Already reeling from a months long box office slump, Hollywood absorbed another body blow at midyear with the realization that the DVD boom was over as home video sales for the first half of 2005 inched ahead only 1.1%. The remarkable ascent of the DVD, which has seen the penetration of DVD players into 70% of U.S. households in just seven years, has leveled off as lower income late adopters apparently are buying only about 7 DVDs per year, one third of what the early adopters typically purchase. Sales of videotapes, now a mere 7% of the home video market, have dwindled away and DVD sales growth can no longer make up the slack.
The number of new DVD releases per year is about to go well over 12,000 in 2005, an estimated 7-9% increase that far outstrips the growth in sales, meaning that each DVD release is bringing in fewer dollars. The lure of turning vast catalogs of older movies and TV series into cash via DVD is a powerful incentive for the studios to continue to increase the output of DVDs, and the result of the DVD glut is a lowering of prices across most categories. The average MSRP for multi-disk TV show releases has declined from $57.40 in 2000 to $45.31 in 2005, and DVD deflation has also played a role in the stagnation of home video sales during the first half of 2005.
This leveling off of DVD sales has already had an effect on the stocks of major studios as Dreamworks (Shrek 2 and Shark Tales) and Pixar (The Incredibles) have had to lower their forecasted earnings. Not that Shrek 2 and The Incredibles weren't big hits on DVD -- The Incredibles has actually earned more on DVD ($325 million) than it did in the theaters ($275 million) -- it's just that these mega-releases failed to meet sales projections based on previous releases -- The Incredibles sold 15 million DVDs while previous Pixar releases Finding Nemo and Monsters Inc. did over 20 million.
The Hollywood studios still love the DVD's 60-90% profit margins, but they are finding that though some films such as Alien vs. Predator, Ray, Napoleon Dynamite, House of Flying Daggers, Friday Night Lights, Ladder 49, and Elektra do much better on DVD than at the box office, other films such as Oceans's 12 haven't come close to earning box office numbers on DVD. While some films that earned between $25 and $75 million can top their box office take on DVD, there appears to be a cap on the DVD earnings of the big tentpole pictures like Shrek 2, Harry Potter and the Prisoner of Azkaban and Spider-Man 2 -- all of which did well but failed to meet projections resulting in returns of unsold disks to the studios.
The one DVD category that has shown a major 31% increase in the first half of 2005 is TV show releases. Studios such as Paramount (Chappelle's Show) and Fox (Family Guy, The Simpsons) with strong TV lineups have done well while others without TV connections such as New Line have suffered.
While some niche market segments such as TV series have had explosive growth, others like anime have had trouble maintaining market share. While anime has been able to maintain its relatively small 1.5% share of the North American home video market in the first half of 2005, this was accomplished largely by sales of top tier titles such as Miyazaki's Nausicaa. The plethora of anime releases in 2003 and 2004 (around 725 each year) has led to extremely poor sales on 'B' and 'C' level titles and licensing costs make it difficult for American anime companies to lower prices -- the average anime MSRP has only gone from $27.97 in 1997 to $26.11 in 2005. The growing number of releases in all the DVD categories has made the struggle for shelf and rack space for DVDs at retail brutal. Target recently announced it was dropping all but the best-selling anime titles (see 'Target Phasing Out Most Anime'), a move that was at least partially balanced by Best Buy's decision to take space away from CDs for DVD releases -- Best Buy indicated that both TV shows on DVD and anime would benefit from the added space.
The growing number of DVD releases in all categories makes it impossible for even the biggest 'big box' retailer to carry everything, and this should increasingly open up opportunities for independent retailers who specialize in a particular genre (or subgenre), though competition from Internet retailers will remain a problem. But as the DVD market matures it will become increasingly possible to stake a claim on a discrete portion of what is a very large and, at least in terms of sales growth, an increasing level playing field.