Hollywood's new star named DVD

Bob Tourtellotte

LOS ANGELES: A new star is rising in Hollywood these days, but it's not a

hunky leading man like Ben Affleck in "Pearl Harbor" or the brash and

beautiful Angelina Jolie of "Tomb Raider."

No, the marquee name that has movie studio executives seeing dollar signs is

a shiny little disk called DVD.

The Digital Video Disc got its start in showbiz four years ago and is now

becoming a big contributor to the corporate bottom lines of the likes of The

Walt Disney Co., News Corp. Ltd. and Metro-Goldwyn-Mayer Inc.

The excitement is based on several factors, including this past year's

explosion of DVD players in homes, special features that are creating an

entirely new market and profit margins that are high now and expected to go even

higher. "The beauty of it is," said News Corp. executive vice

president of Mike Dunn unit 20th Century Fox Home Entertainment, "DVD is

very sexy right now."

DVD players are currently installed in over 16 million consumer homes,

according to an April report by the industry's DVD Entertainment Group. A DEG

group spokeswoman said industry figures forecast the number of players,

including portable units, to reach 27 million by the end of 2001.

That is up from 150,000 at the end of DVD's first year on the market, 1997,

and 8.6 million at the end of 2000, as cited in a report issued last week by

consultants at PricewaterhouseCoopers LLP. The study forecasts the total number

of installed DVD players in US households to hit 52 million by 2005, or nearly

half of all US homes.

Critical mass, major boom

Moreover, Sony Corp.'s Playstation 2 video game console and the new Microsoft
Corp. Xbox video player, which both have DVD capabilities, will expand the

market. In many cases, those units will put two players into homes - one in

adults' living room and one in the kids' playroom.

In recent years, industry executives have been wondering when the number of

players will reach a critical mass - a point at which DVD is no longer the arena

of only one class of consumers, such as early adopters, but instead reaches all

types of men, women, singles, couples and families.

At that point, the cost of making millions of DVDs and promoting them in

wide-reaching media like radio, television and broad-issue consumer magazines

makes sense because any one product will be available to millions more

consumers.

"There's no doubt in my mind that we've reached critical mass by the

sheer volume of product in the market and the growth we expect to see,"

said David Bishop, president of Metro-Goldwyn-Mayer Inc.'s Home Entertainment

Group.

Indeed, on Friday, the DVD Entertainment Group said more than 10,000 DVD

titles aimed at all types of consumers now sit on retail shelves, and that

figure continues to grow rapidly.

Of any studio, perhaps MGM, which relies most heavily on its library of films

to generate revenues, has the most to gain from the shift of DVDs aimed at early

adopters - mostly male and mostly action movie fans - to DVDs aimed at mass

consumers. It recently released a box set of "Rocky" films tied to the

25th anniversary of that blockbuster movie's premiere.

Not to be outdone, last week Fox launched a set of five Marilyn Monroe films

like "The Seven Year Itch" and "Gentlemen Prefer Blondes" at

a Playboy Mansion bash attended by none other than Hugh Hefner, flanked by

blondes dripping in diamonds.

At a news conference in New York on Monday, Paramount Pictures is expected to

unveil plans to release Francis Ford Coppola's Oscar-winning "The

Godfather." Family-oriented Disney, whose animated VHS tapes have topped

the charts in the home video market for years, also stands to gain. A recent DVD

set of animated hits "Toy Story" and "Toy Story 2" ranks

among top 20 DVD titles sold.

This fall, Disney plans a DVD of "Snow White and the Seven Dwarfs,"

featuring songs by Barbra Streisand and a new navigational tool that Disney

executives say will make DVDs easier and more friendly to use for kids.

New markets, higher margins

The best-selling DVD remains DreamWorks/Universal's action hit
"Gladiator," which has sold some 5.4 million units. At an average

price range of $18 to $20 for a DVD, that equates to a box office haul of $97

million to $108 million.

But more important than basic sales is that the added movie outtakes,

filmmaker interviews and games have made DVD an entirely new product for a new

consumer. That means DVD revenues are new cash - "found money" - from

an old product that might have been tossed on the heap of film history.

Depending on the number of features in a DVD and the promotion spending

backing it, profit margins run in the 50 per cent to 60 per cent range, which is

comparable to VHS now. That means that of the $18 to $20 average cost at retail,

the studio is pocketing 50-60 per cent of that price.

But the executives point out that it's not the current profit margins, but

the future profit margins that matter most because as more units are cranked

out, cost per unit shrinks. That means future DVD profit margins should rise

while the margins for older, VHS tapes shrink. Following that, the mix of DVD

sales to VHS sales among video divisions is changing, too.

Right now, the executives said, DVD sales range from 10 per cent to about 35

per cent of total home video sales. One said he expects the mix to reach about

40 per cent DVD to 60 per cent VHS by the end of 2001 and a 50/50 mix next year.

The talk of increasing sales generates the biggest issue surrounding DVD

because as sales of DVDs rise in retail stores, the fear is that the rental

market will be cannibalized. Many executives, however, said that issue may not

come to a head until next year at the earliest, and most said they did not want

to do anything that jeopardized the rental market. They stressed, too, that VHS

is still a very viable product.

So the spotlight should continue shining on DVD as sales continue upward, and

investors in media stocks will likely hear the star's name mentioned a lot more

in the years to come.

(C) Reuters Limited 2001.