Hollywood
Banks on Foreign DVD Bonanza
International Herald Tribune – January 31, 2005
Ross Johnson – N.Y. Times
It has always been hard to pry reliable numbers out of Hollywood, even when the numbers tell a happy story. The latest example of this is the growing influence of international DVD sales.
For the past two years, the Motion Picture Association of America, the lobbying group for the studios, has claimed that Hollywood loses $3.5 billion every year, almost all of it overseas, to the sale of illegally copied films, mainly on bootleg DVDs and their cheaper Asian equivalent, Video Compact Discs (VCDs).
But the association is far less forthcoming when asked how much money the Hollywood studios are making on foreign sales of home video (a category that includes DVDs, VCDs and VHS tapes).
"Those figures are confidential, and we don't release them," said Barbara Berger, a spokeswoman for the association.
By most estimates and anecdotal evidence, revenues from international home video sales are the fastest-growing part of Hollywood's business. The most reliable estimate comes from Screen Digest, a British data company, which calculated that the home video divisions of the U.S. studios garnered $11.4 billion in wholesale revenues from the $24.6 billion that overseas consumers spent buying and renting home video products in 2004.
What is more certain is that the windfall from overseas home video sales is affecting how the movie business is run. It is inflating budgets for films with big international potential, like the upcoming "Batman Begins," changing how A-list stars negotiate their take of the profit, and prompting studios to spend millions fighting piracy - particularly in Asia and Russia - that they fear will threaten lucrative developing markets.
"International home video is the last great profit center for the studios, and they are going to keep those numbers as smoky as they can for as long as they can," said Ron Bernstein, who runs the book department at International Creative Management, negotiating for authors for their piece of the profits from films.
The question of how to share the DVD windfall has been a sore subject among Hollywood's labor negotiators for the past year, but the studios have been able to hold their ground.
The writers' and directors' guilds recently agreed to new contracts without any gains on the DVD issue. On Saturday, the national board of directors of the Screen Actors Guild and the American Federation of Television and Radio Artists voted by a 2-1 ratio to recommend to its members that they accept a new contract with the producers that had no gains for home video residuals.
No one argues that the studios are purposely under-reporting international home video gross revenues or misrepresenting those figures to Hollywood talent who have back-end profit participation deals.
But the accounting of film and television syndication revenues obtained internationally has long kept auditors busy. Almost none of the multinationals that own the studios break out numbers for their home video divisions in U.S. Securities and Exchange Commission filings, preferring to lump them with feature film revenues into a single category called "filmed entertainment."
"The thing about studio accounting is that it's always tricky, but usually legit," said Ed Limato, the vice-chairman at International Creative Management, who also represents Mel Gibson, Richard Gere and Steve Martin. "Until we do an audit, and everybody does one nowadays, we don't get the video numbers broken out between domestic and international gross revenues."
For Limato and other top agents for A-list talent, 2004 was a banner year. Stars are able to negotiate their own portion of home video revenues, unlike rank-and-file guild members who are locked into a royalty fee schedule. As a result, the star pulls in up to 7 percent of distributor video gross revenues as a royalty - about one dollar for every DVD version of their films sold - compared with the rest of a movie's cast, which typically shares in just 1.1 percent.
But do not expect the studios to gladly increase the portion of the international home video jackpot that is not already going to top Hollywood actors.
"For a long time, the film business was a single-digit business on investment return," said Charles Roven, the producer of "Batman Begins," from Warner Brothers. "Now, because of home video, it's a low double-digit business, and the studios want to make sure it doesn't go back into the single-digit business."
The next Batman project shows how international home video sales are altering the budget calculations of some blockbuster movies. Roven was able to get a budget, according to an executive at Time Warner who requested anonymity, of more than $180 million, based on the expectation of high home video sales in the United States and abroad. Roven also estimates that the worldwide marketing budget for his film may exceed $100 million.
"Warner Brothers would not be putting this kind of money into the film unless someone thought the investment would be returned in home video," Roven said.
Still, an accurate measure of that money is not easy to find. Though independent U.S. data companies supply a figure of $27 billion in annual U.S. home video consumer spending by monitoring bar code scanning, no independent data company has the financial horsepower to track international consumer home video spending via those bar code scan systems.
Even the leading trade papers do not regularly track international home video consumer spending, nor international gross distributor revenues.
The future could hold more good news for Hollywood.
Historically, the sale of DVD players tends to stimulate greater spending on movies and boxed sets of television series. On average, a U.S. television household with a VHS tape player increases its spending on home video products by more than $100 annually when a DVD player is brought into the household, according to Adams Media Research of Carmel, California. If foreign consumers continue to bring home DVD players and start buying DVDs at the rate U.S. consumers did earlier this decade, the international video sales numbers could rise dramatically.
Warner Home Video, which is the leader among the studios with a 20 percent share of international wholesale revenues, is counting on that increase. A Time Warner executive, who asked not to be identified because of his company's policy of not breaking out home video figures, said that Warner will gross $2.25 billion this year in international sales and that the number "could easily hit $5 billion or $6 billion in three years."
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