This is interesting stuff. Plays right into the ongoing debate about new distribution models. I've made some text bold to emphasize statements...

According to a recent report issued by investment bank Goldman Sachs, the four major media conglomerates will see zero profit growth in the home entertainment marketplace in 2006, and a high-single-digit decline in total home video revenue for 2007, Gamedailybiz.com reports. The report describes several important factors regarding the rapid decline:

1. DVD players penetration will be at 79.7% next year, reducing the number of "library builders."

2. Late adopters are less likely to purchase large number of DVDs.

3. The quality of releases will decrease as much of the quality titles in the studio's back catalogs are exploited.

4. With demand waning at the box office, sales of new release DVDs may also suffer at retail.

5. Sales growth from new formats will be hampered by format disputes.

We believe that these factors will also contribute to DVD profit growth decline:

1. Downward pricing pressures will squeeze margins -- the average price per disc in the typical multi-disc set has fallen from around $20 dollars per disc in 2000 to approx. $8 per disc today. Due to the sheer number of buying options available to the consumer, DVDs are quickly becoming a commodity product.

2. Shady marketing tactics will turn off customers -- continually reissuing titles to fleece and re-fleece consumers (aka "double dipping") has become rampant in the business. Some studios are getting lazy and simply changing the packaging without adding any value. This tactic is merely hastening the onset of buyer fatigue. Studios should embrace the notion of high-value special editions (like the Criterion Collection) which results in brand loyalty and repeat purchases.

3. Much like they did with music five years ago, consumers will quickly become accustomed to owning digital versions of video content.

Just look at the year over year decline in packaged music sales (and the rampant growth in digital music sales) and there's no question in anyone's mind where this business is headed.

Naysayers who think that the era is "five years away" should take a hard, fast look at the 1,000,000 video downloads at iTunes over a 20 day period last month. Apple, or some other company, will likely come on board with an Ipod-like device to carry hundreds of hours of HD-quality video that can be jacked right into a TV set. Those companies who don't get their digital ducks in a row will be on a raft of unsold DVD product floating in a sea of red ink by the end of 2007.

As I've posted previously, I do think downloadable movies will be the norm sooner than later - especially when you can play them on a portable device, a computer, and most importantly on a real television with a high quality image (preferably HD).

-Blake

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