Jumping Straight to DVD

November 2006

As consumers get more and more used to the convenience of
watching DVDs, distributors are adjusting windows in an ever-changing market.

By Peter Caranicas

The home-video market has long been a critical part of the
release pattern of theatrical films, supplementing the box-office revenues of
the Hollywood studios and independent producers alike. As the shiny little
discs have replaced the VHS tape format in recent years as a less bulky,
easier-to-use medium, home video has also come to have a huge impact on the
distribution of TV product—including TV movies and premium network and
free-TV series.

But even as DVDs have emerged as a powerful moneymaker for
other media, they have remained on the sidelines when it comes to original
releases. The studios will occasionally release the sequel to a box-office hit
direct to the DVD market in order to avoid the large print-and-advertising
(P&A) costs associated with theatrical marketing, and the independents
sometimes go straight to DVD with certain films challenged by the cost of going
theatrical.

But that is not most studios’ and producers’ preferred way
of doing business. “They have their formulas for whether or not it makes sense
to release a sequel theatrically or just on DVD,” says Fernando Szew, the CEO
of MarVista Entertainment. “It depends on where the distributors or the
broadcasters want to spend their marketing dollars.

“Once there are recognizable characters and a preestablished
audience for a story line, as with Disney’s Aladdin”—whose sequel was
released only on DVD—“you have to evaluate the P&A costs of going
theatrical versus the lower costs of going straight to DVD, and often doing a
direct-to-DVD sequel makes a lot of sense,” Szew adds. “It’s a lower-cost way
to continue a franchise.”

“The costs of releasing theatrically are prohibitive, no
matter what the size of your company,” concurs Ken DuBow, the president of
First Look Television. “You really have to be judicious on a corporate level
and think of where to put your effort.” DuBow adds that if a film fails to meet
the test of theatrical-release costs, “that doesn’t necessarily make it a bad
or a lesser movie. Often, producers are obsessed with theatrical release; they
would serve themselves better going to straight to DVD and then TV.”

First Look is bringing several DVD-appropriate movies to the
American Film Market (AFM) and AFI Fest in early November, including the
thriller Subject Two; the romantic drama Touched, starring Jenna Elfman; and
the Halloween-themed horror film The Pumpkin Karver.

“There’s a preponderance in the straight-to-DVD market of
sequels to movies, where a sequel couldn’t justify the hefty marketing and
production budget that a studio would have put into that kind of movie,”
concurs Rob Green, the VP of U.S. scripted programming, Hollywood TV movie
acquisitions and remake rights at Granada International. “We have a ton of such
titles in our own library. With sequels, you’re getting someone else’s
marketing dollar to help sell in an arena that you have an expertise in.”

But with those notable exceptions—theatrical-type
films whose distributors can’t justify the cost of theatrical
release—straight-to-DVD movies tend to be very genre-specific.

“Straight-to-DVD films are usually so-called genre
movies—lower-budget horror, action, or youth comedy,” says Cord Douglas,
Cinamour Entertainment’s president of distribution. “The market can be strong
for these titles if the stars are moderate-name talent or if the project
has a clever high-concept hook.”

Charles Fries, the president of the Fries Film Group, points
out that DVD-only product is limited in range because it tends to be
inappropriate for other media. “Films produced solely for the DVD market tend
to be extreme films—extreme in terms of their content,” he explains. “Most
producers would not want to limit the range of exploitation to DVD, so the ones
who produce just for the DVD market—as distinguished from DVD and TV, and
for all rights—are doing so because the product they’re producing is not
welcome in those other media.”

Fries cites the extreme horror genre. “You have horror films
that can play on TV—if not on prime time then at least on late-night. And
then you have horror sub-genres, like zombie films, slasher films and others
that are too extreme to play on TV at all. Some of those who produce this kind
of very extreme film understand what they are doing, and some don’t. That’s
certainly not what we’re interested in doing. We’re not distributing films that
are solely for the DVD market.”

George Shamieh, the CEO of American Cinema International
(ACI), terms such films “aggressive.” He says,“Although these movies are often
not made as well as others, and don’t necessarily have known casts, there’s
definitely a market for them in DVD.”

That being said, title and subject matter can sometimes be
as important as genre. “I sold a film a couple of years ago to [Twentieth
Century Fox Home Entertainment] called Incident at Loch Ness,” recalls Granada
International’s Green. “It was an art-house movie with Werner Herzog playing himself.
It was a documentary, not a genre film, but Fox said to us, ‘If the words “Loch
Ness” are in the title, we’ll buy it.’ They’ll look at their distribution
numbers, at sales numbers, and they know what they can sell.”

CONVOLUTED MARKET

Worldwide DVD distribution is a complex thicket of licensing
relationships and negotiated deals that vary by distributor, buyer, territory,
genre and budget—not to mention local cultural differences and legal
practices. If any rule can be said to apply to international DVD rights, it is
that the rules are in a state of flux.

“We approach the DVD market in two ways,” explains Fries.
“One way is that we license film rights to distributors around the world, some
of which are solely video-distributors, and some of which are distributors who
have all rights in their territory and perhaps in turn license the video
rights—or they may have their own video distribution arm. But
alternatively, from time to time we will license rights for individual media,
directly to DVD and then directly to TV. There’s no one way to do things.”

Films that Fries Film Group is representing at AFM include
the supernatural thriller Alien Agent, starring Billy Zane; the horror film
Canes, with Edward Furlong; the comedy Numb, starring Matthew Perry; and a
slate of films originally made for Lifetime.

America Video Films recently found success with Flight 93,
the TV movie originally produced for A&E about the doomed United Airlines
flight on September 11, 2001, in which the passengers overpowered the terrorists
and crashed the airplane into a Pennsylvania field. “We took that title on for
DVD,” says Claudio Braslavsky, America Video Films’ director of acquisitions
and marketing. “It made it into the Top 10 in movie rentals in the U.K.
Internationally, it went straight to DVD. TV will come later.”

America Video Films is also handling the French feature
Stealing Mona Lisa, which takes place in the Louvre. “There always has to be a
hook with the big movies and what’s going on in the market,” says Braslavsky,
alluding to the connections viewers will make between the TV program and the
recent high-profile feature The Da Vinci Code.

“Sometimes we distribute DVD product to TV and sometimes we
don’t,” says MarVista’s Szew. “It depends on the titles and on the region. This
is a very convoluted area. There are certain territories where you know that a
certain kind of title or certain genre will not work on TV but will work
perfectly on video, and vice versa.

“For instance, in general terms, a straight action, or horror,
or disaster/catastrophe film would work very well on video in Asia, though not
necessarily so on TV,” adds Szew. “Conversely, a well-made romantic comedy will
work on TV around the world, but will not work on video unless it has a
significant cast or it’s a theatrical production.”

DOING WINDOWS

Unlike other media, DVD derives much of its revenues from
consumers who want to own and collect the product. “The DVD market is
essentially a sell-through business,” says Gene George, the president of Regent
Worldwide Sales. “When something has aired on a channel and there’s awareness,
if people haven’t seen it, or if they’ve seen it and they like it, then the DVD
release gives them the opportunity to purchase it and own it.”

Regent is promoting several films at the AFM, including the
nautical thriller Phantom Below, and the adventure drama Air Force 2, in which
the U.S. vice president is kidnapped following a plane crash.

Granada’s Green notes that there are strong similarities
between TV movies and straight-to-DVD material, “especially,” he says, “when it
comes to their tight budgets, and a marketing push that comes more at MIPTV and
MIPCOM than it does at the Cannes Film Festival. You’ll see a lot of DVD
marketing going on at the TV markets.”

Granada had particular success recently with the space and
undersea thriller Deep Rescue. “I bought it as a straight-to-DVD title,” says
Green, “but subsequently—perhaps confusingly—it was picked up by
Showtime.”

In many cases, a prior DVD release can enhance a product’s
subsequent run on television. “For much of our kids’ programming, if it has a
DVD release it’s just that much more valuable,” says Adam Wright, the senior VP
of worldwide sales at PorchLight Entertainment. “We have movies, animated
features and animated series that fall into the category of going straight to
DVD, and then to TV.” Wright cites PorchLight’s The Kid & I, a comedy
starring Tom Arnold, as one example of a film that would go straight to DVD
internationally.

“A lot depends on the content,” Wright continues. “If it’s
an animated feature or, especially, a children’s series, you want that
broadcast window or broadcast deal in place first, because that makes the DVD
more valuable. If it’s a movie, you would make the video-distribution deal
first, securing a window where the video can be released, and then go to TV so
you can exploit other windows. Usually we tell broadcasters that they can have
the film about six months after the video start date.”

But distribution windows are entirely negotiable, with relative
prices based on the value of a property to the buyer. “As a general rule, if
the picture is an important film to a DVD distributor, he wants it ahead of
TV,” says Fries. “That does not necessarily mean that they must have it ahead
of television, but if they get it after television it’s going to be less
valuable to them.”

“Windows are collapsing,” observes Regent’s George. “Many
video companies now don’t necessarily require the holdback they used to. Now
you might have a free-TV broadcast first, then it can go to DVD afterwards.”

Of course, the determination of a given film’s sequential
distribution windows is not usually made by the distributor. “We are not
producers of the movies, we are a distribution company, so basically that
decision is made for us,” says America Video Films’ Braslavsky. “When we buy a
TV movie—we already know it is a TV movie because there are no theatrical
rights—it can go straight to DVD. In cases where we have all rights, the
film will go to theatrical, and then it goes to DVD.”

PorchLight’s Wright emphasizes that the DVD and TV markets
can actually help each other. “They’re very complementary. With children’s
product, the broadcast can actually act as a promotion for the DVD. In fact,
all these markets—including licensing, merchandising and
publishing—can all help promote one another.”

Regent’s George agrees. “A TV release can encourage
awareness for the DVD release,” he says. “There are situations in France, Spain
and Germany where the TV broadcast occurs first. There’s no longer a window
because the video can go out at any time. When it airs on free TV first, that
can actually build awareness for the DVD release.”

In the experience of ACI’s Shamieh, the market in Spain
requires that the DVD appear first, “but in France it does not really matter.
It varies from one country to another. Each has its own limitations and rules.”

In any event, because of complicated rights issues, it’s not
always possible to engineer an ideal sequence of distribution windows for a
given product. “You can’t always set it up the way you would like in the best
of all possible circumstances,” says Fries. “Sometimes you get stuck, but one
would prefer to sequence them in a manner that results in maximizing the
revenues.”

There’s no doubt that traditional practices no longer apply.
“Whether it goes first to DVD or to broadcast is a complicated question,” says
MarVista’s Szew. “Traditionally you would want things to go to video or DVD
first, then to broadcast TV. But now we’re finding that this is no longer
necessarily the case. Even in the U.S., preestablished recognition helps a
title in any medium. That means that if it was broadcast, that can help the
video.”

Szew cites the example of the recent MarVista acquisition
The Ron Clark Story, a TV movie starring Matthew Perry that was broadcast to
high ratings on TNT. “Because of all the publicity that TNT did, there’s now
recognition for the title,” he says. “We have North American video rights to
it, and we’ll be releasing it on our new video label, MarVista Home
Entertainment, which we just launched.”

RUNNING THE NUMBERS

Ask the experts about the budget of a straight-to-DVD movie
and you’ll get even more answers than the number of people you interview.

But there’s general agreement that most direct-to-video
films are produced on modest or shoestring budgets—the exception being
the studio sequel. “The budgets of [DVD] films can be as low as $1.5 million or
as high as $20 million,” says Cinamour’s Douglas. At the upper end,
“straight-to-DVD films tend to be sequels to studio films, where producers hope
to cash in on a brand-name project that no longer features a big-name cast. The
aim of such DVD movies is to strike gold in the U.S. home-video market and then
sell the title internationally to mainstream free-to-air broadcasters, as well
as international video.”

“We’ve released movies with budgets ranging from $500,000 to
$10 million direct to video,” reports Mark Lester, the president and CEO of
American World Pictures. “But $10 million is on the high side, and you’d
probably lose money with something that big. At that price you’d need to be in
the theaters.” According to Lester, direct-to-video releases from the major
studios are generally budgeted in the $5-million range. But, he notes, the
majors have massive promotional and distribution resources. “As an independent,
you wouldn’t want to spend more than a couple of million for a direct-to-video
movie.”

Among other product, American World Pictures’ AFM offerings
include the comedy I See You.com, with Beau Bridges and Rosanna Arquette, and
the vampire thriller Soul’s Midnight, with Armand Assante. A U.S. DVD deal has
already been made with Image Entertainment, and American World Pictures is
seeking DVD and TV deals elsewhere in the world.

ACI’s Shamieh says that some DVD-oriented horror films are
produced for $100,000, or even less, yet they gross as much as $2 million in
the marketplace. “There’s a real market for horror,” he notes. “It’s an amazing
phenomenon among teenagers and horror-movie fans. You keep thinking it’s going
to go away, but, wow! They keep on selling.”

At AFM, ACI is screening seven movies, including what
Shamieh describes as “women in jeopardy” films, a family movie, and two
comedies (including 7/10 Split, with Tara Reid). “We have two small horror
movies,” adds Shamieh, with the DVD market particularly in mind for those.

“Some of these movies are produced for very little,” agrees
First Look’s DuBow. “Subject Two was produced by three friends who got the idea
for the movie, rented a place in Aspen to do it, and shot in about 12 days.
They shot on video and spent about $400,000.”

Others place the production budget somewhat higher. “The
sweet spot for a lot of straight-to-DVD movies is a budget of $3 million to $5
million and a marketing budget of $1 million or less,” says Green of Granada
International. “Such numbers make the whole proposition a lot more palatable.”

PIRATES OF THE DVDS

The terms “DVD” and “piracy” have gone hand in hand since
the medium was invented. “Piracy is the most crucial issue for DVD,” says
Shamieh. “In many countries, piracy has destroyed the value of video, and it
has put a major dent in video worldwide. In countries where piracy took 20
percent of the market, we could live with it, but now it’s 80 percent. In
places like Mexico, Malaysia and Korea, piracy has collapsed the video market.”

Shamieh believes governments should be more actively
involved in piracy prevention, but he realizes how impractical that wish may
be. “America right now has so many things that it’s pushing,” he notes. “How is
it going to push for video? And is the government of Pakistan going to send the
police after video pirates? They have other pressures and not enough
resources.”

Piracy is less of a concern for Fries Film Group. “The
majors are the primary victims of piracy,” Fries says. “Independent product
gets pirated from time to time and we do what we can to deal with it.”

American World Pictures’ Lester agrees. “Pirates working in
labs are focusing on studio films,” he says. “If Brad Pitt is in your movie,
it’s going to appear on the streets a little sooner.” One way to combat pirates
is through a quick release, he adds. “In places like China and Thailand, we try
to get the films out really fast. If it comes out first on DVD, no one is going
to get the chance to tape it in a movie theater.”

The inevitable advent of high-definition DVD—whether
it eventually arrives in its Blu-ray or HD-DVD version—has the potential
to enhance revenues but also presents new challenges for the industry.

For Fries, the change to a new format will provoke new
home-video library sales. “Historically there has tended to be a surge in sales
of library product with changes in media, as there was in the transition from
VHS to DVD,” he says. “I don’t think in this particular case it’s going to be
as great a surge, but something will be going on there.”

Some foresee potentially higher home-video revenues with the
advent of higher-resolution DVD formats. “If the retail unit price is set high
enough, Blu-ray or HD-DVD can make a record-setting impact on home-video
revenues worldwide,” states Cinamour’s Douglas. “Video distributors need to use
focus groups to determine the highest acceptable price threshold
for consumers. These new video formats cannot be allowed to fall into the
bargain-basement pricing of DVD. If the average retail prices can be sustained
at $25 per unit, distributors will be increasing profits over the average DVD
by more than 300 percent.”

Regent’s George stresses the importance of having
appropriate materials. “Every title we’re producing, finishing and delivering
right now is available in HD elements,” he says. “That’s an important part of
our planning for the future. It’s important to have those elements available.”

HIGH-DEFINITION VIEWING

First Look’s DuBow agrees, and says that HD production is
the way to go if DVD is the goal as opposed to theatrical release. “The Pumpkin
Karver was made for straight-to-DVD release and shot on HD,” he says. “For a
theatrical release we would have to make the video-to-35mm transfer, which
costs around $60,000. Unless somebody in the world wants to release it
theatrically, why would you spend that money? We take delivery knowing that
we’re selling the movie as a DVD title, not a theatrical one. There are no 35mm
materials.”

But Green of Granada International takes the view that the
new technology “is mostly a headache. These are formats that our customers
around the world will come to in their own time. It won’t be everyone at once.
As a producer, you’re just trying to make a movie, and however it’s
distributed, it’s distributed. People are hoping that the reason DVD sales are
flat is because some of the early adopter customers are taking a wait-and-see
attitude, but I think adoption of these players is a year away.”

As technology continues to advance at a breakneck pace, some
industry players are already looking to the day when home-video product will
move from physical media to online downloading and viewing.

“Broadband distribution will probably overtake video stores
over the next ten years, as consumers will be able to download titles from the
Internet,” says Cinamour’s Douglas. “It will be critical for the market to
differentiate between temporary downloads that erase themselves after a few
days and permanent downloads. Otherwise the unit price will drop severely for
each download, creating a weak home-entertainment market that will not be able
to sustain nontheatrical film production.”

“The next step in the business is that all these DVDs will
just disappear into an electronic universe,” predicts DuBow. “The hardware is
going to disappear into a digital world. You won’t have the cost of the raw
materials as you do with video and DVD, and movies will find a whole new life.”

And just as it was once asked how home video will affect the
movie-going experience, a major question these days is how broadband
distribution will affect the home-video experience.

“My fear is that the eventual loss of video stores will be a
loss of a tactile browsing experience where consumers can choose films that are
promoted with larger-format artwork and DVD cases that can be handled
spontaneously,” says Douglas. “Indie film producers may find that nontheatrical
films without a lot of fanfare marketing will be lost in a sea of thumbnail
icons. It will be harder to stand out from the rest of the field, while
big-name titles coming off of wide theatrical releases dominate web services
more than ever.”

“Technology’s real impact will come when you’ll be able to
just download something on the computer and stamp out a DVD, including cover
art,” says American World Pictures’ Lester. “If independent companies have
access to this and are not shut out by monopoly laws, or by companies taking
over the broadband space and limiting its use, then it will revolutionize
everything.”