Over/Under Analysis:
Units Shipped vs. Box Office

Last year, we circulated the "Over/Under Analysis" as a way of calling attention to the real disorganization ofthe low end of the video rental market. Several months after release of that analysis, we followed up with a "by invitation only" B-Title Conference in which we focused on marketing issues for small films. This year, in a repeat of last year's analysis, we report on significant changes in the structure of the video rental business.

• The low end films (Group III -- under $10 million in box office) are different in important ways, marked especially by the performance of Fox, Paramount, HBO,MGM and Polygram -- studios that were not as effective in this segment last year.
• The middle and high ends of the market (Group II, from $10 to $40 million in box office; and Group I, over $40 million) show the effects of increasingly narrow buying by stores, with more concentration in the higher grossing films. Disney executed a substantial turnaround in the middle (Group II) category, with a strong market leading performance.

The "Over/Under Analysis" is focused on the studios that release the titles rather than other factors (eg, actors, genre) that might affect the sales of a video. We build a relationship between units shipped for rental priced titles and theatrical box office, and then look to see which studios did over or under the expected or average line. Box office and units shipped information for these titles is based on information available to us from trade and other sources that are reasonably and usually reliable.

Background

For this round of the "Over/Under Analysis", we identified 72 titles released from October 1, 1994 through March 31, 1995. The titles we focused on were only rental priced titles. Distributors of these titles breakdown as indicated in the table below:

Distribution of Units Shipped vs. Box Office

The chart below shows the distribution of units shipped by theatrical box office. Box office runs along the horizontal axis from 0 to $160 million for the films included here. Units shipped runs along the vertical axis from 0 to 700 thousand units.

Obviously as box office increases, the number of units shipped tends to go up. From the distribution of points on this graph, however, it is clear that there is not a precise linear relationship between box office and units shipped. In fact, the pattern appears to be curved, with a steeper slope at the lower box office levels and a flatter slope at the higher box office levels. Moreoever, rental transactions do not necessarily match units shipped in any highly correlated linear way. Among other matters, this is a very important finding for those considering revenue sharing schemes.

In order to analyze this range of titles, we broke them into three groups

• Group 1: titles over $40 million in box office (13 titles)
• Group 2: titles between $11 and $40 milllion (26 titles)
• Group 3: titles less than $11 million in box office (33 titles)

It would be possible to break up the 72 titles at several points. However, this three part break reasonably corresponds to the experience of the industry majors: only a few titles (18 percent) are in the grup 1 category; the rest are more or less evenly split between Group 2 and Group 3.

Each of these sub groups is treated separately in the full text version of this white paper. In this report, however, we skip the group by group analysis and go to the summary of conclusions.

Summary: Talking Cash

In the chart and graph below, we have combined the total units by which a studio exceeded or missed the expected target, and then multiplied it by $62 (a typical wholesale price paid to the studio) to arrive at a dollar amount which shows how much a studio made over or under expectations.

Underpeformance or outperforming the average expected levels on a consistent basis can have important financial implications. For example, if Turner/New Line had met the industry average for its six titles shipped, they could have seen another $10.9 million in revenue! Keep in mind that this data is only for the six months October 1 to March 31; so the actual annual improvement could be substantially greater.

By contrast, MCA's success was consistent through each of the 3 film size categories and undoubtedly reflects on their sales and marketing practices. MCA added a total of $9 million to their coffers by consistently exceeding expectations for units shipped.