http://www.nytimes.com/2005/01/31/business/media/31dvd.html?pagewanted=print&position=
January 31, 2005
Video Sales Abroad Are Good News in Hollywood. Shhh.
By ROSS JOHNSON
Here's a Hollywood riddle: If a car leaves Los Angeles at 9 a.m. traveling toward Reno at 30 miles per hour and another car leaves from Reno for Los Angeles at 40 m.p.h., when will the two meet?
Answer: We're not obligated to divulge that information.
It has always been hard to pry reliable numbers out of Hollywood, even when the numbers tell a happy story. The latest example of this is the growing influence of international DVD sales.
For the last two years, the Motion Picture Association of America, the lobbying group for the studios, has claimed that Hollywood loses $3.5 billion every year, almost all of it overseas, to the sale of illegally copied films, mainly on bootleg DVD's and their cheaper Asian equivalent, video compact discs (VCD's).
But the M.P.A.A. is far less forthcoming when asked how much money the Hollywood studios are making on legitimate foreign sales of home video (a category that includes DVD's, VCD's and VHS tapes).
"Those figures are confidential, and we don't release them," said Barbara Berger, a spokeswoman for the M.P.A.A.
By most estimates and anecdotal evidence, revenues from international home video sales are the fastest-growing part of Hollywood's business. The most reliable estimate comes from Screen Digest, a British data company, which calculated that the home video divisions of the United States studios garnered $11.4 billion in wholesale revenues from the $24.6 billion that overseas consumers spent buying and renting home video products in 2004.
What is more certain is that the windfall from overseas home video sales is affecting how the movie business is run. It is inflating budgets for films with big international potential (like the upcoming "Batman Begins"), changing how top stars negotiate their take of the profits and prompting studios to spend millions fighting piracy - particularly in Asia and Russia - that they fear will threaten lucrative developing markets.
"International home video is the last great profit center for the studios, and they are going to keep those numbers as smoky as they can for as long as they can," said Ron Bernstein, who runs the West Coast book department at International Creative Management, negotiating a piece of the net profit from films for authors.
The question of how to share the DVD windfall has been a sore subject among Hollywood's labor negotiators for the last year, but the studios have been able to hold their ground. The writers' and directors' guilds recently agreed to new contracts with no gains on the DVD issue. On Saturday, the national board of the Screen Actors Guild and the American Federation of Television and Radio Artists voted by a 2-to-1 ratio to recommend to members that they accept a new contract with the producers that had no gains for home video residuals.
No one argues that the studios are purposely underreporting international home video gross revenues or misrepresenting those figures to Hollywood artists who have back-end deals for a share of profits.
But the accounting of film and television syndication revenues obtained internationally has long kept auditors busy. Almost none of the multinationals that own the studios break out numbers for their home video divisions in Securities and Exchange Commission filings, preferring to lump them with feature film revenues into a single category called "filmed entertainment."
"The thing about studio accounting is that it's always tricky, but usually legit," said Ed Limato, the co-president of International Creative Management, who represents Mel Gibson, Richard Gere and Steve Martin. "Until we do an audit - and everybody does one nowadays - we don't get the video numbers broken out between domestic and international gross revenues."
For Mr. Limato and other agents for top talent, 2004 was a banner year. Stars are able to negotiate their own portion of home video revenues, unlike rank-and-file guild members who are locked into a royalty fee schedule. As a result, the star pulls in up to 7 percent of gross revenues from video distribution as a royalty - about a dollar for every DVD version of the films sold. The rest of a movie's cast typically shares in just 1.1 percent.
But don't expect the studios to gladly increase the portion not already going to top Hollywood actors.
"For a long time, the film business was a single-digit business on investment return," said Charles Roven, the producer of "Batman Begins" from Warner Brothers, a division of Time Warner. "Now, because of home video, it's a low double-digit business, and the studios want to make sure it doesn't go back into the single-digit business."
The next Batman project, due out in June, shows how international home video sales are altering the budget calculations of some blockbuster movies. Mr. Roven was able to get a budget, according to an executive at Time Warner who spoke on condition of anonymity, of more than $180 million, based on the expectation of high home video sales in the United States and abroad. The executive also estimates that the film's worldwide marketing budget may exceed $100 million.
It is a huge investment, considering that box office ticket sales for the Batman franchise have decreased worldwide, despite currency inflation, from $411 million for the first installment in 1989 to $238 million for the fourth movie in 1997.
"Warner Brothers would not be putting this kind of money into the film unless someone thought the investment would be retuned in home video," Mr. Roven said.
Still, an accurate measure of that money is not easy to find. Though independent United States data companies can supply an accurate count of the $27 billion in annual domestic spending on home videos by monitoring bar code scanning, no independent data company has the financial power to track international spending through those bar code systems. Even the leading entertainment industry trade papers do not track international consumer spending on home videos, or gross revenues for international distribution.
"We don't go after those numbers because they're just so hard to get," said Scott Hettrick, Variety's home video editor and the editor in chief of its sister publication, Video Business.
When it comes to their big international hits, the studios will go so far as to divulge how many units have been shipped. Jim Cardwell, the president of Warner Home Video, said that "Harry Potter and the Prisoner of Azkaban" - the third installment in the Potter franchise, released on home video two months ago - "had shipped 27 million units worldwide as of the end of January 2005."
At DreamWorks SKG, Kelley Avery, head of the company's worldwide home video team, said that "Shrek 2" was the top international seller last year with 37 million units sold, 13 million of them outside the United States. (Ms. Avery noted that the "Shrek 2" numbers were for net sales, taking returns into account.)
And the future could hold more good news for Hollywood. Historically, the sale of DVD players tends to stimulate greater spending on movies and boxed sets of television series. On average, an American household with a VHS tape player increases its spending on home video products by more than $100 annually after it acquires a DVD player, according Adams Media Research of Carmel, Calif. If foreign consumers continue to bring home DVD players and start buying DVD's at the rate United States consumers have done, the international video sales numbers could rise substantially.
Warner Home Video, which is the leader among the studios with a 20 percent share of international wholesale revenues, is counting on that increase. A Time Warner executive, who asked not to be named because of his company's policy of not breaking out home video figures, said that Warner grossed $2.25 billion in 2004 in international revenues and that the number "could easily hit $5 billion or $6 billion in three years."
If the gravy train continues for international home video, it will continue to push up budgets and benefit producers like Mr. Roven of "Batman Begins."
"Nowadays, it's the money, baby," he said.
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