Independents' DVD-making economics

There’s a Hollywood wizard sitting on my desktop, although it’s not the Harry Potter kind. For just €50 the wizard will encode video and audio, auto-generate chapters, add ‘extras’, create a DVD menu and even offer its own parental classification notice. BOB AUGER explains.

After simulating DVD playback, it can burn a disc image to DVD-R and generate the colour artwork for disc label Jewel case insert. The resulting disc plays back on any normal DVD player and the wizard will repeat the process as many times as required, for no extra charge.

It’s a long way from my first authoring experience. Encoder and software insured for $1,000,000, a team of highly trained specialists, days of heartache and no way to test the end product without spending a fortune on replication. Today, the entry cost for professional authoring is affordable for any video service company and it would be hard to spend over €50,000 for a fully equipped facility, including the Digi-Beta player.

DVD replication costs have fallen rapidly as well, typically less than half what they were in 2000. Where once DVD-5s could cost over €2 each, it is now possible to negotiate prices well under €0.50 a unit and prices continue to drop. Automated DVD packaging and intense competition has reduced the cost of a standard box to €0.20 or less.

For the independent publisher it has become increasingly difficult to acquire rights to major titles. Most film content is pre-sold, with DVD rights as part of the package and seen as a major revenue earner. The occasional surprise ‘hit’ title that may emerge at a film festival, for example, can command advance rights payments of over €500,000 making it hard to see how this investment can ever be recovered from DVD sales alone.

The fortunes of Independents vary across Europe, being very much subject to local market conditions. In France, the UNEVI (National Union of Independent Video Publishers) has been established to represent the Independent sector in negotiations with government and industry. Despite the historically important cinema industry in France, TV networks or multinational distributors have increasingly snapped up local production rights, leaving under 5% for the Independent sector.

The task of the Independent producer/distributor in France is made harder still by the fact that the Hollywood majors have nearly 80% of the video retail market, one of the largest market shares in Europe.

Faced with increased competition across the board, there is pressure on prices from all quarters. Over 90% of companies offering DVD production services say that competition has increased over the past year. The same proportion indicates that published rates have fallen or remained the same in the period, averaging €3,200 to author a simple catalogue title and €5,400 for a complex feature.

DVD design adds an average of €1,800 to the basic title, while complex graphics for a feature can be produced for around €3,500. Design prices have remained firm in the past year; in some cases customers have increased their graphics budget at the expense of authoring costs, often negotiated down to well below €1,000.

2003 has been a buyer’s market for the Independent producer and deals have been possible with almost any European compression, authoring and design facility. The effect of such price pressure has been to reduce the profitability of DVD facilities, many of which have resorted to cross-subsidising their DVD production division from profits generated elsewhere.

Loyalty to one or two suppliers is evidently the secret to obtaining the highest discounts, since most DVD vendors indicate that lower rates are available to customers who commit to a series of titles. As with other business transactions, buying in bulk is a sure way of saving money.

If the producer is prepared to venture beyond the boundaries of the home country, design, compression and authoring rates can be significantly cheaper, though customers outside the euro zone should be aware that currency fluctuations can lead to big holes in restricted budgets. Even so, suppliers in Germany and Belgium offered bargain rates during 2003, according to some independent producers. Professional compression and authoring for as little as €700 per title can be sourced from vendors in some countries, in some cases with graphic design included.

One final note for buyers, an increasing number of replicators offer deals to regular customers that effectively make compression and authoring free if you are prepared to order a minimum number of discs, the only extra cost is the design element of the project. There are even vendors who will offer packaging artwork as part of the deal, again as long as you are prepared to commit to a fixed number of units.

Which brings us to manufacturing. There is continuing consolidation among replicators, with Deluxe taking a majority stake in Ritek and acquiring Disctronics, Cinram buying Warner DVD manufacturing and distribution and Technicolor/ Thomson determined to take over the DVD world.

Interestingly, in September 2003 Technicolor announced a tripling of capacity at its Polish factory, delivering an annual capacity of over 200 million units from this plant alone. Automated packaging is also offered alongside replication, with a throughput of almost 300 million DVD cases per year. Technicolor DVD has been in Poland since 2002 and this growth is not simply to service DVD demands from the eastern part of Europe.

Skilled labour and lower manufacturing costs will enable the company to compete aggressively for DVD replication business throughout the continent, especially when Poland accedes to the European Union in May 2004. As the year progresses, it is likely that we will see increasing price competition from the new member countries, especially in areas of manufacturing and fulfilment. Creative services are less likely to be affected, since most Independent publishers prefer to source these services closer to home.

The packaging market has always been competitive, with many manufacturers producing look-alike cases, taking advantage of the fact that the Amaray patent only applies to the locking mechanism. More recently, packaging innovation has revolved around anti-pilfer security, with Amaray again leading the charge with the Red Tag‘ system that makes it impossible to remove a disc from the case without the in-store De-Tagger.

Finding space on the retail shelves has always been a crucial issue for the Independent DVD publisher. Without the considerable marketing budgets at the disposal of the majors, and access to volume discounts that are associated with orders of 500,000 or more units, it is hard to persuade the retail chains to stock titles from the smaller publisher.

In an attempt by the majors to increase market share, DVD titles such as Titanic have been re-released at prices under €10, pushing other product out of the top ten best-sellers and making it even harder to achieve visibility for Independent product. There have been success stories in 2003, including the surprise hit Amélie, but compared to the best–selling title of the year (Lord of the Rings – The Two Towers) which sold 3.8 million units in the UK alone, Independent product is a drop in the ocean.

The average initial replication run for an Independent’ budget title is around 6,000 discs and break-even is expected at about 4,000 units, according to a recent pan-European survey for the European Video Perspectives Evidently, these figures mask a wide variation in production costs and price points but they are far removed from the quantities delivered to the Hollywood Studios. In the UK alone, 140 million DVDs were sold through retail outlets in 2003.

The specialist retailers, who have provided space in the past to a selection of Independent DVD titles are seeing their base market of big-selling titles being creamed off by supermarkets, who stock a limited selection of the biggest sellers and discount heavily compared to the recommended price.

A new development in the UK may offer a ray of hope for the smaller publishers and distributors. Modelled on the successful US bookstore Barnes & Noble, the Silverscreen stores promise the largest range in the market. The stores actively promote products on display and anticipate that shoppers will spend an hour or more browsing the displays.

Although there are outward similarities with the FNAC chain in France and Spain, Silverscreen sells nothing but DVD. The chief executive Ernesto Schmitt is very bullish about the chain’s prospects, citing a DV market potential of €5 billion in the forthcoming year compared with book sales of €3.5 billion. Despite his certainty that Silverscreen will be successful, he also forecast the closure of at least one major specialist video chain before the end of the year.

The consequences of the February 2004 bankruptcy application from Tower Records, following 13 consecutive quarters of losses, have yet to play through. Although the decline in CD Audio sales played a major part in this collapse there can be no doubt that DVD price-cutting by retailers Wal-Mart and etailers Amazon, among others, has had an adverse effect on the group’s turnover. In Europe, major supermarkets are following a similar pattern, which will lead in all probability to further casualties on the high street.

Alongside the market for films on DVD, Music DVD is beginning to take off, offering opportunities for Independent producers with access to back catalogue as well as for those creating new 'made for DVD' product. There is a substantial legacy of classic video footage that until now has lacked an easy market.

Video on VHS was never successful and broadcast opportunities are limited and not overly profitable. The impact of audio downloads on music sales has led labels to seek revenues elsewhere and DVD is a perfect way to resell existing content. Inspired Entertainment, for example, has negotiated rights to artists such as Elton John, Aretha Franklin and Tony Bennett.

Music DVD is a steady seller and sufficient titles have now been released for retailers to devote dedicated racks to music product. It is a genre that Independent publishers and producers can enter with some degree of certainty that titles will be displayed.

Looking ahead, DVD promises to maintain the spell it has cast on consumer buying habits, more than replacing VHS but creating a surge in public demand that has still to be fully met. Costs will fall in most areas, though an increase in the price of raw materials could have an effect on discs and packaging alike.



Formerly Managing Director of top DVD authoring house Electric Switch, Bob Auger is now head of UK-based DVD consultancy Newmérique and is currently working on a number of projects, including the use of DVD for educational purposes.
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