The down-low on the DTV market

If the flurry of deals announced in June at Licensing Show by the likes of American Greetings, Hasbro and Paramount are any indication, quite a few producers and property owners ...
September 1, 2004

If the flurry of deals announced in June at Licensing Show by the likes of American Greetings, Hasbro and Paramount are any indication, quite a few producers and property owners are rushing down the path of DTV. And for good reason.

While the kids DTV market in the ’90s was largely the domain of big studios like Disney, which specialized in cranking out small-screen sequels to its big-screen hits, a certain doll named Barbie and the invention of the DVD format began to change the landscape at the turn of the century. Since Barbie first pirouetted onto the home entertainment scene in her debut DTV Barbie in the Nutcracker (2001), the franchise has spawned two more titles (Barbie as Rapunzel and Barbie of Swan Lake) and has sold more than 13 million units in the U.S. – indicating a real appetite for non-theatrical content.

Looking at the numbers, there’s certainly cause to believe that this success story could be repeated. The children’s video genre (including both DVD and VHS products) cornered around one-fifth of the US$25-billion U.S. home entertainment business last year. And it’s estimated that kids DTV sales make up somewhere between US$1 billion and US$2 billion of the total children’s video pie, with sales expected to grow between 10% and 15% in 2004.

The conversion to DVD is also adding fuel to the fire. There are roughly 70 million DVD players in U.S. households right now, with somewhere between seven and 12 million homes owning two or more. As the machines continue to proliferate – popping up more frequently in places like kids’ bedrooms, the family minivan and on the road as portable players – demand for children’s DTV product hasn’t even reached its peak yet. According to Glenn Ross, president of Barbie’s DTV distribution partner Lions Gate Family Entertainment, unit sales of non-theatrical DVDs for kids are expected to grow from 11 million last year to 51 million by 2007.

Production appeal

Beyond its market potential, there are other reasons why producers and property owners are turning to DTV. The medium can be a more cost-effective channel for generating revenue and exposure than the television market, which has been plagued by low license fees and fewer programming slots in recent years. Delna Bhesania, CEO of Vancouver, Canada-based animation house Bardel Entertainment, says the direct-to-retail nature of the DTV market makes it a much less risky proposition than a TV series. It can take years to secure a broadcast slot on a major U.S. network. And even then, unless a show generates really outstanding ratings, it’s unlikely to drive enough merchandise sales to make back the initial investment in production – let alone a tidy profit.

Another appealing facet of DTV production is that it doesn’t typically cost as much as TV and theatrical projects. At between US$2 million and US$5 million, the production budget for a 75- to 90-minute animated DTV feature is considerably lower than a standard 26 x half-hour TV series, which runs about US$300,000 per episode for a total commitment of US$7.8 million. Animated feature films cost at least US$20 million to produce, not to mention the enormous marketing spend involved in creating excitement for them in theaters. (According to the Motion Picture Association of America, the average marketing budget for a film sits at US$39 million.)

The shrinking cost of animation technology and excess production capacity – too many studios with not enough work to go around, driving down work-for-hire rates – are certainly two of the biggest factors contributing to the lower budgets. But Jonathan Goodwill, a producer at Bardel, points out that the price-point of the end-product – somewhere between US$16 to US$24 for DVDs – will only support moderate budgets. New-release theatrical DVDs, by comparison, need to retail for more than US$24 so that the studios can recoup their production and marketing investment.

Although DTV animation can sometimes be less intricate and detailed as a result of budgetary restrictions, most producers enjoy the creative freedom that comes with the longer one-off format and simpler approval process. Rick Mischel, CEO of Vancouver, Canada’s Mainframe Entertainment, finds it refreshing to only deal with input from property owner Mattel and distributor Lions Gate on the Barbie DTVs his studio produces. For TV projects, a producer often has to consider the concerns and creative needs of multiple international co-production partners, as well as any broadcasters that have pre-bought the show.

Project turnaround times on DTVs are also advantageously shorter, with many titles going from development and production to the retail shelf in 18 months, meaning their owners can cash in sooner on an ROI that sits between 30% and 40%. (By comparison, its not uncommon for a TV series to take two to three years to go from the pipeline to on-air debut.) Part of the reason for this speed is that it takes a lot less time to raise financing on DTVs, since distributors shoulder so much of the overall cost and effort involved in getting a title out to the consumers.

Distribution and financing deals for DTVs are usually structured as either straight-up video rights acquisitions for specified territories, or true partnerships wherein the distributor cash-flows and co-owns the project.

With an acquisition, the distributor typically fronts an advance (the amount of which is based on sales projections) to help fund production. Then the two parties agree on a guarantee (a minimum sum that the project’s owner will receive regardless of how it performs at retail) and a per-unit royalty to earn out the advance. According to Peter Maule, Nelvana’s VP of home entertainment and retail distribution, video royalty rates in the U.S. currently run between 15% and 30% of net sales, and advances/guarantees can sometimes amount to as much as half of a project’s production budget. Once the terms are settled, the producer delivers the finished project to the distributor, who then takes care of manufacturing the videos (in both DVD and VHS formats), selling them into retail and marketing them once they’re on shelves.

As far as partnerships go, the deals being forged by distributors and producers/property owners are much less cut-and-dried. Lions Gate Family Entertainment is aggressively pursuing this model, having just inked a deal with Marvel to bankroll the production of at least four animated DTVs featuring characters from the comic conglomerate’s considerable content library. According to Marvel Studios president and COO David Maisel, Marvel will direct the creative development of the flicks, with Lions Gate funding development and production and taking the lead on distribution and marketing. The first title, The Avengers, is expected to hit retail in 2006.

Toyco Hasbro and Paramount Home Entertainment have similarly partnered for the production of DTVs based on Hasbro toy lines. G.I. Joe: Valor vs. Venom, Tonka Tough Truck Adventures: The Biggest Show on Wheels and Transformers Energon will be on shelf in the next two months.

Why everybody needs to know your name

It’s certainly not impossible to build a DTV brand from the ground up. Big Idea’s Christian market crossover vid series VeggieTales has sold more than 30 million units since it launched in 1993. And although Levymann Entertainment’s first Itty Bitty Heartbeats kidvid products only launched in Toys ‘R’ Us last October, TRU has already reordered three times, and Wal-Mart began selling 35,000 units this June.

But it’s important to understand that these bottom-up initiatives require an incredible amount of patience (VeggieTales spent five years in the limited Christian specialty market before crossing over to mass in 1998) and financial investment on the part of their owners.

These examples aside, success in the DTV medium is largely predicated on brand strength. Lions Gate’s Ross, for one, won’t even look at properties that don’t have strong and sustainable brand recognition. ‘You need something that immediately connects with consumers, and well-known brands and franchises really help,’ he says. ‘Barbie, Hot Wheels, Clifford – they all had a pedigree before video, whether they’re based on a toy, a book or a TV series.’

Unfortunately, there are a finite number of existing properties that fit this bill, and many of them are already in the DTV pipeline. MGA’s hit doll Bratz entered the fray in August with Starrin’ & Stylin’. The Dragons: Fire & Ice DTV slated for release this month is based on the Mega Bloks toy line and co-produced by Bardel, the toyco, Lions Gate Family Entertainment and Alliance Atlantis. Along with the titles launching this fall, Hasbro has projects based on Candy Land and the Weebles in the pipeline for 2005. Mattel is working on My Scene and Polly Pocket DTVs for release later this year and in spring 2005, while sister company Fisher-Price will continue putting out titles based on its Rescue Heroes and Little People toys.

And it seems like DTV is the vehicle for retro revival, with companies such as Classic Media using the medium to breathe new life into older entertainment characters. Frosty the Snowman and Peter Cottontail will be the first to go DTV in 2005, but there are also vids in the works for American Greeting’s The Get Along Gang (2005) and Holly Hobby (2006). And DIC has just inked a distribution deal with Warner Home Video for nine home video and DTV products based on its latest brand Trollz.

And it’s not like these DTVs are being launched in isolation. Property owners including Mattel (Barbie as The Princess and The Pauper), HIT Entertainment (Snowed Under: The Bobblesberg Winter Games) and American Greetings/Nelvana (Carebears: Journey to Joke-a-lot) have devised comprehensive product rollouts around their DTV debuts. For each title, a line of toys and consumer products themed to tie into the film’s plot will hit retail simultaneously with the DTV in hopes of netting prime cross-merchandising shelf space at retail. On top of this onslaught, there are also kid-centric theatrical releases competing for shelf space. Holiday 2004 is a good example, with DVD releases for blockbusters Shrek 2, Harry Potter 3 and Spider-Man 2 likely to command considerable retail real estate.

Creating an in-store mega-presence is the goal of almost every kids video distributor in this market, and they’ll spend a big portion of their US$500,000 to US$1 million per-title marketing budget trying to convince retail buyers to give them more space to house full lines of product.

King Features is attempting to reinvigorate the 75-year-old Popeye franchise this fall with new DTV Popeye: Quest for Pappy. The company’s marketing director, Nisreen Shocair, pegs a tight sales kit as an essential tool for reaching buyers. She says you need a well-designed, four-color package that provides a detailed outline of the brand’s current retail sales, existing partners and proposed media spend for the DTV (including an itemized account of ad placements), as well as a short trailer of the show.

And as always, retailers are looking for exclusives, cross-promo opportunities and special packaging that will make their DTVs sell through briskly and their profits soar. Carol Lee, DIC Entertainment’s senior VP of home entertainment, says the on-pack music CD premium featured on Strawberry Shortcake’s Berry Merry Christmas DTV was popular with consumers. Toys ‘R’ Us ended up ordering about 60% more product than it normally would for similar chain-wide promos, and the retailer atypically placed a reorder after the initial sell-in.

King Features has cooked up a Popeye grocery store promo to run throughout November. The famous sailor will appear on packages of Brawny paper towels and seven million packages of Allen Canny and River Ranch spinach at grocers across the U.S., with plugs for the DTV and a sweepstakes contest for a first-prize family trip to Universal Studios in Orlando. The video will also be featured on in-store end caps with sweepstake entry forms and accompanying consumer products.

But even if you do manage to charm the buyers, there’s a tougher barrier standing in the way of building big presence at retail – the age-old problem of consolidation. There are only so many avenues to move big volumes. You’re pretty much looking at four major players for the kids market, with Wal-Mart, Target, Kmart and, to a lesser extent, Toys ‘R’ Us involved in pitched battles that drive price-points ever downward. Wal-Mart alone can drive between 30% and 50% of a title’s total sales.

Alternative channels such as grocery and drug stores, on-line retailers and direct sales are open to carrying this type of product, but realistically, it’s difficult to meet your projections without making inroads with the Bentonville behemoth and its competitors.

And with so much more kidvid product available to them, retailers are becoming much less tolerant of under-performing titles. Lions Gate’s Ross says 10 days is the proving point for most children’s DTV titles right now; if they haven’t started meeting sales expectations by then, they can kiss their premium placement goodbye. So to try and make sure their products hit retail with as much consumer awareness as possible, some distributors are spending as much as 60% to 70% of their total ad budget to promote kids titles (primarily via TV spots) before their street dates.

Unlike the adult theatrical business, souping up direct-to-video DVDs with interactive extras such as bloopers, docs and CD-ROM games won’t generate much more movement at retail. Character appeal, price and ease-of-use are far more influential elements with parents, so a number of distributors are opting for quick-play DVD models in which the show starts as soon as kids insert the disk (eliminating the need for complicated remote usage, which often stymies younger kids). Starting this quarter, all of Columbia TriStar Home Video’s new kids DVDs will loop back and start playing again if they’re not stopped by remote within 10 seconds of ending. Lions Gate is adopting a similar strategy for its youngest-skewing releases.

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