25 Years of Digital Entertainment — Part Two: The Digital Stream

Media Play News is celebrating 25 years of digital entertainment with a two-part special report.

In part one, available here, we chronicle the development of the DVD, which launched this digital revolution, as well as its two successor discs, Blu-ray Disc and 4K Ultra HD.

In this, the second part, we trace the history of digital distribution, including electronic sellthrough, digital rental and streaming. This feature also is available on our podcast:

Beginnings

The digital distribution of movies and other filmed content always had a seductive appeal to Hollywood, even before the launch of DVD. The prospect of no manufacturing costs, no shipping expense and, perhaps best of all, no returns was like a utopian dream — sweetened, ever more so, by the fact that transactions could be conducted directly with the consumer. The studios could finally cut  out the middle man — which in the early days of home video actually consisted of two  middle men — wholesalers and retailers — both of which siphoned off profits the studios would much rather keep all to themselves.

A key part of DVD’s legacy is the mass digitization of film content that followed its March 1997 U.S. debut. Because the DVD audience was so hungry, the studios opened their vaults and digitized their libraries.

This opened the door for  more viewing versatility in the future, particularly as digital distribution took hold in two branches — transactional video-on-demand (TVOD) and streaming.

Cable on the March

Even in the glory days of the VHS videocassette, there was a precedent for movies and other filmed content being brought to consumer homes without a physical component: pay-per-view (PPV), which gave the rental business a good scare in the late 1980s and early ’90s.

The vision of PPV on the cable end originated in the late 1970s with Cube, a two-way interactive system introduced by Warner Amex Cable Communications, the cable TV joint venture of Warner Communications and American Express, in Columbus, Ohio. The first PPV cable channels in the United States appeared in 1985, with names such as Viewer’s Choice, Cable Video Store and Request TV. But PPV had one flaw that kept it from capturing the majority of consumers who had taken to renting videocassettes for their evening entertainment: the inability to offer on-demand viewing, with the option to pause, stop, go forward or go back. The best the cable companies could do was offer staggered starting times, but even then, viewers were not in control the way they were when watching a videocassette.

PPV channels such as Viewer’s Choice gained popularity in the 1980s and early ’90s, but were hampered by the inability for users to pause, go back or fast forward the way they could on VHS.

The concept of video-on-demand was an appealing one, not just to cable companies but also to the new “Baby Bell” telephone companies that had been established as a result of the 1982 antitrust breakup of AT&T. The challenge was how to squeeze a movie into the limited bandwidth of a copper cable, which was fine for a speech signal but woefully inadequate for a movie. VOD became possible only as a result of two major technological developments: MPEG video compression and the asymmetric digital subscriber line, a data communications technology that enables faster data transmission.

VOD development efforts picked up in the early 1990s, particularly after the Baby Bells were given the green light to provide video services, which previously had been forbidden under the Cable Communications Policy Act of 1984.

In 1991 the Time Warner New York City Cable Group in Queens, N.Y., launched the nation’s only 150-channel cable-TV system, a big jump from the 35 or so channels the typical cable households could receive. At the time the Los Angeles Times said the Time Warner project, “which is starting out slowly with 10,000 subscribers in two neighborhoods, is a model of what’s in store for the rest of the country.”

Former Warner Home Video president Warren Lieberfarb remembers the reaction. “It was the announcement of the 150-channel PPV system, with its PPV offerings that facilitated staggered starting times and gave consumers significantly more choice, that really triggered a very significant selloff in Blockbuster stock and caused Wayne Huizenga to try to find a buyer, as he saw the writing on the wall as to where the future of transmitted distribution was going,” he says. (In 1994 Huizenga did, in fact, sell Blockbuster to Viacom Inc.)

In October 1992 Bell Atlantic announced a VOD trial in northwestern Virginia. The following January, The Washington Post reported that Blockbuster Entertainment Corp., at the time the biggest video rental chain, was talking to Bell Atlantic about providing movies to the new service. Blockbuster, The Post said, “apparently has decided to join the upcoming ‘video-on-demand’ revolution in television rather than fight it.”

Tele-Communications Inc. (TCI), the country’s largest cable television company, also was experimenting with VOD. “Video Retailers Troubled by TCI, Carolco PPV Venture,” screamed a front-page headline in Billboard’s May 6, 1993, issue about a new deal between the cable giant and the film company. “I can’t imagine any sane executive in Hollywood wanting to tamper with its main revenue source,” Blockbuster senior programming VP Ron Castell told the trade. He noted that while home video generated $4.1 billion in revenue in 1992, PPV (the terms back then were often interchangeable) brought in less than $100 million.

Mike Fidler, who in the early 1990s was working for Pioneer Electronics, says the cable companies were particularly aggressive in developing VOD capabilities.

“The major cable companies were developing advanced technologies for higher bandwidth to bring more on-demand content, with better quality and real-time delivery, to drive new revenue as well as compete with the anticipated arrival of telcos in their space,” he says.

But the promise of VOD never quite materialized. The cable companies were also in a race with satellite providers to expand their channels — and grow their bundles. The telcos didn’t have the “last mile” into the broad consumer market that the cable companies had, and they were focused on moving into the mobile and internet markets. And the home video and consumer electronics industries were enamored with something called the DVD.

Mike Dunn (at the January 2017 CES).

“The studios were focused on DVD, which was exploding beyond belief,” says Mike Dunn, who at the time was a senior marketing executive at 20th Century Fox Home Video. “At the same time, to the cable companies, [VOD] was this orphan stepchild that didn’t have enough penetration and demand at the time to make it worthwhile. It was just a small niche business.”

DVD was such a cash cow that it was perched atop the sequential distribution system the studios had implemented to maximize post-theatrical revenue. This “window” strategy saw new theatrical releases come to DVD first, and to every other distribution channel, including VOD, weeks or even months later.

“You had the whole retail community — between Walmart and Target and Best Buy and Amazon — on the run,” Dunn says. “DVD became the hot retail product, and given the investment of retail we had a window on VOD to give DVD an edge.”

Studios Dabble in Digital Delivery

Concerns over illegal digital distribution finally got Hollywood’s attention. Studios had seen what had happened to the record industry. Because CDs were not encrypted, they could easily be copied and shared via a computer and the internet. And when the record companies responded to a slowdown in CD sales by hiking list prices and killing the single, which cost the same to manufacture as a full CD album, angry consumers took to the emerging internet and began swapping digital song files on sites such as Napster.
Ben Feingold, president of home entertainment for what is now Sony Pictures from 1994 to 2006, says he and his fellow home video executives feared that with greater bandwidth capacity the same thing could happen to movies, but were told by the Motion Picture Association of America (MPAA) “that we had to have a platform of our own or we couldn’t sue the pirates,” Feingold recalls.

Sony and Warner agreed to lead a multi-studio consortium to finance and commercialize a digital distribution venture that became known as Movielink. Four studios — all the majors, except Disney and Fox — put up $35 million to fund the project, which with Justice Department approval launched in November 2002. It allowed video files to be formatted to be compatible with both the Real Video player and the Microsoft media player.

The new service, however, didn’t make much noise, nor did a similar venture, CinemaNow, that been established earlier by a group that included Lionsgate and Microsoft.

In 2003 the Walt Disney Co. launched MovieBeam, a VOD service in which movies were sent wirelessly into subscriber homes through unused Public Broadcasting Service (PBS) station frequencies. The movies were then downloaded onto a hard drive inside a set-top box that consumers had to purchase for around $150. This box was connected to MovieBeam servers by telephone lines so that consumers could be charged each time they “rented” a movie ($1.99 for catalog, up to $4.99 for new releases). MovieBeam, too, failed to catch on, as retailers had a hard time explaining how it worked to their customers. Besides, DVD was booming.

Beginnings of Digital Ownership

It was only in the middle 2000s, when the furious growth of DVD at last began to subside, that the studios revved up their commitment to VOD — and as they had in the early days of VHS, they focused their efforts on sales rather than rentals through what they called “electronic sellthrough,” or EST.

The first EST platform, from Starz, was Vongo, which debuted in January 2006. Vongo was a movie download service in which subscribers, for $10 a month, could download as many movies as they wanted to, playable only on computers or portable devices that ran Microsoft’s Media Player. Sony agreed to provide the new service with movies.

In April 2006, Sony Pictures and five other major studios — MGM, Paramount, 20th Century Fox, Universal Pictures and Warner Bros. — began to sell digital copies of their movies on MovieLink and CinemaNow. Multichannel News noted at the time, “The purchase price is higher than what DVDs sell for in store, with Movielink executives citing the download convenience and multi-PC access for the roughly $10 in price difference.”

A month later, a skeptical Washington Post observed, “There’s never been a better time to get movies online — as long as you’re paying NetFlix (sic), Amazon or some other company to ship a DVD to you. If you want to download the movie, however, you’re going to be frustrated. Still. Three years after Apple’s iTunes Music Store brought online music sales to life, the movie industry continues to treat Web distribution as an experiment it can tinker with at its leisure. The latest belated addition to the movie-download market is the ability to purchase movies instead of just renting them. … If you must obtain a movie in the next few hours but can’t leave your house or have anybody else pick up the flick, these two Windows-only stores might work. Otherwise, it’s unclear who would bother with them: They stock far too few movies, charge too much for them, offer them at a quality inferior to any DVD and grossly restrict your use of these purchases.”

Apple CEO Steve Jobs (shown here at the March 2010 Academy Awards) is credited with jump-starting the electronic sellthrough business by urging studios to sell movies on iTunes. (Photo by Jaguar PS/Shutterstock)

Credit the late Steve Jobs, the celebrated co-founder of Apple, with jumpstarting the EST business in the wake of Apple’s October 2005 launch of the fifth-generation iPod, the first to play videos. The only drawback: No content.

That would soon change. Feingold recalls that before the video iPod launched, he received a frantic phone call from Jobs: “He called me on his Blackberry, and he said, ‘Feingold. This is Jobs. You have to get here ’cause I need movies from Sony.’ So I flew up to San Francisco, met with him, he showed me the prototype and I told him I felt Creative Zen was better and he ended up buying the patents for Creative Zen. He had already launched the iTunes store, but only with songs, and when I met with him he said he didn’t believe in rental. I told him it doesn’t matter what he thinks because people like rental because it’s cheap and they have no money, and at the time rental was 85% of all [VOD] transactions.”

In September 2006, Apple began selling Disney movies on its iTunes music store, with an initial allotment of 75 titles, including Pirates of the Caribbean and Cars. Jobs personally announced the deal and promised that new films would be available online for just $12.99 on the same day as their arrival on DVD.

“Here we go again! First music, then TV shows, and now movies,” Jobs said in an Apple press release announcing the deal. “In less than one year we’ve grown from offering just five TV shows to offering over 220 TV shows, and we hope to do the same with movies. iTunes is selling over 1 million videos a week, and we hope to match this with movies in less than a year.”

Things progressed rapidly over the next two years. Other studios followed Disney onto Apple iTunes. Paramount signed on in January 2007, followed by Lionsgate in February and MGM in April. At the end of the year Apple Insider reported that 20th Century Fox also would make its films available on Apple iTunes — and not just for sale, but also for rent. The publication noted that the deal wouldn’t be officially announced until after the holidays so as not to interfere with DVD sales. Also, other studios were concerned that supporting Apple would lead to the same type of market dominance in the digital distribution of movies that Apple had achieved with music.

In the meantime, Sony Pictures, Universal Studios and Warner Bros. had already started distributing movies on rival services that had sprung up from Walmart Stores and Amazon.com, which had launched its own Amazon Unbox movie downloading platform in September 2006, at the same time as Apple. (Unbox was later rebranded as Amazon Video on Demand but was subsequently scrapped in favor of Amazon Instant Video, the precursor to today’s Prime Video, which offers both subscription and transactional VOD).

By May 2008 all three studios were also providing Apple iTunes with new movies on the same day as the DVD release. Time Warner’s then-CEO, Jeff Bewkes, also said Warner Bros. would begin releasing the majority of its titles on cable VOD, also on the same day as the DVD.

During his keynote address at Macworld 2008, Jobs announced the launch of movie rentals in the iTunes store, like EST releases available on the same day as the DVD.

Netflix in the Stream

While Apple was making headlines with its digital movie distribution efforts, Netflix was quietly making plans to distribute movies electronically as well, although in a different way. After finishing 2006 with 6.3 million subscribers to its DVD-by-mail rental service, the company on January 16, 2007, introduced a streaming service, called “Watch Now,” that allowed subscribers to instantly watch movies and TV shows on their personal computers. “Watch Now” started out with just 1,000 titles, ranging from vintage classics such as Casablanca to cult and foreign films as well as miniseries. The service was free to subscribers of the company’s then $5.99-a-month disc plan, although they were limited to just six hours of streaming per month.

CEO Reed Hastings told Forbes at the time, “DVDs sell for about $16 each, and a lot of companies, like Apple and Amazon, focused on that ‘download-to-own’ number in their online video strategies. That involves files, complex applications. … We focused on convenience and simplicity.”
Streaming soon became even more convenient and simple when viewership was extended from the PC to the TV through a Roku set-top box and, before long, other streaming devices, including Blu-ray Disc players.

One of the earliest Netflix streaming sites, circa 2010 (Media Play News archive).

Netflix’s streaming business grew slowly at first, but accelerated when the company began introducing newer and higher-profile movies from the major studios, which were stung by slowing DVD sales and the failure of Blu-ray Disc to be a similarly big business. In October 2008 Netflix announced an agreement with Starz to make about 2,500 movies and concerts available for instant streaming. Earlier in the year, Starz had signed three-year movie output deals with Sony and Disney, and separate library deals with Warner Bros., MGM and Universal. Those deals included Vongo, which Starz shuttered in August, two months before the Netflix deal.

A Wired story from the following year elaborates the significance of the Netflix-Starz deal: “Each studio usually signs with just one pay channel; all Warner Bros. movies appear only on HBO, while Sony’s go to Starz. After a few months, the pay-TV networks hand off their rights to broadcasters and ad-supported cable stations. A few years later, the premium channels get the films back, giving them exclusive rights to air them. The windowing system can keep films locked up for years. … Unless [Reed] Hastings and [chief content officer] Ted Sarandos could find a way around the windowing system, it would be a challenge to show any major movies that had been released in the recent past. Then they discovered a loophole: Why couldn’t Starz sell Netflix the right to air its movies. … The studios were stunned. ‘This is the last thing you want,’ moaned one studio executive. ‘More eyeballs with no incremental revenue.’”

Any “moaning” didn’t last long. In January 2010 Warner Bros. Home Entertainment cut a deal with Netflix to make new DVD and Blu-ray Disc titles available to Netflix disc-rental subscribers after a 28-day window. “At the same time, a renewed and expanded license for Warner Bros. streaming content will allow Netflix to offer its members more movies they can watch instantly,” the press release stated, almost as an aside. Similar deals with 20th Century Fox and Universal followed in April.

Then, in August 2010, Netflix announced it would pay nearly $1 billion during the next five years for streaming rights to movies from Paramount, Lionsgate and MGM just 90 days after they appeared on the Epix pay-TV movie channel, a joint venture between the three studios. The Associated Press observed at the time that the agreement “marks another breakthrough in Netflix’s bid to stock its online streaming library with more-compelling material, so it can keep its subscription service relevant as more households order entertainment through high-speed Internet connections. The online streaming push also helps the company reduce its postage bill for mailing DVDs to its 15 million subscribers. … Analysts believe the influx of newer movies will enable Netflix to maintain its rapid growth of the past two years, lifting its earnings even higher despite the hefty licensing fees.”

In November 2010 Netflix launched a streaming-only plan in the United States, two months after starting a similar plan in Canada.

What many saw as Netflix’s biggest prize came in December 2012, when it inked a multiyear licensing agreement with The Walt Disney Co. that would make it the exclusive U.S. subscription television service for first-run live-action and animated feature films, beginning in 2016. The deal also included immediate access to Disney classics such as Dumbo, Pocahontas and Alice in Wonderland, with high-profile direct-to-video releases also on board beginning in 2013. Netflix stock immediately jumped 14% on the news.

Ben Feingold in 2004 (Media Play News archive).

Feingold says he believes the rush to sell movies to Netflix was a bad idea. Not only did it devalue films by including them on an all-you-can-watch subscription platform, but it also enabled Netflix to grow stronger at the studios’ expense.

“People were shortsighted,” Feingold says. “When you work at a large public company and you have a bunch of bombs or a bad quarter, there’s a lot of pressure from the finance people to make your number. So somebody comes along and offers to plug a hole, so they do it and worry about the future later. But you should never let short-term profits affect your strategy.”

Warren Lieberfarb, Warner Home Video president from 1982 to 2002, maintains that licensing product to Netflix “would ultimately prove to be cannibalistic to the linear cable networks, pay-cable networks, ad-supported cable networks, and broadcast television networks that were owned by these same studios’ parent companies. And those networks were the largest sources of profits for the media conglomerates. The studios were creating a behemoth that years later they would try to copy, but in the interim they were threatening their own cable and broadcast interests.”

The push for newer, better movies paid off. In 2012, streaming brought in an estimated $2.34 billion, up 45.8% from the prior year and nearly twice the revenue generated just two years earlier. But by then, Netflix was no longer the only game in town. In June 2010, Hulu, a joint venture between News Corp, NBC Universal and the Walt Disney Co. to aggregate recent episodes from their respective television networks for free showing over the internet, launched a subscription streaming service, called Hulu Plus, that featured full seasons of TV shows. Then, in February 2012, Amazon launched a free streaming service for Amazon Prime subscribers while continuing to offer transactional rentals and sales through the Amazon Video Store.

Studios Push Digital Ownership

Meanwhile, studios continued to pursue their dream of selling movies digitally rather than physically, with no manufacturing or shipping costs and no returns. First they added digital copies to Blu-ray Discs and DVDs; then they began giving digital releases an early window, generally two weeks before the disc. Sony Pictures kicked things off in October 2011 with Bad Teacher, followed by 30 Minutes or Less in November. “The studio liked the results,” Deadline reported at the time. “Sony says total digital revenues were 24% higher than comparable films released the same day as discs.”

To further goose digital movie sales, five of the six major studios banded together to support UltraViolet, an initiative to provide disc buyers with a digital rights “locker” that enabled consumers to play back their purchased content on participating retailer sites. UltraViolet, launched in the fall of 2011, allowed consumers to access their purchased content anytime, anywhere, on a wide variety of devices, from smartphones to tablets.

UltraViolet was an attempt by studios to boost digital movie sales by providing consumers with a digital rights “locker” that would let them play back their purchased content on participating retailer sites. It was hampered by the lack of key digital retailers Apple, Amazon and Google and was ultimately shut down in 2019. (Media Play News archive)

Even so, EST grew slowly, in part because of the split between Disney and the other studios. Disney launched its own digital locker in February 2014, called Disney Movies Anywhere. UltraViolet stumbled along for several more years, hampered by the lack of key digital retailers Apple, Amazon and Google, before being shut down in 2019. By then, another digital locker had emerged: Movies Anywhere, an outgrowth of Disney Movies Anywhere. But, again, studio support was not unanimous; this time the holdouts were, and remain, Paramount and Lionsgate.

Observers say pricing was a key factor as well: Consumers had grown accustomed to lower prices for digital content through e-books and music, and yet digital movies were priced equal to, or higher than, a DVD or Blu-ray Disc.

Studio efforts to grow digital sales as well as rentals — a business model that by then was being called “transactional video on demand,” or TVOD — were aided by the emergence of several other high-profile “digital retailers.”

One of the first was Microsoft, which launched its video service in 2006, the same year as Apple and Amazon. “The tech-savvy gamers of the Xbox 360 quickly adapted to the instant accessibility of movies with the Xbox Video Store in 2006; this gamer audience helped fuel the business and understanding of digital distribution at a time when TVs were not as smart and broadband penetration was starting to reach a larger audience,” says Pedro Gutierrez, business and marketing category lead for entertainment, consumer applications and advertising at Microsoft.

Then came Vudu, which in 2009 became the first VOD service to sell downloads of high-definition movies. A year later Vudu was acquired by Walmart, whose own attempts to begin selling movies digitally in 2007 had failed due to the popularity of iTunes.

Others followed, including Google Play in February 2012; FandangoNow, an offshoot of the popular Fandango movie ticket service, in 2016; and Redbox On Demand in December 2017.

Redbox, best known for its fleet of 40,000 bright-red disc-rental kiosks, launched a digital movie store in December 2017. The company has since mounted an ambitious digital transformation and now offers streaming as well as free live TV.

On the cable side, one of the biggest developments was the November 2013 announcement by cable titan Comcast Corp. that it planned to start selling movies via set-top boxes and its Xfinity TV website. At the time Radio+Television Business Report noted that “the move … shouldn’t be difficult since movie studios are actively looking for ways to increase digital sales as customers continue to move away from DVD purchases.” Comcast achieved modest success because it promoted the sale and rental of movies and provided an on-screen program guide.

In 2012, according to estimates from DEG: The Digital Entertainment Group, digital rentals generated just under $2 billion in consumer spending, while digital purchases, or EST, brought in $811 million. Together, that’s more than consumers spent on streaming. But five years later, in 2017, digital rentals and sales, combined, generated an estimated $4.1 billion — less than half the $9.6 billion generated by subscription streaming.

Streaming Soars

A lot had happened on the streaming end in those five years. Netflix accelerated its international expansion efforts, which had begun in Canada in 2010; by 2017, the streamer had a presence in 190 countries. The Harvard Business Review notes, “How did it expand so quickly? First, it didn’t enter all markets at once. It started slowly, in countries that were similar to its U.S. home market. Using what it learned in these markets, it expanded to a few dozen countries by 2015, and then continued learning and growing from there.” At the January 2016 CES, Netflix announced a major international expansion into some 130 new territories, including most countries in Africa. “That marks a substantial increase in the size of Netflix’s global network, which previously spanned 60 countries in North America, Latin America, Europe, and in the Pacific,” the Los Angeles Times noted at the time. “Now, Netflix has services in more than 190 countries, including Russia, India, South Korea and Saudi Arabia.”

Netflix’s global growth strategy was rooted in localism. The company developed programming that would appeal to specific countries and regions, and invested heavily in local-language options for both dubbing and subtitling.

Netflix also took technology into account and deployed dedicated servers for streaming in countries where broadband capacity wasn’t up to snuff.

In addition, Netflix shifted its domestic strategy from relying on Hollywood movies to producing and acquiring its own content, beginning with “Lilyhammer” in 2012. A year later came “House of Cards,” the first original web series to snag major Emmy nominations, and then the much-lauded “Orange Is the New Black.” In 2016, Netflix released 126 original movies and shows, and the following year announced its intent to have original content account for half its programming menu — at a cost of $8 billion.

“It’s the old adage that content is king,” Mike Fidler observes. “As Netflix became more powerful with their subscription universe, it became essential for them to develop their own content and to go beyond Hollywood movies to international programs and serial programming with less dependence on first-run movies.”

This year, Netflix is expected to spend $18 billion on original content, with a 2022 pipeline consisting of 68 feature films and just under 400 original series.

Success invariably breeds envy, so it was no surprise that as Netflix grew, so did talk of high-profile competition beyond Amazon Prime Video, whose size no one really knows for sure because subscriptions include free shipping from the parent company, and Hulu, whose focus has always been on TV product. November 2019 saw the launch of streaming services Disney+ by The Walt Disney Co., and Apple TV+, a streamer from Apple.

Pandemic Push

Then, just as people began talking about “streaming wars,” came the pandemic. The World Health Organization’s March 2020 declaration of a worldwide COVID-19 health crisis triggered a surge in streaming, with theaters shuttered and people told to stay home. Restrictions loosened, then tightened again at the end of the year with a second wave of the virus. WarnerMedia had a captive audience for the May 2020 launch of HBO Max, as did NBC Universal for the July 2020 debut of Peacock. The streaming business got another big boost in December when WarnerMedia announced it would release its entire 2021 slate of 17 high-profile feature films simultaneously in theaters and on HBO Max, an initiative it began on Christmas Day 2020 with Wonder Woman 1984.

Consumer spending on streaming had already been climbing, from an estimated $12.9 billion in 2018 to $15.9 billion in 2019. But 2020 saw the biggest gain yet, a whopping 37.2% increase to $21.2 billion, or 70% of total consumer spending on home entertainment, according to estimates from the DEG.

For the transactional business, both physical and digital, the pandemic proved a double-edged sword. On the one hand, homebound consumers were hungry for entertainment, which is why they flocked to streaming. But on the other, the closure of movie theaters prompted studios to postpone major new theatrical releases or hand them off early to their SVOD subsidiaries.

And while the pandemic did make premium video-on-demand a reality, with studios premiering the movies they didn’t hold back to home viewers at a higher purchase or rental price, the revenues generated by PVOD weren’t credited to home entertainment. “Our estimate is there’s $1 billion of consumer spend that’s not captured in the numbers that you’re presenting,” Universal Pictures Home Entertainment president Michael Bonner said in an August 2021 DEG presentation in which the trade group announced its first-half home entertainment spending estimates.

Still, DEG estimated significant gains for the digital side of the transactional business in 2020, with consumer spending on digital rentals up 18.3% to $2.3 billion and spending on digital purchases up 16% to nearly $3 billion.

In the following year, 2021, DEG estimated that transactional digital sales and rentals, stung by a continued lack of product and early windows for streaming services, fell 21% to a combined total of $4.19 billion.

Streaming, meanwhile, posted another 20% gain in consumer spending to an estimated $25.3 billion, or 80% of the home entertainment spending total. Netflix finished the year with a global subscriber count of 222 million, 75 million of them in the United States and Canada, while Disney+ in its latest earning release said it had nearly 130 million subscribers worldwide, 42.9 million of them in North America. (Apple TV+ proved to be a nonstarter, although on a January 2022 earnings call Apple CEO Tim Cook, while providing no numbers, said the whole intent was “to give storytellers a place to tell original stories.”)

HBO Max, combined with its linear sibling, HBO, ended 2021 with 73.8 million subscribers, more than 46 million of them domestic. Peacock in January 2022 announced it had 9 million paid subscribers at the end of 2021 and that it would double its budget for original content to $3 billion in the new year.

The competition intensified in 2021, with the January launch of Discovery+ and the March debut of Paramount+. Both services ended the year with respective subscriber counts of 22 million and 32.8 million.

And yet the streaming business is not without its challenges. In industry circles there’s more and more talk of streaming fatigue, as the costs of stacking multiple subscriptions rise. (A TiVo study last year found the average consumer is spending $142.20 a month on high-speed internet and SVOD — more than the average $100 cable bill.) And there’s a relatively new kid in town, ad-supported VOD, that takes away some of the sticker shock in return for commercials — just like broadcast TV. Some services are discounted; others are completely free. And some don’t even require subscriptions. Those that present television content online are known as free ad-supported TV, or FAST.

Redbox, the company known for its more than 40,000 bright-red kiosks offering DVD and Blu-ray Disc rentals, is in the midst of a digital transformation focused on streaming. Redbox CEO Galen Smith says the resurgence of home entertainment after the lean pandemic years has so far been dramatic.

“It’s a great time for entertainment, with people coming back to theaters and studios releasing more, and bigger, movies again,” he says. “On our end, we want Redbox to be a full-service entertainment destination for everyone.”

A ‘Layer Cake’ of Viewing

What does the future have in store for digital entertainment? Most observers see consolidation ahead for SVOD services — already, the newly minted Warner Bros. Discovery has announced plans to combine HBO Max with Discovery+ — and continued growth for AVOD, with TVOD holding its own as more content enters the distribution channel.

Redbox’s Smith says he thinks that given the current economic conditions, including inflation and rising gas prices, consumers will begin cutting back on their SVOD services and attrition rates will rise.

“They will sign up for months when programming they’re interested in will be available, and cancel after watching. It’s going to be an interesting year given all these factors. I think you’ll see consumers seeking cost-conscious entertainment options that include free options like AVOD and FAST services, as well as inexpensive new movie rentals like those at our Redbox kiosks.”

Ben Feingold, the former Sony Pictures Home Entertainment president, says he believes AVOD is the wave of the future. “Free movies for people — it’s crack for the consumer,” he says. “And with all the ad revenues sliding off cable, AVOD will continue to grow. One of the ways AVOD works is you can data mine and find your audience set a lot easier, so there’s opportunity in niches.”

Paramount Home Entertainment president Bob Buchi’s perspective: “The entertainment industry has flourished over time through a strategy of windowing that serves to maximize the revenue throughout the lifecycle of a title and provides consumers with a variety of viewing options that best fits their lifestyle. With the proof of these last 25 years, we can be assured of the power of the theatrical experience and that entertainment at home will continue to evolve and that multiple formats, both transactional and subscription, can and will continue to coexist and thrive.”

Microsoft’s Pedro Gutierrez agrees. “The only certainty for the future is the continued need to provide consumers with the choice of how they want to view their desired entertainment,” he says. “There is an opportunity for SVOD, AVOD and EST/VOD to coexist, which will result in varied growth and consumer shifts amongst the three service types. Entertainment enthusiasts will subscribe to the SVODs that have their favorite content, AVOD gives the consumer a more limited yet free access to content, and EST provides consumers with the ability to build their always-accessible film library.”

Jim Wuthrich, head of content distribution for WarnerMedia, agrees that choice is the No. 1 factor. “Think of it as a layer cake rather than replacement — each new service is additive to the options of viewing,” he says. “Some services may get squeezed, but they don’t go away. Subscriptions are here to stay and will continue to fuel more of the content industry. But we will also see increased uptake of hybrid services such as HBO Max that combines a lower subscription fee with advertising. Purely ‘free’ services (AVOD/FAST) will continue to attract audiences as viewers migrate from traditional pay-TV bundles. EST and TVOD provide an a-la-carte option and serve the purpose of collecting and sampling. Together, along with the physical disc, terrestrial TV, cable and satellite, the video options lead to more viewing — and a tastier cake.”

And what does Warren Lieberfarb, the man most responsible for the digital revolution through his push for DVD 25 years ago, have to say about all this?

Consolidation among streamers is pretty much assured, he says, given the high cost of producing original content and maintaining a steady flow of current expensive, quality product. “Attracting new subscribers and retaining existing subscribers — minimizing churn — requires high-quality, audience-satisfying new productions,” he says. “This is akin to an ‘arms race’ for audience attraction and retention.”

As for AVOD, he’s not so sure. “Consumers have shown a willingness to pay for commercial-free content for over 50 years through commercial-free cable, VHS, DVD, Blu-ray Disc and streaming,” he says. “Commercial-free movies and TV shows are a highly engaging entertainment experience, and one I believe consumers will continue to be willing to pay for.”

25 Years of Digital Entertainment — Part One: The Disc That Changed the World

Twenty-five years ago this month, the spark was lit for what has grown into a $32 billion-per-year business. The March 1997 U.S. debut of DVD was not only the most successful consumer electronics product launch in history. It was also the start of the digital revolution in home entertainment.

Without DVD, there would be no Blu-ray Disc or 4K Ultra HD Blu-ray, still the format of choice of movie purists and collectors. Without DVD, there would be no digital distribution or streaming. That’s right — there would be no Netflix, no Disney+, no HBO Max, no Hulu, no Peacock, and no Paramount+.

DVD’s compact size and high capacity also made it feasible to put entire TV series in one neat little package, which led to “binge-watching,” rooted in the TV-on-DVD explosion of the early 2000s and now part of popular jargon, and a regular habit, thanks to Netflix.

As a Microsoft tribute ad to Warren Lieberfarb, the Warner Home Video president hailed as the father of DVD, noted, the shiny little digital disc “helped usher in a new era of technology that changed the world.”

Media Play News is celebrating 25 years of digital entertainment with a two-part special report. This month, we will chronicle the development, launch and rise of DVD and its two successor disc formats, Blu-ray Disc and 4K Ultra HD Blu-ray. Next month, we will trace the history of digital distribution, including electronic sellthrough, digital rental and streaming.

Beginnings

The origin of the DVD can be traced back to 1986 when Warner Home Video, under the direction of president Warren Lieberfarb, first advocated for the development of a format to put movies on a five-inch optical disc, similar to the CD that had taken the music industry by storm just a few years earlier.

As the years progressed, Lieberfarb’s drive to develop a video disc for the distribution of movies intensified. After more than a decade of steady and significant growth, the home video industry — centered on the rental VHS videocassette — had begun to flatten. The novelty of renting movies was fast wearing off, and the cable business was aggressively courting consumers with more and more appealing pay-per-view options.

The path to DVD, however, was far from a straight one. It had many twists and turns.

Read our EXCLUSIVE Q&A with Warren Lieberfarb

“CD was launched in 1982, and when this became a mass-market success, it really drove the home video industry through a number of trials and errors,” said veteran industry consultant Marc Finer. “This included everything from evaluating the somewhat outdated Video CD format — which was limited to 80 minutes of video and/or still images — to rebranding the analog Laserdisc as CD Video, which was scrapped because it was felt this would simply cause consumer confusion. The ultimate solution was to develop an entirely new format that combined the portability and convenience of the audio CD with the latest state-of-the art video technology.”

Lieberfarb envisioned this new type of video disc riding the coattails of the CD explosion and turning consumers from renters into buyers — and generating significantly higher profits for the studios. He charged his organization with achieving this vision in an attractive, convenient, collectible form that — unlike the high-cost, cumbersome existing Laserdisc system — could be easily and inexpensively replicated.

“The goal was to have a form of packaged media that would be economically superior to the margins and royalties of pay-per-view, and to offer the consumers higher quality and convenience than the VHS rental market,” Lieberfarb said.

Warren Lieberfarb (right) and Ben Feingold, at the time presidents of Warner Home Video and Columbia TriStar Home Video, at the opening business session at the 1997 Video Software Dealers Association (VSDA) convention in Las Vegas, where the discussion was focused on DVD. (Media Play News archive photo)

The DVD project — code-named TAZ after Warner’s whirling Tasmanian Devil cartoon character — plunged Warner Home Video into a new world of advanced technology. Lieberfarb and his team, working closely with Toshiba Corp., soon became familiar with such new concepts as a bonded disc, digital assets management, authoring and other related production issues.

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Beyond developing these new technological skills, the Warner team had to negotiate the specifications of the DVD system with the very different corporate cultures of the CE and IT industries, as well as the unique business cultures of its Asian and European partners. Within the Warner Home Video organization, a “Manhattan Project” spirit developed, as more members of management were brought in to apply their special expertise to TAZ — encouraged by the new format’s potential.

Then, in 1992, Sony and Philips announced their own intent to develop a high-capacity video disc utilizing CD replication technology.

Take a photographic journey back to 1997, when DVD launched in the U.S.

Development work at Warner accelerated. The Warner-Toshiba consortium in June 1994 officially announced the development of a five-inch Super Density (SD) disc, which could hold an entire movie. Three months later, in September, Sony and Philips announced their own specifications for a high-capacity video disc, called the Multimedia Compact Disc (MMCD).

Fears of a format war rippled through the industry as 1994 turned into 1995. But with the disruptive battle between VHS and Betamax still fresh on everyone’s minds the rival disc consortiums — Warner and Toshiba on one side, Sony and Philips on the other — began working on a compromise.

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The final agreement was announced in December 1995, with both sides agreeing to support something called the DVD, which initially stood for “Digital Versatile Disc,” a moniker that over time evolved to Digital Video Disc.

“We all knew that we needed to work out a solution to bring a unified and fully supported new technology to market,” said Mike Fidler, who just before the March 1997 launch of DVD moved from Pioneer Electronics to Sony Electronics, where he was SVP of marketing. “We understood that consumers, as well as retailers and stakeholders, needed a single solution that could deliver all the incredible benefits of a CD-like optical disc, including high performance, high convenience and low cost, to drive a new sellthrough video business. All companies worked together to deliver this vision.”

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‘A True Pop Culture Phenomenon’

After that, things happened fast. In November 1996, the first DVD players went on sale in Japan with a small assortment of titles, mostly music videos. The first feature films on DVD appeared in Japan on December 20 — The Assassin, Blade Runner, Eraser and The Fugitive from Warner.

Consumer electronics companies showecased their new DVD players at the January 1997 CES in Las Vegas. There was no content yet available to play on the new machines, but they attracted quite a bit of attention–and commanded a fair amount of floor space.

DVD was quite prominent on the show floor of the January 1997 CES. (Consumer Technology Association photo)

For the U.S. software launch, a handful of Imax documentaries arrived on March 19, 1997, with the initial batch of DVDs from Warner and MGM arriving in a seven-city test March 24. Titles in that first box of about 20 movies included Twister, Bonnie & Clyde and The Mask, all packaged in the cardboard “snapcase” that Lieberfarb is said to have preferred.

In May 1997 the first music video titles were released on DVD, including Eric Clapton: Unplugged.

In June 1997, the DVD Video Group was established, with the goal of being the “singular source” of information about the format, Billboard observed at the time. Organized by the late Philips executive Emiel Petrone, the group helped facilitate a unified marketing message across all of the industry’s leading companies.  

Read WarnerMedia executive Jim Wuthrich’s guest column, ‘Lifting and Shifting from the Disc Into the Digital Stream’

In July 1997 what was then MCA/Universal Home Video said it would support the nascent format. That month, the Video Software Dealers Association (VSDA) held its annual convention in Las Vegas, and devoted the opening business session to a panel of studio home video presidents discussing DVD and its potential.

In August 1997 Warner went national with DVD, putting discs in nearly every major home entertainment retail chain, including Best Buy, Musicland and Tower Records. And in September Walt Disney Studios announced its support for DVD as well.

Bob Chapek, CEO of The Walt Disney Co., remembers those days well. “At that point I was SVP of marketing for home video, running marketing, essentially,” he said. “What I was actually doing was making sure those discs would actually play, because if you remember there were some playability issues, as there are with all new formats, compatibility issues between players and discs, and making sure that anything we put in the marketplace was going to actually deliver on what the consumer expected. And then, shortly thereafter, we started innovating, trying to take full advantage of all the capabilities that the new digital format had. More than just no need to rewind, right? Or you can start a movie anywhere you wanted to — there wasn’t that linearity, and we tried to take advantage of that in so many ways.”

Twentieth Century Fox, led by feisty ex-Disney home video chief Bill Mechanic, was a conspicuous holdout — in part, observers said, because of Lieberfarb’s command of the spotlight. Citing piracy concerns, Mechanic pushed for digital VHS, the videocassette’s last gasp, which never really got off the ground. When a reporter subsequently asked when Fox would join the other studios in supporting DVD, Mechanic’s flippant response was, “Ask Warren Lieberfarb.”

Then, just as DVD was beginning to gain some momentum, along came Divx, a pay-­per-play variant championed by the CEO of Circuit City, one of the country’s major consumer electronics retailers. Fox, not surprisingly, embraced Divx, as did Paramount, Universal, Disney and DreamWorks.

But Divx died a surprisingly swift death, done in by a failure of consumer electronics manufacturers — who were focusing on making more, better and cheaper DVD players — to support it. The playing field was obstacle-free, and DVD’s popularity began to accelerate.

In February 1998 Air Force One became the first DVD to ship more than 100,000 units. In April, Paramount announced its intent to release movies on DVD, followed in August by a reluctant 20th Century Fox and, in September, by DreamWorks.

An early Warner Home Video ad for DVD. (Media Play News archive photo)

The percentage of people who switched from renting to buying movies kept rising, surpassing even Lieberfarb’s initial projections. In November 1998 the 1 millionth DVD player was shipped to retail; in December it was reported that DVD players were in 1.4 million U.S. homes, and that these households had snapped up a whopping 23 million discs that year alone. Computer makers announced shipments of 6 million PCs with DVD drives.

In August 1999 Titanic became the first DVD to ship 1 million units. In October, Disney announced that the first of its vaunted animated classics to be released on disc would be Pinocchio. And by December 1999 4 million U.S. households had at least one DVD player; software shipments, meanwhile, had quadrupled to 98 million discs.

“It was a heady and exciting time,” said Fritz Friedman, who at the time headed worldwide publicity for Columbia TriStar Home Video (now Sony Pictures Home Entertainment).

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“DVD brought home entertainment into the digital age. Digitized content provided such superior image and sound quality that once the consumer experienced DVD, it was hard to go back to tape. Commercially, thanks to the bigger margins on DVD and robust sales, the home entertainment industry entered what I would say was the beginning of a ‘golden age’ in our business. And this success subsequently gave our home entertainment execs seats at the studios’ theatrical production meetings because the huge revenues generated by DVD contributed greatly to a film’s bottom line. Thus, home entertainment revenue potential became a vital consideration in determining theatrical release slates.”

To enhance the value proposition of buying movies rather than renting them, studios began adding bonus content, from deleted scenes and bloopers to detailed documentaries about the making of the film, and director and cast commentaries.

“For New Line, introducing the new DVD format was pure nirvana, energizing and challenging us to think completely out of the box,” said Stephen Einhorn, at the time president of New Line Home Video.

Chapek adds, “I work with Pete Docter still to this day, and I remember innovating on Monsters Inc., with the two paths on the menus, one for kids, one for adults, and it was a completely different experience.”

The swift rise of DVD also allowed two young tech entrepreneurs, Reed Hastings and Marc Randolph, to revive the floundering rental market by doing away with the most hated aspect of the video rental experience: returning copies to the video store, often with hefty late fees.

After first making sure a DVD was below the 13-ounce limit for first-class mail, they launched a company called Netflix that allowed customers to rent movies by mail and then return them in a postage-paid envelope. Hastings, who provided $2.5 million in seed money, had reportedly come up with the idea after he was forced to shell out $40 in late fees for an overdue copy of Apollo 13. By 1999 the company had settled on a subscription model; Hastings enlisted two veteran video “rentailers,” Ted Sarandos and Mitch Lowe, as his wingmen and sent them on the road to talk up the Netflix concept, armed with a white plastic mailbox as a prop.

Reed Hastings and a stack of DVDs Netflix would rent by mail. (Netflix photo)

The business grew rapidly; within a year there were 100,000 subscribers, including Colin Powell. In early 2000 Hastings and Randolph offered to sell Netflix to Blockbuster for $50 million. Blockbuster turned them down.

By 2003 Netflix had 1 million subscribers, and two years later the service was reportedly renting 1 million movies a day. Blockbuster, meanwhile, was on a losing streak, culminating in the chain’s 2010 bankruptcy.

In the meantime, DVD’s fortunes kept rising. In October 2000 Sony’s highly anticipated new PlayStation 2 video game console came to market with DVD playback. By December of that year DVD players were in 13 million homes, and it was reported that consumers during the year had bought 182 million discs.

In June 2001 holdout George Lucas announced that Star Wars: Episode I — The Phantom Menace would appear on DVD in October, the first “Star Wars” film to be available on the format.

In October 2001 MCA/Universal announced first-week sales of 25 million units of The Mummy Returns. A few days later, Disney said the DVD debut of Snow White and the Seven Dwarfs was the first DVD title to sell a million copies in a single day. That kicked off a running sales-record battle, with the trade press inundated with press release after press release touting a new victory of one sort or another.

By December 2001 the industry was preparing for a very giddy, gleeful Christmas. The latest stats showed DVD players were now in 25 million U.S. households, with total discs sales for the year at 364 million.

In April 2002 DVD player shipments hit 30 million. Two months later, Netflix — the upstart rental organization that offered DVD rentals by mail — opened 10 distribution centers, paving the way for next-day delivery. Also in June, the Motion Picture Association of America reported that DVD accounted for 40% of the studios’ total worldwide revenue.

In August 2002 The New York Times dubbed DVD “the most successful home entertainment device in history … a true pop-culture phenomenon.” A month later, Disney’s Monsters, Inc. became the first major animated film to sell more copies on DVD (7 million) than VHS (4 million) its first week in stores.

In October 2002 DEG: The Digital Entertainment Group (originally, the DVD Video Group) reported that 153 million DVDs had been shipped to retailers in the third quarter, twice as many as in the third quarter of the previous year. Since launch, the DEG reported, more than 1.1 billion DVDs had been shipped to retailers — 425 million, or nearly 40%, in the first nine months of 2002.

As holiday sales began to heat up, DVD was again front and center — both at the sales counter and as a press-release topic from the studios. In November, what was then Columbia TriStar Home Entertainment (now Sony Pictures Home Entertainment) said Spider-Man set a new sales record, shipping 26 million units in North America, 20 million of them DVD.

In September 2003 the studios began to assemble a variety of multi-disc boxed sets aimed at the gift market and diehard DVD fans looking to enhance their collections. In October, analyst Tom Adams of Adams Media Research revised buy rates upward to 15.5 DVD units per household per year, citing “phenomenal” sellthrough growth in the first half of the year. By December 2003 50 million U.S. households had at least one DVD player. The following month the DEG reported that consumers had spent $11.6 billion that year on buying DVDs and another $4.5 billion on renting discs.

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Decline

This success could not have been achieved without retail support. As soon as DVD began to take off, the big mass merchants rallied behind it, using DVD to drive store traffic even if it meant selling discs at loss-leader prices.

Rental dealers, even the mighty Blockbuster chain, were slow to migrate to DVD, and by the time they did the business was firmly in the hands of the big chains. There was no way they could compete on price.

Netflix wasn’t the only company to delve into DVD rental. McDonald’s began renting DVDs in vending machines and in 2005 sold half the company, known as Redbox for its bright-red kiosks, to Coinstar, whose primary business was coin and bill-changing machines. Kiosks were placed outside high-traffic discount stores, supermarkets and drug stores. Redbox flourished — despite litigation from studios that felt the cheap dollar rentals cannibalized DVD sales. In 2016 Redbox was sold to Apollo Global Management and became a standalone company.

Consumer spending on DVD purchases hit $15.5 billion in 2004, up 33% from the prior year. But in the fourth quarter of that year softer-than-expected sales on certain new mega-hit theatricals suggested to some that the gravy train might be running out of steam.

Bob Chapek, then president of the Walt Disney Co.’s home video distribution arm, Buena Vista Home Entertainment, told Home Media Magazine at the time, “It’s an indicator that things might be slowing down.
I expect that next year we’re going to see a significant fall in the buy rate per household. Maybe the 30th percentile will buy as much as the 20th, but with the 70th percentile you start to hit the laggards.”

Even so, in February 2005 DreamWorks’ Shark Tale sets a new record for a February sellthrough release, selling 6 million units its first week in stores. In April the DEG announced DVD shipments of more than 400 million units in the first quarter of the year, up 21% from the first quarter of 2004.

VideoScan data showed sales to consumers rose 20.5% in the same period.

Then came a dismal 2005 holiday season, with title after title missing its sales target. The press releases touting new sales records abruptly stopped. And when the year-end numbers were tallied, they showed DVD sales with a mere 5% gain over 2004 — a far cry from the double-digit increases to which the industry had grown accustomed.

Observers attributed the slowdown in DVD sales to a maturing market, as well as the emergence of high-definition TVs. But worry not, studio executives told fretful retailers: A next-generation, high-definition disc format is just months away from launch.

The only problem was, there were two of them.

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Next-Generation Blues

Work on a high-definition disc format began even as DVD was in the early stages of its meteoric rise in popularity. The best minds of the consumer electronics industry knew that as clear and crisp as DVDs looked on regular TVs, they were not meant for the new breed of high-definition TVs poised to take over the market, and it was imperative to develop a next-generation optical disc that could present viewers with true 1080p HD.

Rival high-definition, next-generation formats at the January 2008 CES. (Media Play News archive photo)

After years of lab development, Sony Corp. in 2000 unveiled a pair of projects — one in partnership with Pioneer — that employed blue-laser technology, with the promise of far greater capacity than DVD. The first prototypes were displayed in 2000, and two years later the Blu-ray Disc rewritable format was officially unveiled. The nine founding members of the format — Hitachi, LG Electronics, Matsushita Electric Industrial (which later became Panasonic), Pioneer, Royal Philips Electronics, Samsung, Sharp, Sony and Thomson Multimedia (which later became Technicolor) — began releasing specifications, and the first consumer Blu-ray Disc home recording device, the Sony BDZ-S77, was released in Japan in April 2003 with a price tag of $3,800. It was touted as a means of recording high-definition broadcasts; no studio content had yet been released on the new disc.

But the DVD Forum, led by Toshiba, had other ideas. Also in 2003, the consortium behind the original DVD launch adopted specs for a high-definition successor that they called HD DVD. It employed red-laser technology, the same as DVD, but on a higher-density disc.

The battle lines were drawn around a fundamental philosophical difference. The HD DVD camp wanted to ramp things up as quickly as possible, with a format that was evolutionary in nature: It used the same red-laser technology as standard DVD, but on a dual-layer disc with three times the capacity of a standard DVD — ample room for a high-definition picture, better sound and more extras. It was also an open format that could be brought to market quickly to start meeting the needs of consumers looking for high-def content on disc.

Blu-ray Disc, on the other hand, was a revolutionary new product that employed blue-laser technology and offered even greater capacity — six times that of a standard DVD. It wasn’t seen as an interim step, but as a “format of the future” more than capable of accommodating expanded interactivity and associated broadband services — a promise that certainly has come to pass.

Warren Lieberfarb, the father of DVD, was among Blu-ray’s harshest critics, calling it “vaporware” and questioning whether it would ever be brought to market.

On the content side, Ben Feingold, who at the time was president of what is now Sony Pictures Home Entertainment, pushed for studios to rally behind Blu-ray Disc several years before they ultimately did. In a presentation to the Sony board, he recalls, “I said, ‘We need to accelerate the next-generation format,’ and their response was, ‘We’re doing so well with DVD, why would we go to a new format?’ I told them I was noticing a very sharp drop in early adopter purchases, and I was kind of alarmed at the decay.
I told the board we have to obsolesce to keep ourselves in the game, like the tech companies are always doing, with a better product. Sony agreed, but everyone else said we don’t want to do that.”

Blu-ray Disc ultimately was launched in the United States in June 2006, at the same time that HD DVD appeared on the scene. What followed was a format war every bit as bruising and destructive as critics had feared. Studios lined up on either side of the aisle, with Universal, Paramount and Warner Bros. supporting HD DVD, and Sony, Disney and Fox rallying behind Blu-ray Disc.

Consumers, caught in the middle, were understandably confused — and reacted by not buying either format. Fueling their hesitancy was the emergence of digital distribution options. Consumers had become accustomed to buying their music over the internet — so why not movies?
Netflix thought the same; in 2007, just one year after the launch of Blu-ray and HD DVD, the company augmented its disc-by-mail rental business by offering its subscribers the chance to “stream” movies and TV shows over the internet.

The format war, Feingold said, “was very damaging — it delayed everything by about 18 months.”

Why wasn’t there a compromise, as there had been with DVD?

“There were two issues,” Feingold said. “There were competing hardware companies that didn’t want to agree on a standard — led by Toshiba on one side and Sony on the other — because they were fighting over patents, royalties and pride. And the second issue was that studios were being induced through compensation to align with one side or the other. I made a bunch of deals with a number of companies to support the Blu-ray format.”

Ironically, 2006 turned out to be a banner year for physical media. Consumers spent more on disc sales and rentals than they ever had before — or since. Total disc sales generated $16.6 billion in consumer spending, while disc rentals brought in another $7.5 billion.

Shortly after the two rival high-def formats came on the market, Warner Bros. and Paramount said they would support both formats. At the January 2007 CES in Las Vegas, the Warner Home Video team, in a nod toward appeasement, debuted a two-sided disc with HD DVD on one side and Blu-ray on the other. Even the packaging was half blue, half red, the colors adopted by the competing formats.

Warner Home Video at the January 2007 CES debuted a two-sided disc with HD DVD on one side and Blu-ray Disc on the other, held up here by Warner executives Ron Sanders (left), Steve Nickerson and Kevin Tsujihara. (Media Play News archive photo)

A big boost to Blu-ray came in late 2006 when Sony put a Blu-ray Disc drive in its new PlayStation 3.

In March 2007 Sony Pictures Home Entertainment’s Casino Royale was the first Blu-ray Disc to ship more than 100,000 units. That was also the same month that Blu-ray sales topped 1 million.

By this time, Blu-ray was already outselling HD DVD, and in June 2007 Blockbuster announced it would carry only Blu-ray. Disney gave Blu-ray Disc a significant push with extravagant media events for new Blu-ray releases such as the first two “Pirates of the Caribbean” movies in May 2007 and, that summer, an educational mall tour.

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The War Is Over

In January 2008 Warner announced it would support only Blu-ray after May of that year. Walmart and Netflix soon announced the companies would carry only Blu-ray. And on February 19, 2008, the high-definition format war officially ended, with Toshiba announcing it would no longer market HD DVD. Both Universal and Paramount, which several months before had gone all in on HD DVD, quickly announced their support for Blu-ray Disc.

By the end of 2008 there were more than 10.7 million Blu-ray players in the market, outpacing the adoption of DVD (5.4 million players by the end of its third year), according to the Blu-ray Disc Association. In October 2008 Walt Disney Studios Home Entertainment introduced the industry’s first Blu-ray combo pack, Sleeping Beauty, which sought to ease the transition from DVD to Blu-ray Disc by offering consumers the chance to get both formats in one package. Wall-E followed in November and High School Musical 3 came in February 2009. They were so well-received that the combo pack soon became an industry standard.

The January 2009 CES saw huge electronics industry support for the format, with Panasonic announcing the world’s first portable Blu-ray player, and Sharp unveiling HDTVs with built-in Blu-ray drives. By mid-2009 there were more than 2,500 Blu-ray releases in the market, and by the end of the year home entertainment leaders noted that despite the global economic meltdown Blu-ray Disc sales were up a whopping 70% from the prior year. Also in late 2009, former Blu-ray rival Toshiba announced it would begin selling Blu-ray players and laptops with Blu-ray drives.

The creative community also rallied behind Blu-ray. Director James Cameron said, “I wish all my movies could be seen by everyone at home in Blu-ray. It’s the image quality, it’s the color, it’s the quality control — it’s everything.”

James Cameron (third from left) and Jon Landau (far right) with DEG officers David Bishop, Craig Kornblau, Mike Dunn and Ron Sanders at Blu-Con 2010. (Media Play News archive photo)

A novel tangent briefly captivated the consumer electronics press, if not the consumer: 3D Blu-ray. CES 2010 was something of a coming out party for the throwback to the 1950s theatrical craze, with a flurry of 3D Blu-ray hardware announcements and commitments by DreamWorks Animation, Walt Disney Studios Home Entertainment, and Sony Pictures Home Entertainment to release 1080p 3D discs to owners of 3DTVs utilizing active-shutter glasses.

The glasses, however, hastened the format’s downfall. They were expensive, easily broken or misplaced, had to be recharged, and proprietary to each manufacturer. HDTVs with passive 3D, using glasses with polarized lenses of the same type employed by theatrical 3D, didn’t catch on either. And with limited content suitable for 3D presentation, the format experienced a rather quick decline.

Regular Blu-ray Disc, meanwhile, continued to gain ground, although not at the level of DVD. Consumers were reluctant to ditch their DVD collections and repurchase their libraries. Even if the DVD picture quality wasn’t quite as good, many considered it good enough. There was also a new kid on the block — disc-based video games — that siphoned away the young male consumers who had played a key role in DVD’s initial success.

“When we launched DVD there was no game platform other than cartridge,” Feingold said. “VHS sellthrough was pretty much limited to family-oriented product, with practically no ‘R’-rated product. DVD changed that, and guys started buying movies. Then the game platforms came, and guys started playing video games instead of buying movies.”

In March 2010 Redbox announced it would begin offering Blu-ray rentals at its kiosks in the summer. A month later, Avatar became the best-selling Blu-ray Disc ever, with initial sales of more than 1.5 million copies.

Blu-ray Disc sales up shot up another 68% in 2010, contributing $1.8 billion in revenue, with 11.25 million Blu-ray devices sold for the year, bringing the total U.S. installed base to more than 27 million households.

The Blu-ray Disc tide continued to swell, even as Netflix was growing its streaming service and studios began offering movies for sale over the internet, as downloads, through iTunes and other services.

But then history repeated itself: A new, even better TV came on the market, and, again, physical media didn’t have a seat at the table.

The first 4K TVs, billed as “ultra high-definition,” or UHD, were previewed at the January 2012 CES. They boasted more than 8 million pixels, compared to about 2 million pixels in a 1080p HDTV.

But as the Los Angeles Times opined at the time, “with so many consumers more than happy with 1080p (and 720p, a less-intensive level of high-definition), why bother?”

What’s more, the paper noted, “there’s nothing to watch in that format.”

It wasn’t until CES 2016 that a premium version of the disc format — 4K Ultra HD, with HDR, offering greater contrast and deeper, more life-like colors — was introduced, this time with full support from both consumer electronics manufacturers and the studios.

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A Third Generation of Disc

The first 4K Ultra HD Blu-rays went on sale in March 2016 and broke all sales expectations, even though there were just two players on the market, from Panasonic and Samsung. By then, more than 84 million U.S. households had at least one regular Blu-ray Disc player, and consumers had bought some 750 million Blu-ray Discs.

4K Ultra HD Blu-ray backers at CES 2016: 20th Century Fox’s Mike Dunn, Sony Pictures’ Man Jit Singh, Warner’s Ron Sanders, and Universal Pictures’ Michael Bonner. (Media Play News archive photo)

In October 2016 Eddie Cunningham, then-president of Universal Pictures Home Entertainment, said 4K Ultra HD Blu-ray “represents a transformative time in home entertainment,” delivering “an unprecedented viewing experience which we expect in turn will cement the format as the best way to watch movies at home.”

In January 2022 the Consumer Technology Association (CTA) reported that 4K Ultra HD TV penetration grew from 36% of U.S. households in 2020 to 52% in 2021, while DEG: The Digital Entertainment Group in February 2022 reported that sales of 4K Ultra HD Blu-ray Discs rose 6% in the fourth quarter of 2021 — the latest in a series of steady sales gains.

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A Proud Legacy

With 4K movies and TV shows readily available from Netflix and other streaming services, 4K Ultra HD Blu-ray has yet to expand beyond a niche market. And with streaming now accounting for nearly 80% of all consumer home entertainment spending, it is doubtful that it ever will.

Physical media remains a viable business, but its popularity has been on a downward slide for the past decade and a half. Consumer spending is a fraction of what it was in those heady days of 2006 when consumers spent more than $24 billion on buying and renting discs — at the time, mostly DVDs.

The following year, disc sales and rentals posted their first-ever decline, and as digital distribution and, in particular, streaming, took hold, the annual drop in consumer spending on physical media hit double digits.

Most recently, according to DEG estimates, total disc sales generated just $1.97 billion, while rentals brought in $822.7 million.

The total, $2.8 billion, is less than 12% of the 2006 tally.

And yet the disc’s legacy remains. As head of Studio Distribution Services (SDS), a joint venture between Universal Pictures Home Entertainment and Warner Bros. Home Entertainment to distribute DVDs, Blu-ray Discs and 4K Ultra HDs in North America, Cunningham is one of the few Hollywood executives who are still focused on the disc.

He’s quick to underscore DVD’s importance in the digital entertainment food chain — and maintains the disc business, small as it has become, still has years of life ahead.

“In many ways, the DVD was the beginning of the digital revolution for our industry,” he said. “While packaged media no longer occupies a lofty position near the pinnacle of the media business, it is still a significant category. Many consumers and collectors are still remarkably committed to physical purchasing, and the retail industry remains steadfast in their support for it.

“The Blu-ray Disc and 4K Ultra HD formats are still the best way to enjoy the highest-quality, uninterrupted, picture and sound in the home. And as long as retail stays engaged, we will have a good business for many years to come.”