DVDs Are Finally Paramount
Viacom Studio Aims to Revive
Fortunes by Exploiting Vast Library
By MERISSA MARR
And JOE FLINT
As Viacom Inc. looks to turn around its Paramount Pictures movie studio under new management, it has one key advantage: the old management's cautious approach to exploiting the studio's DVD library.
DVD sales of television and movie hits have been Hollywood cash cows for the past several years. But under the leadership of former Viacom Entertainment Group Chairman Jonathan Dolgen, Paramount was slow to embrace the boom because of concerns over piracy. Instead, the studio opted to hold many of its titles back for a rainy day.
That rainy day is here—and the dousing was so bad that Mr. Dolgen and longtime studio creative chief Sherry Lansing have been swept out of their jobs because of the studio's mediocre performance. Now Viacom co-President Tom Freston and new Paramount chief Brad Grey are looking for ways to revive the studio's fortunes, and selling DVDs is one quick and ready strategy.
Other studios, having aggressively mined their A-list and B-list catalog, are rushing out new properties like "The O.C.: Complete Season 1" within months of their original airing. Paramount, in contrast, still has a slew of unexploited vintage franchises to distribute, both on the movie and TV fronts. The studio is set to unleash a host of classics this year, including "Happy Days," "The Brady Bunch" and "The Beverly Hillbillies," followed later by shows such as "Beverly Hills 90210" and "Melrose Place."
The old 1980s show "MacGyver" is another one Paramount has up its sleeve. Viacom is expected to whip up some $15 million in sales and $5 million of profit from DVDs of "MacGyver," an action-adventure series about a troubleshooter who could disarm nuclear missiles with a paper clip or stop an acid leak with a Hershey bar. Similarly, the DVD series of "Charmed," a more recent show about three witch sisters, is expected to generate more than $60 million in sales and some $15 million in profit.
On the movie side, after bringing out some of its older library, Paramount is readying a big gambit on John Wayne movies. The Duke made a lot of movies for Paramount, and now the studio has consolidated many of his other films by acquiring a library called Batjac. The aim is to introduce new viewers to one of the studio's biggest stars, with titles including "The High and the Mighty" and "Hondo." At the same time, Paramount is pumping out a slug of other Westerns, as well as classics such as "The African Queen," and a more aggressive slate of special editions of newer movies, from "Titanic" to "Airplane!"
If Paramount's strategy works, analysts estimate its contribution to Viacom's bottom line could increase significantly, a welcome relief at a time when the company's radio business is stagnating. The first effects of the new DVD strategy are expected to be visible in Viacom's 2004 results, set to be released tomorrow.
Tom Lesinski, who is leading Viacom's DVD efforts as head of Paramount's home-entertainment division, articulates the new strategy as essentially fourfold: building Viacom's library with acquisitions like the Batjac and PBS catalogs; tapping high-margin TV and movie titles across Viacom; aggressively repricing titles; and doing deals like a recent one with Hasbro for the long-term rights to distribute videos based on properties such as G.I. Joe.
"Our strategy is designed to outpace the already solid growth in the DVD industry," he says.
Paramount had a 10% share of the $15 billion of catalog and new-release DVD sales in the U.S. last year, compared with 21% for Time Warner Inc.'s Warner Bros. and almost 16% for Walt Disney Co., according to DVD Exclusive research. Paramount estimates that 53% of its movie catalog and 95% of its TV library have yet to be released on DVD. The studio is expected to deliver 25%-30% growth in movie and TV DVD sales this year, with margins reaching as much as 50%. World-wide home-video revenue for Viacom properties is estimated to be around $3 billion.
Viacom's move comes just as DVD sales growth is poised to tail off. PriceWaterhouseCoopers estimates DVD growth will moderate in 2006, dropping to mid-single digits in 2007-2008. That said, sales of TV DVDs are expected to continue to show strong growth. Studios are also hoping that a less mature international market will pick up any slowdown of movie DVD sales in the U.S.
With so many titles scrapping for shelf space, Paramount's offerings will need to stand out from the crowd. Paramount hopes to improve its chances at the checkout by spending more on DVD marketing and cutting prices.
By waiting so long, Paramount missed out on the higher prices when DVD sales first took off. Defending his strategy, Mr. Dolgen says: "We had a rolling three-year plan of projects so that we could release our catalog in an orderly way." For instance, he argues that if Paramount had released "The Godfather" on DVD in 1998, instead of when it did in 2002, the movie wouldn't have been as successful, because DVD-player penetration was still in its infancy in the 1990s.
The biggest boost ahead is expected to come from TV DVDs. Viacom already has a thriving kids DVD business, thanks to Nickelodeon. While Paramount released 35 TV DVDs in 2002, that will jump to 220 this year. As a general rule, TV DVDs are more profitable to a studio. However, the expense of renegotiating the actors and producers, and clearing the music rights, can sometimes cut into profits. On the first season of "Happy Days," for instance, it cost almost $1 million just to get the music clearance.