Marcy Magiera

Alternative angle on digital adoption
August 11, 2008

I was lounging on the bank of beautiful Lake Almanor in northern California last month, when I got a call from the office about the uproar an investment report by Lehman Brothers analyst Anthony J. DiClemente was causing in the industry. DiClemente, you might remember, downgraded the stocks of Disney, News Corp., Time Warner, CBS and Viacom on the belief that the shift to digital distribution is going to be too disruptive to the movie and TV industry. Specifically, that the decline in packaged media revenue would dramatically outpace digital revenue growth in the next two years.

A recent report from Screen Digest and Adams Media Research ought to be much better received.

In the report, which essentially rebuts Lehman Brothers’ reasoning, authors Tom Adams and Roger R. Smith forecast a compound annual growth rate (CAGR) of 4.4% for the major U.S. studios from 2007 to 2011. They note that the figure is a far cry from the 9.5% CAGR the worldwide film industry grew at from 1997 to 2004, but also a big improvement from the 1.5% negative growth recently.

The analysts believe that all forms of digital delivery, despite growing rapidly, will still account for just $2.2 billion in 2011, or about 5% of net feature film revenue worldwide. While the slow adoption of paid-for digital delivery will limit the Internet upside for the studios in the near term, they reason, it also will protect their revenue from DVD and still fledgling Blu-ray Disc.

Among key points in the report:

• Blu-ray has made a relatively slow start but will be embraced as sub-$200 players come to market next year, and consumers will not skip Blu-ray for Internet HD. The authors are cautious about how much Blu-ray will rejuvenate disc sales, since players are backwards compatible. But a pricing premium for Blu-ray and an uptick in household buying volumes as consumers convert to the new technology should still provide a boost to studio revenue, they believe.

• DVD remains the best form of movie consumption, since it is convenient, portable and provides what consumers perceive as good value for its price. (This stands in contrast to music CDs.) These factors help deter piracy, as do long video download times.

• The trend toward wanting to own content rather than rent it is unlikely to reverse itself in the digital arena, meaning DVD sales will not turn into digital rentals.

• Studios actually net slightly more from an iTunes download than the sale of a DVD at wholesale due to the absence of manufacturing and marketing costs. The pricing negotiated by the studios with Apple makes sense to protect DVD/Blu-ray profits, although it may limit unit volumes in the digital market.

The full Screen Digest/Adams Media Research report is available at www.globalmediaintelligence.com.

Posted by Marcy Magiera on August 11, 2008 | Comments (0)