Management Strategies For The Future Of Digital Entertainment

The following is a transcript of a speech delivered at the IRMA Executive Forum held in March 1999 at Amelia Island, Forida by Charles Van Horn, Executive Vice President, the International Recording Media Association (IRMA).Good morning. I'm Charles Van Horn, Executive Vice President of the International Recording Media Association. I want to welcome all of you here today - and officially introduce the conference theme that we will be addressing during the next few days - and for the foreseeable future.I think everyone agrees that we are at a critical stage in the future of recording media. It is an exciting future; it is a future on the cutting edge of technology. But it is also a future fraught with serious challenges. That is the reason that we have selected the theme, ""management strategies for the future of digital entertainment"" for our executive forum here this week. As our Chairman Scott Bartlett explained, our mission is to serve as a forum for our members, to help the recording media industry navigate its future in this new digital age.All of us here have our own specific interests and business priorities. But there is one single, overriding question for all of us to address:What role will packaged media play in an age where our society is becoming increasingly networked and easily accessed by electronic delivery systems?We need to know:- what exactly is the future of the Internet and its ability to deliver audio, video and multimedia inexpensively and directly into households?- what is the new promise of DVD, and how does it pose new options for replicators, raw material providers, packagers, retailers - for that matter, for everyone involved in the distribution of physical media?- what impact will electronic delivery have on new recordable media formats such as CD-R? - what is the prognosis for those formats upon which we all currently depend on, the CD, both in its audio and ROM permutations, VHS and other tape-based formats?- and along with these questions, what are the issues of copyright and the protection of investment and intellectual properties that this new era of digital entertainment delivery poses for everyone involved?In the short lifetime of recording media, starting let's say with the fortuitous meeting of Bing Crosby and an Ampex tape machine fifty years ago, there have been monumental changes, as we all know. IRMA has witnessed the introduction of the audio cassette, the ascent of the video cassette, and the dawn of the age of optical replication, and the debut of a next generation consumer CD format. How will those changes play out in the next century? What will recording media be in the next five years, ten years, fifty years?One thing is for certain; ours is a substantial business to contend with. Although we often consider recording media to be a footnote to the entertainment, software or consumer electronics business, in fact, we are an industry unto ourselves. In the past year IRMA has established that the recording media industry is a $17 billion global industry. For comparison: CEMA figures show $17 billion as the entire market for personal computer sales in the U.S. Significantly, it is sales of hardware products such as the PC that ultimately determine how much prerecorded and blank software we all sell - and, all indications point to the fact that this business is growing steadily.If you chart the total factory sales of only those consumer electronics product categories that have direct relation to our business - Those VCRs, camcorders, home and car audio systems, DVD players, PCs and game machines that utilize software - you'll spot this trend:Sales of these hardware categories grew from $32 billion in 1997 to $34.3 billion last year, and they are projected to continue to grow to $35.8 billion in 1999. Of course, there are changes. Growth in the PC and game categories are compensating for slumps in audio and video. But for most of us in this room - software is software - and as long as we adapt our businesses to service a changing customer base, these are extremely positive signs.In other words ñ donít trade in those CD lines and VHS dubbers for an Internet server at this point. Those established recording media formats are still doing nicely, thank you.Consider these figures from CEMA on unit sales of just higher-end stereo VCRs.1997 7.6 million units1998 8.6 million units1999 9.1 million unitsNot a bad growth rate for an analog, magnetic format, huh?Now consider these SoundScan figures, as reported by Billboard at the end of 1998. Their numbers showed CD album sales year to year between 1997 and 1998 were up 15 percent. Not too shabby a growth story at a time when the music industry is falling in love with the web as its next big distribution stream.But then again, music and video are only part of the growing pie from which we nourish our businesses. What about games? We all know how much this category is growing. In fact, it's growing faster than the Internet. The international data corporation has disclosed this fact: While U.S. households with internet access grew by 22 percent last year, U.S. households with some form of videogame player grew by 28 percent. Yes, the video game market has gone mainstream, with 38 percent of all U.S. homes owning some form of game console, and ever-lower prices now pushing home PC penetration toward 50 percent. And we are just now entering a new era of videogame mega marketing, with a title like Turok 2's rolling out a consumer blitz campaign that resulted in approximately $84 million in sales. Barbie alone had seven game titles and $100 million in sales for 1998 - as reported in the Wall Street Journal.We believe this is where the promise of DVD fits in. As evidenced by the game phenomenon, consumers are eager for a new form of entertainment. And DVD offers even greater possibilities in the coming years from entirely new entertainment formats like music videos, interactive audio/video titles, and multimedia gaming.And let's not overlook plain old video. We are all familiar with the general euphoria that greeted the end of year figures for DVD-Video. One point one million players shipped. There are now 2,300 titles out there. Fourteen point three million software units have been sold. There are over 40 DVD hardware models available under 30 different consumer electronics brands; and DVD-Video hardware represented approximately $5 billion in retail sales during 1998. These are figures reported by the DVD Video Group which predicts that this year about 200 titles will be released each month - reaching 4,500 titles by the end of 1999. Hardware sales are predicted to double this year to more than two million units. Of course, by VHS standards this is all relatively small. But this is a medium whose future is only being glimpsed now. And with its new creative potential, it offers a bright sign for packaged media in an era where the stock market and the business press have gone bonkers over any business model that incorporates the Internet into its sales pitch.They should pay equal attention to what's happening in recording media. And if so, I contend, they would be quite impressed. The IRMA Worldwide Optical Media Market Intelligence Report was released in the summer of 1998. Some updated data from the 1999 study has just been received and Iíll share it with you.In 1998 the North American DVD and CD replication market increased at a rate greater than 22 p[ercent over 1997 to 3.05 billion units. DVD had the highest growth rate with a 400 percent increase in DVD-Video and DVD-ROM units to 65 million. CD audio and CD-ROM grew 20 percent over 1997 with 2.98 billion units versus 1997's 2.48 billion units. DVD-Video player buyers in the U.S. averaged 13 discs in the first few months of purchase. Our projections: units replicated for DVD-Video worldwide will be 430 million units in 2002. In Europe, where we will be conducting a DVD Production Conference in may, we also see a steady growth in DVD-Vdeo and DVD-ROM replication - with the year 2002 seeing 140 million DVD-Video and 270 million DVD-ROM units replicated. Of course, with this growth has come challenges in DVD manufacturing and authoring, and there are new developments almost daily in structure and materials of the DVD disc itself. There are increasing demands on replicators to be turnkey authoring and packaging facilities, as well. The challenges that the recording media industry faces are not unlike those being paralleled at retail. That's why we're especially honored to have Bradbury Anderson, President and CEO of Best bBuy, here for tomorrow's keynote address. The retail community is going through some significant digital changes unto itself. Just in the past few weeks we have seen Best Buy initiate a DVD catalog, Blockbuster prepare for a spin-off from its corporate parent; Amazon.com add prescription drugs to its mix - after having added video last year - and border's books seeing its stock go down - just because it doesn't have an Internet presence, according to some analysts. No one knows how the emerging battle between the shopping mall and the Web will shake out. Undoubtedly, consumer buying patterns will change in the new digital millennium. However, Iím still banking on basic human nature - that consumers will continue to go out and shop and continue to opt to own and collect their media. Is basic human nature changing? I don't think so but Iíll leave that question to the experts. What I do know is that retailing is changing; that manufacturing demands are changing; that demographics are changing. And, as such, recording media is changing too.We at IRMA are fortunate to have among our members, executives who address these changes on a daily basis. In surveying some of their opinions, we have come up with some very observent looks into the state of the recording media market:From Bruce Allan, our President, and the Vice President and General Manager of Harris Corporation Broadcast Systems Division, we learn that we shouldn't underestimate the impact of DTV on general consumer electronics expenditures: ""The TV broadcasting digital conversion is expected to create a $6 billion market opportunity in broadcast hardware alone . . .. For the home entertainment industries, it's a rare opportunity to reinvent themselves.""Meanwhile, Quentin Lilly, C.O.O. of Technicolor Packaged Media, reminds us not to ignore our bread and butter businesses: ""as long as key industry participants continue to identify and effectively manage the various challenges perched around the proverbial corner, the videocassette format will continue as the leading packaged media choice for a number of years.""And as for diversity, from Joe Ryan, President and CEO of Emtec Pro Media, Inc. we learn that: ""home entertainment, whether audio or moving picture or any combination, is unlikely ever to become a single-format environment. Magnetic tape will have a significant place in the multi-format future.""For the business challenge ahead, Bob Burkhardt, Director of Product Management at Verbatim Corp., relates a basic business axiom: ""tomorrow's winners must accommodate growing storage capacity requirements without increasing cost or administrative overhead, and without decreasing reliability or performance.""Combined, this means that new technologies are posing new opportunities. Older technologies must be nurtured. All the while, we must continue to run our companies with the basic business regimens that have gotten us this far.While we respect the fact that today's world is one of ever-widening customer choices and increasing pressures to provide consumers more for less.The mission of this 1999 IRMA executive forum is to provide you with an overview executive briefing on these basic themes so that you can formulate your own management strategies for the digital age. This involves understanding technology trends; demographic trends; global economic trends; retail trends; as well as issues specific to the recording media manufacturing. These are great and important issues that will change the way we live and the way we do business. And we have assembled here over the next few days, i believe, some of the leading thinkers on the subjects.I wish you an active and informative forum - and successful business endeavors into the next century.