost its novelty, so many consumers don't feel the need to stock up on as many new releases. Many consumers have turned to downloading and rentals, with Netflix in particular enjoying a burst of popularity -- a good thing for filmmakers, but not such a good thing for studios, who make a lower profit margin on rentals than sales. 

You could also argue that we now live in a cultural moment where people don't want to own things as much as they want to experience them. That would explain why event-oriented entertainment -- be it in the movie multiplexes and Imax theaters, the concert business or big arena sporting events -- is enjoying considerable success while stay-at-home entertainment (DVD and TV) have seen considerable drop-offs. 

No one knows the answer, but in the movie business, executives are unsettled, unsure of what movies to greenlight if they can no longer be sure of which of their old economic models still apply. It's why studios are no longer making deals where talent gets first dollar gross--unless the talent is willing to wait until the studio breaks even first. In Hollywood, executives are a lot like great athletes--if they lose their confidence, they can't do their job well. It takes a lot of built-in swagger to roll the dice on a slate of $100 million-plus movies. But as the DVD numbers continue to slide, studio chiefs are finding it hard to take those big wads of cash out of their pockets. Right now, they're spending a lot of time looking for safe bets.  


Comments () | Archives (16)

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Seems pretty simple to me. People are buying on DVD those movies they liked and enjoyed in the theaters. They're the keepers. Those movies whose success was based on hype but didn´t deliver are not bought. If the studio types cannot figure this one out it is no wonder they brood about the future of the business. They simply cannot understand the basic fact that a movie is a product and for that product to have a long shelf life, the basis of a DVD, it needs to work.

It would seem to me that the DVD business is only volatile today if you don't take quality into account. Anyone seeing IRON MAN and then seeing INDIANA JONES 4 would know that one is a well crafted fun movie with great characters... and the other is just summer junk.

The studio execs simply need to do what studio execs did before them - know good material from bad material. Hard to imagine Jerry Wald not knowing what project was going to work on a basic level and what was never going to work no matter who starred in it. BATTLESHIP? Is a project like that something that will eventually ship DVDs or is it just a flashy idea that sounds great when you are drunk and awful the next morning?

A studio exec has a million responsibilities - but all of those stem from making movies that people want to watch again and again. If they can't take the time to make sure the script is good - and know what good is - none of the other responsibilities will matter.

Hey, but we need this film by July 4, 2010! Gotta rush it into production!

Why not plan further ahead? Nobody likes to plan ahead anymore. Why not aim the film at July 4, 2011, and get the script into shape and then *lock it* - once it is the script the studio wants to make, the script that will sell tickets and DVDs; that script doesn't go through radical changes that cost the studio money and assue that a rough draft of the script is the thing that is filmed. If the script is about the Sheriff Of Nottingham it does not morph into something that is the exact opposite of that.

If it is the studio's investment and the studio's profits or losses, the studio has to step up and kick a little ass. They have to know what is good and bad, make the decisions, and stick by them.

- Bill

Why are DVD sales down 18%? My guess here:

Better scripts. Higher quality development. The studios may need to make an 180 degree turn in some of their practices to meet the future. They are competing with writer controlled television series that offer character development and unexpected story turns. Why own a DVD of a bad movie?

Well, you remark in the story that "stay-at-home entertainment (DVD and TV) have seen considerable drop-offs". Could it be that people are spending more of that time at home online?

Quality also seems to be a major issue in successful follow through on DVD sales for a theatrical release. So a safe bet for studios would be to stop making crappy movies. They should pick the right artists, talented directors and reliable producers with coherent visions, and let them do their thing. Then they should sell the movie that is made, rather than create a film around a marketing campaign.

Just some thoughts...

The problem is not that studio execs don't get that unpopular (either with critics or the audience) theatrical release now equals low DVD sales. The problem is predicting which releases will be unpopular at the greenlight stage! Every studio thinks its movie is going to be liked or they wouldn't greenlight it. Until they have crystal balls, they can't do anything with this information. They can only work harder to make high quality productions and hope they made a good investment. There are no safe bets in Hollywood.

This is actually a lot simpler than it seems.... the movies that do well on DVD are the ones that stand up well to Repeat Viewings. The ones that people want to watch over and over again.

Is it really shocking then that Slumdog didn't do well on DVD? Great movie for theaters? Yes! DVD? Well... I mean, really, how many times can you possibly want to watch it?

Same goes for Indy 4... lots of people went and saw it at the Box Office and realized how crappy it was. Anybody who didn't see it in theaters heard about how crappy it was and at best rented it from Netflix or Blockbuster. But who is gonna want to watch that garbage over and over again to warrant actually buying the DVD??

I don't agree that we're moving more towards event themed entertainment. I think people are just being more shrewd about which movies they spend their hard earned recession dollars on to own and keep forever. And people just aren't buying whatever crap comes along anymore.

has anyone ever even asked the question - have the studios/distribution companies reported their dvd sales correctly?

ask any a-list lawyer in town, you cannot get accurate accounting.

dvd's are still a cash cow, though for a limited time.

VOD, netflix, X-box live, your day is coming.

The comments above remind me of the blind Hindus who are allowed to touch only one part of an elephant in order to identify it. The one who touched the tail thought the elephant was a rope. The one who touched the leg thought it was a tree. Each came up with a different interpretation of what an elephant is "in itself and of itself." Each was right, and yet each was wrong at the same time. Mick's comment is correct in regards to the "word-of-mouth" nature of DVDs. If a movie is great in theaters, word of mouth is good and DVD sales are strong. If word-of-mouth is bad, DVD sales are weak. Bill's comment about seeing further down the line and locking in projects months and years in advance is not practical. Often a break through movie will set a trend that will shift the appetite of the audience preventing long range "lock-ins." Alex, Beth, and Emmy say the problem begins with the original story. Good story, good movie, good word-of-mouth, strong DVD sales. I'd like to add a few more ingredients into this recipe, my own perception. I remember going to the Drive In to see movies. I sat in the privacy of my vehicle. I could neck with my girlfriend, sneak some wine in, and really feel comfortable without people pressing around me. There's always somebody whose cell phone goes off during the movie, someone sick and coughing, someone talking loudly behind you. It takes away from the experience. The DVD is the new Drive In. As to the quality of the movies - it should be remembered that Hollywood is an industry of gate-keepers: theatrical agents, powerful agencies, managers, literary agencies, and all the producer-slash hyphenates that turn what used to be a very fluid industry into the viscosity of molasses. Just try to get a screenplay sold. You need a literary agent before any producer will look at it. Try to get an acting job, you need a theatrical agent and be a member of the Screen Actors Guild. The break-through movie is like a salmon trying to get back upstream to mate. Each dam and obstacle is a gate keeper. Very few make it. One last point, when I can buy 100 blank DVDs for $20, and then am expected to pay $20 for a movie DVD, I feel that I'm being fleeced and say to myself: "I'll just wait until the price drops to $5 in the free-for-all basket."

The "Madea" comedies by Tyler Perry do well as DVDs. They dominate the comedy DVD section, and are fun to watch. The Gate Keepers in the movie industry prefer ready-made hits to green light. However, the internet keeps the door open inspite of the Gate Keepers, to show African American culture without the laughs.

Follow these links to see what I mean.






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