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Whither Digital Sellthrough?

11 Jan, 2011 By: Erik Gruenwedel

Electronic sellthrough (EST), once considered successor to physical media in the burgeoning transition to digital distribution, appears to have fallen on hard times.

Despite finishing 2010 up 16% with revenue of $683 million, from revenue of $589 million in 2009, EST revenue actually fell 8% during the fourth quarter, according to data released by BTIG Research in New York.

Notable in the decline is the fact that when Apple – the largest retailer of EST – re-launched Apple TV, it eliminated EST, opting instead for transactional video-on-demand rentals. And as a result, digital sales, which had been up 37% through the first nine months of 2010 (according to the Digital Entertainment Group), plummeted.

BTIG analyst Richard Greenfield said Hollywood’s zeal to replicate movie disc sales and pricing in the digital space isn’t working. In a recent online post, Greenfield showcased availability of The Town Extended Cut Blu-ray/DVD Combo with Digital Copy for $18.99 on Amazon, compared with $19.95 on Alphaline, the new digital store launched by Sears/Kmart.

“If someone [didn’t know any better], they might actually come to believe that the studios simply do not want electronic sellthrough to work, unless digital is bundled with physical product,” Greenfield wrote.

Frost & Sullivan analyst Dan Rayburn was more succinct: “Why would I buy a digital copy for $20?”

Greenfield wonders if nascent industry efforts at launching digital locker UltraViolet will convince consumers to reconsider digital sellthrough despite optimism from Mitch Singer, chief technology officer for Sony Pictures Entertainment, who said UltraViolet would be the best thing to hit home entertainment since DVD.

At CES last week Singer told the media that cloud-based UltraViolet represented an opportunity for studios to have a “do-over” regarding EST. Greenfield isn't so sure.

“The studios are simply trying to force something to occur that makes no sense for the consumer,” the analyst wrote. “The whole concept of purchasing content that you can’t see/touch is also likely to be very challenging for consumers to get comfortable with, especially when most movie content is not watched multiple times and is easily available to re-rent at any moment.”

Another challenge to UltraViolet is the fact that Apple is not participating in its rollout, which isn’t expected to occur with any significance until 2012.

As a result, Greenfield believes rental, both digital and physical, will continue to flourish in 2011.

Indeed, rental prospered in the fourth quarter and 2010, with kiosks (Redbox and Blockbuster Express) up 91.3% in Q4 to $498 million (from $260 million a year ago), and up 66% to $1.4 billion for the full year from $858 million in 2009, according to BTIG.

Online disc rental pioneer Netflix upped Q4 revenue 31.8% to $585 million (from $444 million) and uppped revenue 28.9% to $2.1 billion in 2010 from $1.7 billion in 2009.

Brick-and-mortar video stores, spearheaded by bankrupt Blockbuster, declined 33.3% in 2010 revenue to $2.4 billion from $3.6 billion in 2009. In the fourth quarter, store-based rental revenue declined nearly 40% to $517 million, compared with $856 million a year ago. The revenue declines reflect a 31% drop in the number of video-specific stores operated.

In 2009 there were 13,875 video stores operating compared to 9,691 stores in operation in 2010, according to IHS Screen Digest.

"In a digital world, rental has become so convenient there is simply no need to purchase content anymore," Greenfield wrote. "It takes the same number of clicks to buy content as it does to rent it."



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