LITTLE SPIN FOR DVD SALES IN '06 WAR BETWEEN HD FORMATS MAY BE AFFECTING RESULTS.

Byline: GREG HERNANDEZ Staff Writer

Despite a strong rise in DVD rentals, home-entertainment industry earnings in 2006 were basically flat -- held back by weak growth in DVD sales and dwindling revenue from the nearly extinct VHS format.

The Digital Entertainment Group said DVD rentals reached $7.5 billion last year, up an impressive $1 billion from 2005. But DVD sales posted only a slight uptick, to $16.6 billion in 2006 from $16.3 billion the year before.

The top three-selling DVD titles of 2006 were ``Pirates of the Caribbean: Dead Man's Chest,'' ``Cars'' and ``The Chronicles of Narnia: The Lion, the Witch and the Wardrobe,'' all released by Disney's Buena Vista Home Entertainment. Still, Disney finished second overall behind top studio Warner Home Video.

But spending on VHS titles, which was as high as $3 billion in 2004, was a mere blip last year, accounting for just $100 million in revenue.

``You have to look at the DVD numbers and (sales and rentals) are both record numbers,'' observed T.K. Arnold, publisher of Home Media magazine. ``People stopped buying VHS and are not as active buying DVDs yet.''

Media analyst Hal Vogel thinks some consumers might be holding back on buying DVDs because of the war between the two new high-definition formats, Blu-ray and HD-DVD, which debuted last year.

``Consumers are confused,'' Vogel said. ``No one wants to take a risk and buy Blu-ray and finding that HD-DVD prevails or vice versa. (The industry) is in a transition and they haven't resolved the issue yet.''

Added Arnold: ``I don't think it would have caught on all that fast anyway, even with one format. People are enamored with HDTV and want to watch their broadcast-TV shows first. Hopefully, the format war will be resolved by the time consumer interest really peaks.''

High-definition DVD is high-resolution video and audio technology that represents a clear quality improvement over the standard DVD. Even though they are quite similar, Blu-ray DVDs have more storage capacity.

While the two formats continue to battle for the hearts and minds of consumers, many have not been hesitant to enter the high-definition television market. The DEG reports that more than 30 million U.S. homes now have HDTV with an estimated 12.5 million sets sold in 2006 and nearly 5 million in the fourth quarter alone.

Since the DVD format was launched in 1998, more than 34.5 million HDTV sets have been sold to consumers and it's estimated that 11 percent of HDTV owners have more than one set.

As far as such high-definition media devices as set-top boxes and game consoles go, more than 750,000 units were sold in 2006. There are currently 12 models of high-definition players including Blu-ray Disc and HD-DVD.

At this week's Consumer Electronics Show in Las Vegas, Warner Bros. is set to unveil the Total HD Disc, a hybrid double-sided Blu-ray/HD-DVD disc that comes as LG Electronics made public its plan to offer a DVD player capable of playing both formats.

This hybrid technology is designed to lure consumers who are wary of buying a technology that might be obsolete, such as the Betamax became after losing a format war with VHS.

Meanwhile, regular DVD players remain popular with an estimated 33 million sold to consumers in 2006.

The DEG estimates that 55 percent of the approximately 88 million homes with DVD players have more than one, when you include set-top and portable players, and TV/DVD and DVD/VCR combination players.

Arnold is optimistic that home entertainment, on both the hardware and software sides, will continue to grow even if it is at a slower place than in the boom years of the late 1990s and early 2000s.

``I think we are looking at a really good couple of years coming up,'' he said. ``People are buying movies and I think next-generation growth will be incremental.''

[e-mail]

[phone]

CAPTION(S):

chart

Chart:

DVD revenue flat in 2006

SOURCE: The Digital Entertainment Group

Gregg Miller/Staff Artist