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The Big Picture

DVDs Turn America's Living Rooms Into a Major Profit Center

April 24, 2001|PATRICK GOLDSTEIN

Is "Nutty Professor II: The Klumps" a big-hearted comedy that's geared for the whole family? Or is it a raunchy, off-color laugh fest that would send your mother-in-law running out of the living room in shock?

It all depends on which version of "The Klumps" you find at your local video store. Last December, accompanied by an ad campaign positioning it as wholesome family entertainment, the PG-13-rated "Nutty Professor II" debuted on home video, selling 5 million VHS copies and 1 million DVDs. Next month, Universal Home Video is releasing the movie again on DVD, only it's not a family movie anymore. It's "Klumps Uncensored: The Director's Cut," with R-rated scenes that weren't in the film when it was released in theaters last summer. Universal is betting that there are so many new DVD buyers in the market today that it can sell another million "Klumps" DVDs the second time around.

In the old days of home video--meaning three years ago--a movie would've been relegated to the back shelves to make room for hotter new product after its first spin on the video store circuit. But the astounding growth of the DVD format has rocked the world of home video in much the same way that the compact disc bonanza of the 1980s fueled a huge boom in sales and profits for the record business. Releasing films in theaters is a dicey proposition even in the best of times, but with home video and DVD the profit possibilities seem limitless for the studios.

Is it any wonder that when I had lunch recently with Universal Home Video President Craig Kornblau, the savvy video chief repeated one phrase over and over, like a mantra: "It's a beautiful business."

*

If you've been in a home electronics store lately, you've probably noticed that DVD is spreading faster than the alien virus on "The X-Files." Since their introduction in early 1997, DVD players have burrowed their way into more than 15 million American households.

For years, tech experts were predicting that TV would be transformed into an interactive medium, allowing viewers to choose new endings for their favorite shows. They were half-right: a generation of young consumers weaned on Game Boys did want a more participatory experience, but it turns out that they're getting it from DVD, not TV. Most DVDs today aren't just movies, they're film schools in a box. Their supplemental features give users the opportunity to hear audio commentaries by the director and key cast members, see costume drawings and pre-production meetings, choose different soundtracks, see how special effects are designed and pick different camera angles for scenes from the movie.

"The consumer is starving for more information about Hollywood, and now we have the perfect vehicle to give it to them," says Kornblau, who spent 13 years as a Disney executive before moving to Universal in 1998. "It's a big success because you get people to buy a second version of your company's core assets, and at a higher price."

If anything, Kornblau is understating the medium's appeal. The blitzkrieg has just begun. When "X-Men" hit video stores last Thanksgiving, it made more money from video and DVD sales--nearly $50 million--than all but one of the new films released in theaters that weekend. Embraced by young male consumers--the best-selling DVD titles are "Gladiator," "The Matrix" and "X-Men"--DVDs already represent nearly one-third of total home video sales. Proponents such as Kornblau predict that DVD sales will represent half of the overall business by year's end. As it is, home video is, on average, the single highest revenue source for movie studios, often representing more than half of all income generated by feature films.

The influence of the DVD boom can be felt everywhere.

* It's a key issue in the threatened Writers Guild of America strike: Studio chiefs have refused to negotiate a penny hike in the current 4 cents per unit payout on video residuals, claiming that it would cost them $200 million over the next three years.

* After signing a new distribution pact with Universal, DreamWorks executives said a primary reason they didn't accept a comparable Warner Films deal was their preference for working with Kornblau over Warner Home Video chief Warren Lieberfarb.

* A surge in DVD rentals was also an important factor in Viacom's recent decision to keep its stake in Blockbuster, the leading home video retailer.

DVDs offer an irresistible economic plus for profit-hungry studios: They sell for $5 more than videos but cost roughly the same to manufacture. It costs studios about $2 to manufacture a DVD or VHS-format video, but while the studios sell VHS videos to retail stores for roughly $13, they can sell DVDs to stores for $18. That means they make $16 on every DVD they sell. Most new DVDs sell for $19.95, with the rest of the markup going to the stores.

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