DEG Spells Upside ‘EST’ and ‘UHD’

Home entertainment group sees sell-through eclipsing VOD in 2016

The Digital Entertainment Group launched in 1997 as the DVD Video Group. Today, it represents nearly 60 companies, a wide-ranging coalition of content suppliers, distributors, retailers, research firms and other stakeholders in the $18 billion home entertainment market. Ron Sanders, chairman of the DEG and also president of worldwide home entertainment distribution at Warner Bros., and Amy Jo Smith, DEG president, spoke with Next TV about the task of reinvigorating the longtime physical-goods segment. They see reason for optimism in electronic sell-through (EST), where profits are often “20 or 30 times” those in the rental and subscription video-on-demand arenas, by Sanders’ estimate, and in Ultra HD and 4K technology. And while TV networks fret about their SVOD “frenemies,” Sanders and Smith believe studios and multichannel video programming distributors have distinct advantages over Netflix (not currently a DEG member) and other over-the-top services. The following are edited excerpts from their conversation with B&C editor Dade Hayes.

NTV: Last month, the DEG released its annual report on home entertainment spending, which showed a 1% overall revenue gain, but an 18% jump in electronic sell-through, to $1.8 billion. Was that the main highlight in 2015?

Ron Sanders: Digital is so important to convert consumers, to keep them engaged, and it gives them better functionality across devices and other things. And it has a much better profile in terms of profitability. It has a very efficient ecosystem. That is a critical area and five years in a row we’ve seen double-digit growth in EST consumer spending. This will be the year that it crosses and becomes bigger than the [video-on-demand] business [which totaled $1.9 billion in 2015, down 2.5%, per the DEG]. Years ago, no one would have believed that it would become bigger than what you can order through a cable system on-demand.

NTV: How do you situate yourselves vis-à-vis Netflix and other SVOD services? Is the marketplace as disrupted as traditional linear TV?

Sanders: We are by definition an aftermarket for most of our mainline products. The broadcaster has the television airing first and then we have next-day air available to buy on iTunes or anywhere else. We have a movie in theaters and the next place you can consume it is a little less than three months later when it’s available to own digitally.…That’s the most exciting time, with the most demand from the consumer, when a movie is coming out of the theater.…We think it’s a perfect opportunity for any retailer, be it a cable system or an OTT service, to grab that consumer when their passion is highest to own the product. That’s something, frankly, that Netflix doesn’t have. It’s a differentiating factor to have the newest movies in the first window they’re available.

Amy Jo Smith: What we see is that if you make the experience great, ease of use and frictionless, people want that content. We see it with the different devices that are in the home enabling this. It’s a great time for content and consumers—you just have to put it in front of them.

NTV: Are user interfaces evolving quickly enough to sustain double-digit EST growth?

Sanders: If you just make it easy for the consumer, they want it on their flat-screen television.… It becomes, what do you want to train the consumer to do? Do you want to train them to leave your ecosystem and go to the OTT providers? If you do that, the habit gets ingrained and it’s really hard to get them back later. Or, do you want to make newer, more compelling content available so they don’t have to leave your system to get it?

NTV: Does the amount of attention paid to Netflix by investors and consumers and the industry discourage you?

Sanders: Not at all. They’re very important to the total ecosystem and they’re a fantastic service. They’ve done a great job converting consumers to digital in the first place. To be able to stream things is a great habit to form because it gets the consumer out of being just locked to the main television, which is a huge deal. It’s also getting young people re-engaged with digital content.…My only point is that [Netflix is] a certain part of the ecosystem. For certain television series they can be first out of the gate. But with most titles, and for films in particular, they’re later in the evolution, later in the time line.…If you really want to drive the new and the most current, the most topical, the things that have just won an Academy Award or whatever, that’s going to be when you have a digital one to buy.

NTV: The DEG report estimates 5 million 4K television sets are now in U.S. homes. At CES, there was a lot of news and energy around Ultra HD and UHD Blu-ray. How important is that to the future?

Sanders: I think it’s going to be very important. I was more excited about it coming out of CES than I was coming in. I wasn’t sure about the unanimity of support. I knew the studios were going to support it and we’d had conversations with certain hardware manufacturers. But there was a uniform momentum and enthusiasm about this that I hadn’t seen for a while. We’ve been through a few battles over formats over the years, but this one does not seem to have any issues in terms of getting people excited.…Best Buy is resetting stores, sooner than we thought they were going to be, to allocate space for it. Other big retailers are begging to come in. We’ve got some [financial] models with low, medium and high estimates and frankly I’m not sure where we’re going to fall on that spectrum, but we know it’s going to be incremental to the business. It makes the home experience better.

Smith: From where I sit, trying to get everybody to agree on things, it’s such a breath of fresh air to have everybody coming to the DEG and saying, ‘We’re coming to market, we need to educate the consumers and get them as enthused about it as we are because we believe this is the next thing.’