2018 ANNUAL REPORT 3 Index INTRODUCTION VIDEO Technology and innovation Welcome to the Entertainment can-watch buffet of have transformed home Merchants Association’s 2018 movies, TV shows, and 4 entertainment in more annual report on the business a growing roster of high- ways than any of us quality original content. of home entertainment. could have imagined 40 Consumers spent VIDEO GAMES years ago, when the first an astonishing $14.6 videocassette rentals came on the market. billion on subscription streaming in 2017, 15 No longer bound by network schedules, according to IHS Markit data – a 46% jump consumers had their first taste of choice: from the prior year. And a Deloitte study RETAILING & they could watch their favorite movies on released in March 2018 shows that 55% STREAMING demand, whenever they wanted to. of U.S. households now subscribe to at least one video streaming service, a 450% Today, there are more choices than ever. 25 increase since 2009. Consumers can watch their movies and TV programs at home, on giant TVs, or on the This proliferation of platforms and devices, MARK FISHER go, on tablets or smartphones. They can and shift from physical to digital, is Q&A game on consoles or over the Internet. mirrored on the video game side of the For those who prefer to purchase and own business, which in the United States alone 38 the latest motion picture and television generated a record $36 billion in revenue content, options abound. They can buy in 2017, up 18% from 2016, according to new movies on physical discs for the best data from the Entertainment Software EMA OVERVIEW possible viewing experience, particularly Association (ESA) and The NPD Group. 40 on the dazzling new 4k Ultra HD format This report provides a comprehensive – or they can buy digital copies and keep overview of the home entertainment them safely stored in their own Movies business and closely examines the home Anywhere “locker.” video, video game, and retail components. For those who just want to watch movies In the following pages you will read about and television shows, they can rent the proliferation of delivery options in both digitally as well as physically, with video and gaming, the surge in streaming a vast assortment of content available for and the push toward original content, the viewing on the Internet, thanks to a broad changing face of retail, and the latest spectrum of retailers, as well as on disc, on new technologies like VR. courtesy of a still-growing army of Redbox The Entertainment Merchants Association kiosks and thousands of remaining video is proud to represent an outstanding group rental stores. of retailers, distributors, content providers, The surge in subscription streaming service and technology companies, and continues to revolutionize (and from others involved in bringing entertainment, a business-model perspective, challenge) both passive and interactive, directly to home video, with its appealing all-you- the consumer. Mark Fisher President and CEO Entertainment Merchants Association ema 2018 Annual Report 4 VIDEO provision to the Copyright Act of Walmart, and consumers switching Overview 1976, which gives the owner of a from renting movies for the night The home entertainment indus- copyrighted work the right to “dis- to buying them. Meanwhile, the vid- try turned 40 in 2017. It was in 1977 tribute copies …. of the copyrighted eocassette rental business was in that a Detroit businessman named work to the public by sale or other a state of decline. Blockbuster and Andre Blay licensed 50 movies from transfer of ownership, or by rental, other retailers cut “revenue-sharing” 20th Century Fox and released them lease, or lending.” And none of the deals with the studios so they could on videocassette under the Magnet- bills ever made it into law. bring in more copies of the hits at ic Video banner. He offered them The video rental business soared a lower price and then share the for sale to the public through a di- throughout the 1980s and early spoils with the studios on the back rect-mail sales operation he named 1990s. At one point there were more end, satisfying more customers. Video Club of America, and ran ads than 50,000 separate video rental But with consumers now able to in TV Guide. stores, most of them independents, buy movies at an affordable price, VCR prices had just dropped be- generating billions of dollars from the DVD sellthrough business flour- low $1,000, and a feeding frenzy en- consumer rentals. Over time, the in- ished. By 2004 consumer spending sued. Blay’s club, spurred by interest dies were gobbled up by fast-grow- on DVDs hit $15.5 billion, a whopping in films like “The Sound of Music,” ing chains like Erol’s and National, 33% gain from the year before. “Patton,” and especially “The French although ultimately an outfit out Eventually, however, the novelty Connection,” quickly grew to more of Texas called Blockbuster Video wore off – just as it had, in the early than 9,000 members, and by the end would conquer much of the country 1990s with video rental. And with the of the year he had sold upwards of with its ubiquitous blue-and-yellow advent of high-definition TVs studios 250,000 videocassettes. motif and “Make It a Blockbuster realized they needed a high-defini- Within three years, most major Night” tagline. tion disc to compete. Unfortunate- studios were releasing their own All the while, studios kept their ly, two competing formats came to films on videocassette, but their at- eye on “sellthrough,” the concept of market, and while Blu-ray Disc ulti- tempts to sell them at prices as high selling movies directly to consum- mately trounced HD-DVD, consumer as $75 were trumped by savvy entre- ers. Videos were sold to retailers for confusion – as well as reluctance by preneurs who were buying cassettes upwards of $100 each, and then re- movie collectors to rebuy their home and then renting them to the public priced to $30 or $20 six months later libraries – stifled disc sales growth. for a few dollars a day. The first video for sale to the public. But sales were Adding to the slowdown in disc rental store is believed to have been modest until the 1997 launch of DVD. sales was the emergence of digital operated by George Atkinson in Los The DVD’s size was more compact, delivery options. Consumers had Angeles. Atkinson charged $50 for an the picture and sound were better, become accustomed to buying their annual membership, which provided but most importantly the price was music over the Internet – so why not the opportunity to rent videos for $10 low. With the DVD, studios took movies? Then, in 2007, Netflix aug- a day. square aim at the sellthrough busi- mented its discs-by-mail business by The studios tried to clamp down on ness by pricing movies at $20 or $30 offering its subscribers the chance to rentals by placing restrictive warn- out of the gate, not six months down “stream” movies and TV shows over ing labels on cassettes, and even the road. the Internet – and, as they say, the presented the issue to Congress for The DVD was successful beyond die was cast. resolution through a series of bills anyone’s wildest expectations. For Today’s home entertainment busi- that would have made the rental nearly ten years, the DVD powered ness is no longer dominated by of prerecorded copyrighted video- the sellthrough business to record a single format or business model tapes an infringement of copyright heights – with studios striking up – or a single device, for that mat- law. Video rental dealers protest- direct sales deals with big nation- ter. Streaming is in the lead, but ed, citing the so-called “first sale” al chains like Best Buy, Target, and disc sales – both DVD and Blu-ray ema 2018 Annual Report 5 Disc – remain an important com- For the third consecutive year, dig- VIDEO ponent, as is rental, both disc and Content ital spending has outspaced spend- digital. So, too, are digital sales of Home entertainment spending in ing on physical media. Total digital movies, spurred by early release 2017 came in at an estimated $25.3 spending came in at an estimated windows. And whereas consum- billion, up 17.6% from 2016, accord- $18.1 billion, or more than 70% of ers once watched movies and other ing to figures compiled by IHS Markit. total consumer home entertainment filmed content exclusively on their As expected, the gains came large- spending. In 2016 digital spending TVs, thanks to Internet connectivity content today is consumed on a vari- ly on the digital side, with total digi- came in at an estimated $13.2 billion, ety of devices, including PCs, smart- tal spending up 37% to $18.1 billion 61% of the total home entertainment phones, and tablets. – but with a caveat. spend of $21.5 billion. Accordingly, the definition of home The majority of digital spending Digital spending is dominated by entertainment has changed. It’s no growth came from subscription SVOD, whose growth is fueled by so- longer just physical content consum- streaming, or subscription vid- called “cord cutters,” consumers who eo-on-demand (SVOD), with con- ers bring into their homes. Home are pushing back on the high cost of sumer spending spiking 46% to an entertainment today encompasses traditional cable and satellite ser- the entire spectrum of personalized, estimated $14.6 billion – although vice by canceling their subscriptions. on-demand content delivery – any IHS Market cautions that one reason A March 2018 report from Leichtman business involved in bringing enter- for the big jump is that it is now in- tainment to the consumer, from the cluding a broader spectrum of OTT Research Group (LRG) says the larg- traditional transactional model to services, including Amazon Prime, est U.S.