Digital video sales’ rise breathes new life into home entertainment

LAS VEGAS — Joann Killeen had never before purchased a digital video, but she took the plunge this holiday season. She forked over $3.28 each to watch the children’s show “Yo Gabba Gabba” on her Apple iPad and dance along with a friend’s grandchildren to the thump of another Nick Jr. show, “The Fresh Beat Band.”

Killeen, 62, is not alone in busting a move. Digital sales have nearly doubled in the last year, becoming the fastest-growing source of home entertainment revenue for Hollywood studios.

“What we’re seeing is a dramatic shift in the digital ownership this year,” said Ron Sanders, president of Warner Bros. Worldwide Home Entertainment.

Electronic sales of movies and TV shows have languished for years, as consumers gravitated to low-cost DVD rentals and online streaming services to deliver video to their television sets, computers and portable devices. Some industry observers speculated about a permanent shift in consumer behavior, away from purchasing.

A combination of factors, including access to high-definition-quality digital video and new ways to download or stream content, has yielded double-digit gains, which the industry plans to highlight Tuesday at International CES, the giant consumer electronics show in Las Vegas.

Annual digital sales surpassed $1 billion for the first time in 2013, the Digital Entertainment Group is expected to report. Consumers in the United States spent nearly $1.2 billion last year to buy movies and TV shows from online sellers such as Amazon.com Inc., Apple Inc.’s iTunes or Wal-Mart Stores Inc.’s Vudu, an increase of 47% from 2012. Electronic sales of newly released films and TV shows were up 60%.

Electronic sales represented a small fraction of the $18.2 billion that U.S. consumers spent on home entertainment last year. But studio executives say the growth in digital purchases, together with increased revenue from Internet streaming services such as Netflix and rising Blu-ray disc sales, could help offset slumping DVD sales.

“It’s clear in the last two years — and especially [in 2013] — that the tremendous growth [in digital sales] has offset an awful lot of the physical decline,” said Craig Kornblau, president of Universal Studios Home Entertainment. “Given the trends, you don’t have to be too optimistic to feel it’s going to all but offset the declines.”

To spur digital purchases, studios started to offer consumers early access to the digital version of a film — making popular titles such as “Despicable Me 2” and “The Hobbit: An Unexpected Journey” available weeks before the DVD release.

Fox also dropped the wholesale price for its digital high-definition movies, allowing retailers such as Amazon to sell the electronic version of “The Wolverine” for $15 while the Blu-ray disc retailed for $20.

“Our belief is, there are about 40 million consumers that are digitally active who have not started a collection,” said Mike Dunn, president of 20th Century Fox Home Entertainment. “What are the benefits that will [entice] those people and move into this model? It’s early access. It’s high definition. And the pricing has to be competitive.”

Consumers found more ways to make digital purchases, even as the Hollywood studios imposed a 28-day delay before making their latest titles available through lower-cost services such as Netflix and Redbox.

The nation’s largest cable operator, Comcast Corp., began selling movies and TV shows through its Xfinity TV store in November. Big retailer Target Corp. also launched a digital download and streaming service last fall, Target Ticket.

Studios also began promoting digital sales at theaters. Sony Pictures Animation, for example, conducted a test with exhibitor Cineplex in Toronto, offering a SuperTicket that paired a theater admission with early digital access to last summer’s animated film “The Smurfs 2.”

“It’s a really encouraging first step in connecting the consumer who’s in the theater to the home entertainment window,” said David Bishop, Sony Home Entertainment’s outgoing president. “You can also send offerings to the consumer, once you know that they purchased a ticket ... and draw them into the purchase model later.”

The proliferation of smartphones, tablets and new, inexpensive gadgets that bring Internet-delivered video to TV sets are helping create momentum for digital purchases. Many of them, such as a new Internet-connected smart TV from Roku Inc., will be on display at CES.

These factors contributed to Chicago resident Doug McLennan’s decision to buy his first digital movies this holiday season.

He acquired “Curious George: A Very Monkey Christmas” on the iPad to entertain his “rambunctious” toddler during a flight to visit relatives in Florida. For his wife, he bought the 2003 romantic comedy “Love Actually” using one of his new Christmas presents, Google’s Chromecast, which delivers Internet video to TV sets.

“I thought, ‘This thing is so teeny, I can bring it in my suitcase and set it up on my mother-in-law’s television,’” McLennan said. “The quality was as good as doing it on demand.... I was pretty impressed.”

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