My DVD Business! It’s Melting, Melting … Melting

Time was, when a movie bombed at the box office, Hollywood studios could always slap it onto a DVD, ship it off to retail outlets and make some or all of their money back.

No longer. The salad days when you could rush dross like “Police Academy: Mission to Moscow” and “From Justin to Kelly” out of empty theaters, onto digital media and into the living rooms of those willing to actually sit through them are over. Total DVD sales are down 7% so far this year. Which is a far cry from the double-digit growth the industry enjoyed just two years ago. High-definition DVDs were supposed to offset this decline, but the silly format war between the HD DVD and Blu-ray supporters has curbed adoption of the next-generation format. Worse, according to analysts, the sparring between the two camps is likely to continue for another 18 months. Which means sales of high-definition discs likely won’t be substantial enough to improve studio revenue this year or next.

So what’s the movie industry to do? Put more emphasis on video on demand and explore digital downloads? Tough call. “While the music and television industries are likely to benefit from an increased array of opportunities in digital distribution, it is not clear to us how the movie industry benefits,” Pali Research analysts Richard Greenfield and Mark Smaldon wrote in a 2006 report. “We believe the inherent value of what a movie is implies that most consumers will want to view most movies in a high-quality experience … the more we think about the movie industry, we keep thinking, what is the benefit from digital? Cheaper distribution and no physical inventory? That sounds great at first, but if the product has to be sold at a discount (comparable to the lower cost to create/distribute) because it is inferior to physical DVDs (in picture quality and usage restrictions/DRM), how does it help the studio business?”

Hey, you guys are the analysts … Anyway, bottom line is this: Film industry screwed for time being. Said Greenfield and Smaldon: “Keep an eye on 2007 film industry profits. We suspect the risk to expectations is increasingly to the downside, with downside risk growing into 2008 unless there is a notable acceleration in next-gen DVD sales and/or a more attractive business model emerges for digital movie distribution.”