DVDs Turn America’s Living Rooms Into a Major Profit Center

Is “Nutty Professor II: The Klumps” a big-hearted comedy that’s geared for the whole family? Or is it a raunchy, off-color laugh fest that would send your mother-in-law running out of the living room in shock?

It all depends on which version of “The Klumps” you find at your local video store. Last December, accompanied by an ad campaign positioning it as wholesome family entertainment, the PG-13-rated “Nutty Professor II” debuted on home video, selling 5 million VHS copies and 1 million DVDs. Next month, Universal Home Video is releasing the movie again on DVD, only it’s not a family movie anymore. It’s “Klumps Uncensored: The Director’s Cut,” with R-rated scenes that weren’t in the film when it was released in theaters last summer. Universal is betting that there are so many new DVD buyers in the market today that it can sell another million “Klumps” DVDs the second time around.

In the old days of home video--meaning three years ago--a movie would’ve been relegated to the back shelves to make room for hotter new product after its first spin on the video store circuit. But the astounding growth of the DVD format has rocked the world of home video in much the same way that the compact disc bonanza of the 1980s fueled a huge boom in sales and profits for the record business. Releasing films in theaters is a dicey proposition even in the best of times, but with home video and DVD the profit possibilities seem limitless for the studios.

Is it any wonder that when I had lunch recently with Universal Home Video President Craig Kornblau, the savvy video chief repeated one phrase over and over, like a mantra: “It’s a beautiful business.”

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If you’ve been in a home electronics store lately, you’ve probably noticed that DVD is spreading faster than the alien virus on “The X-Files.” Since their introduction in early 1997, DVD players have burrowed their way into more than 15 million American households.

For years, tech experts were predicting that TV would be transformed into an interactive medium, allowing viewers to choose new endings for their favorite shows. They were half-right: a generation of young consumers weaned on Game Boys did want a more participatory experience, but it turns out that they’re getting it from DVD, not TV. Most DVDs today aren’t just movies, they’re film schools in a box. Their supplemental features give users the opportunity to hear audio commentaries by the director and key cast members, see costume drawings and pre-production meetings, choose different soundtracks, see how special effects are designed and pick different camera angles for scenes from the movie.

“The consumer is starving for more information about Hollywood, and now we have the perfect vehicle to give it to them,” says Kornblau, who spent 13 years as a Disney executive before moving to Universal in 1998. “It’s a big success because you get people to buy a second version of your company’s core assets, and at a higher price.”

If anything, Kornblau is understating the medium’s appeal. The blitzkrieg has just begun. When “X-Men” hit video stores last Thanksgiving, it made more money from video and DVD sales--nearly $50 million--than all but one of the new films released in theaters that weekend. Embraced by young male consumers--the best-selling DVD titles are “Gladiator,” “The Matrix” and “X-Men”--DVDs already represent nearly one-third of total home video sales. Proponents such as Kornblau predict that DVD sales will represent half of the overall business by year’s end. As it is, home video is, on average, the single highest revenue source for movie studios, often representing more than half of all income generated by feature films.

The influence of the DVD boom can be felt everywhere.

* It’s a key issue in the threatened Writers Guild of America strike: Studio chiefs have refused to negotiate a penny hike in the current 4 cents per unit payout on video residuals, claiming that it would cost them $200 million over the next three years.

* After signing a new distribution pact with Universal, DreamWorks executives said a primary reason they didn’t accept a comparable Warner Films deal was their preference for working with Kornblau over Warner Home Video chief Warren Lieberfarb.

* A surge in DVD rentals was also an important factor in Viacom’s recent decision to keep its stake in Blockbuster, the leading home video retailer.

DVDs offer an irresistible economic plus for profit-hungry studios: They sell for $5 more than videos but cost roughly the same to manufacture. It costs studios about $2 to manufacture a DVD or VHS-format video, but while the studios sell VHS videos to retail stores for roughly $13, they can sell DVDs to stores for $18. That means they make $16 on every DVD they sell. Most new DVDs sell for $19.95, with the rest of the markup going to the stores.

If you sell 4.5 million VHS copies and 2.3 million DVDs, which is what Universal has done with “Meet the Parents,” that adds up to more than $80 million in revenues for the studio. “Meet the Parents” did $166 million in its theatrical release. But it costs twice as much to market a theatrical film as a video, nearly half of the studio’s grosses go to theater owners and movie stars get a far bigger chunk of back-end grosses in features than video. When you do the math--well, it is a beautiful business, isn’t it?

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Universal has been especially good at promoting synergy between its feature and home video divisions. Today the home-video division is releasing “The Mummy Ultimate Edition,” a new two-disc edition of the hit action-adventure film. It’s no coincidence that the package arrives 10 days before the theatrical release of “The Mummy Returns.” In fact, Universal is running TV spots that spend almost as much time plugging the DVD “Mummy” release as they do the new movie.

The DVD itself is a commercial for the new film. It includes behind-the-scenes footage from the sequel with a link to a live Webcast from “The Mummy Returns” premiere and a movie-cash offer that provides a free ticket to see the new movie in its first two weeks of release. The latter feature is the ultimate tie-in: It not only promotes the new movie but encourages consumers to buy the DVD as soon as it hits the stores so they can take advantage of the ticket offer.

In July the studio is releasing a two-DVD package of the first two “Jurassic Park” videos that will also include a free-ticket offer for the July 18 theatrical release of “Jurassic Park 3.”

Studio chief Stacey Snider involves Kornblau in her feature film green-light process and has him sit in on weekly marketing meetings. When “American Pie” was still in theaters in the summer of 1999, the studio considered releasing a new version with racy outtakes, but shelved the idea when Kornblau said it would cannibalize the upcoming DVD release. “Stacey and [Universal Vice Chairman] Marc Shmuger run a very open, symbiotic-oriented business,” Kornblau says. “We’re not forced to have synergy meetings--it just happens naturally.”

Kornblau gears many of his big releases to the core young-male DVD audience. When Universal released “American Pie” on home video in late 1999, it offered the theatrical version as well as a version with footage that had been cut out of the R-rated movie. Billed as “Unrated! The Version You Couldn’t See in Theaters,” the video box left little to the imagination.

Video rental stores opted for the regular theatrical version, but 80% of the DVD sales were of the unrated “American Pie,” which would’ve received a disastrous NC-17 rating if it had been released in theaters, but was allowed in video stores with a harmless NR (not-rated) designation.

In another effort to reach the male-oriented DVD audience, Universal released “U-571” on home video with cover art that was radically different than the movie poster, stressing the movie’s action adventure elements instead of the suspenseful drama.

Kornblau can also reposition movies in the opposite direction. Many parents complained that “Billy Elliot” was given an R because of the presence of four-letter words, even though the film was an inspiring story perfectly appropriate for young adult audiences. So Kornblau is considering releasing a PG-13 version of the movie--minus the swearing--later this year, with an ad campaign geared to Wal-Mart moms who would be uncomfortable buying an R-rated film.

For movie lovers, DVD is a godsend. It allows fans to see movies from the inside out, helping them better understand the creative impulses behind what’s up on screen. As usual, the only dark cloud involves money. If studios continue to rake in windfall profits, they could end up in the same boat as the music industry, which has spent the past two years fighting a debilitating battle with Napster because the industry’s core audience--disgruntled young music fans--believe record companies have been gouging consumers by selling CDs at wildly inflated prices.

Kornblau says consumers will happily pay extra for a quality product. “We’re paying people to pick up all this stuff off the cutting room floor and put it in our DVDs because it adds tremendous value to our product. At some point I’m sure we’ll drop our prices, but right now, when business is booming, our philosophy is: Let’s maximize our business.”

For now, no one is complaining. DVDs are the hottest toy in the toy store. In America, where we love to reinvent ourselves, what could be better than reinventing our movies too?

“The Big Picture” runs each Tuesday in Calendar. If you have questions, ideas or criticism, e-mail them to patrick.goldstein@latimes.com.