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Ken S 08-23-2010 10:02 AM

Studios Seek Out Backup to DVDs
From The Wall Street Journal - August 23, 2010


The decline in DVD sales is emerging as the entertainment industry's most-immediate worry in its struggle to adapt to the rise of digital media.

The trend showed up in second-quarter earnings results recently reported by major media conglomerates, fueling concerns among investors that the outlook for home-entertainment revenue—a key source of profitability for film studios—may be worse than expected.

Leading media executives gave mixed signals about the outlook for DVD sales, with Walt Disney Co. Chief Executive Robert Iger noting the market will remain "challenged," and Time Warner Inc. Chief Executive Jeff Bewkes saying that trends are improving. Meanwhile, studios have announced a flurry of digital-distribution deals, and they're experimenting with the timing of their film releases to video-on-demand and other technologies in hopes of boosting alternatives to make up for DVD declines.

Richard Greenfield, analyst with BTIG Research, said the timing of a film's release for on-demand showings by pay-TV providers has shortened to an average of five days after its DVD release. He said in 2006 the "DVD-to-VOD window" ranged from a minimum of 30 days to upwards of 45 days in order to encourage the more profitable retail sales of DVDs. (Read more from BTIG Research.)

"The studios' willingness to collapse the VOD window is a clear sign to us that the industry is admitting that DVD purchasing is disappearing," said Mr. Greenfield. "Consumers simply do not need to own the overwhelming majority of content released by Hollywood, when that content is so readily available via rental platforms."

In a brewing controversy for movie-theater owners, studios are also considering high-priced home-video offerings that could make films available on-demand soon after they're released in theaters. George Gonzalez, chief executive of XStreamHD, a satellite-home-movie service launching in September, said he has an agreement with Lions Gate Entertainment Inc. to offer some films on the same day they're released in theaters.

For the home, consumers are turning to low-cost movie-rental outfits like Netflix Inc. and Coinstar Inc.'s Redbox. There's also a variety of online download and streaming services popping up that are gaining popularity, and illegal film downloading is also a force in the business.

Viacom Inc. Chief Operating Officer Tom Dooley said these new services offer a revenue opportunity for studios that, over time, will replace declines in DVD sales. He pointed to the recent agreement by Netflix to pay nearly $1 billion over five years to Epix, a premium-movie network launched by Viacom, Lions Gate and Metro-Goldwyn Mayer Inc. In return, Netflix won the rights to films from Epix's studio owners for its online streaming service.

"The deal clearly demonstrated that these new players are going to represent significant revenue streams to studios," said Mr. Dooley. "There is a new market developing that's beginning to replace the physical DVD business. This may not be as elegant a transition as some of the industry's previous transitions because consumer technologies move so quickly these days, but it will happen."

U.S. consumers spent an estimated $2.26 billion on DVD and Blu-ray movies in the second quarter, down 14% from the same period a year ago, according to Nash Information Services LLC, a home-video market-data provider. That figure has been in steady decline since the third quarter of 2007—the year that spending in the category peaked at nearly $16 billion. Last year, the market shrank to less than $13 billion.

Disney and News Corp. didn't disclose their home filmed entertainment revenue results for the period, although News Corp., owner of Twentieth Century Fox Films and Dow Jones & Co., publisher of The Wall Street Journal, said it posted an increase due to strong sales of "Avatar" on Blu-ray.

Viacom, owner of Paramount Pictures, reported a 43% drop in home-entertainment revenue for the period, citing a sharply lower number of releases. Time Warner, owner of Warner Bros., reported an 8% decline. Lions Gate reported a 22% drop, citing a smaller slate of releases.

Time Warner's Mr. Bewkes said higher-margin revenue from digital home video distribution rose 50% in the quarter, and he's confident Warner Bros. can push its overall profit margins higher by accelerating the transition to digital consumption.

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