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Digital Movie Sales: Industry Panacea or Hype?

13 May, 2013 By: Erik Gruenwedel

A common theme throughout the recent studio fiscal calls was the emergence of electronic sellthrough (EST) as an undercurrent to a stabilized home entertainment market.

But a question arises as to how significant digital sellthrough really is. Is EST the catalyst to a renaissance in owning movies? Or is it a big fish in a small and largely insignificant pond?

To be sure, EST generated $231 million in revenue in the first quarter, which was up more than 50% year-over-year. Studios such as Sony Pictures Home Entertainment and 20th Century Fox Home Entertainment, among others, jumpstarted laggard digital sales in the fourth quarter by releasing select titles for $14.99 up to four weeks ahead of street date.

When combined with UltraViolet functionality, EST consumers now have cloud-based access to movies on connected devices — a utility heretofore limited to packaged media. Early access spearheaded a 400% uptick in Q1 digital movie sales at some studios.

“We definitely see an appetite for ownership and incremental lift in our overall title revenue from releasing titles early ahead of physical and VOD,” said an executive who wished to remain off the record.

Yet, while the industry extols digital sales, its contribution to overall home entertainment revenue in Q1 was less than 5%. In fact, sales of Blu-ray Disc and DVD titles — which topped $2 billion — was up more than 2% from last year, according to DEG. EST generated 90% less in revenue than packaged media — the format some observers consider just a few steps behind rental icon Blockbuster in relevance.

In an age of Netflix and subscription video-on-demand, the ability to meld sellthrough with streaming represents a consumer flashpoint to the studios that cannot be understated.

“There’s a subset of consumers that want to own a title as soon as it’s out. And early EST allows them to do that,” the executive reiterated.

Indeed, total digital revenue increased 26% in Q1 to more than $1.5 billion. After sellthrough, principle drivers included SVOD (up 29%) and transactional VOD (up nearly 16%).

But Wedbush Securities’ Michael Pachter questions the true impact of EST. He agrees early access and lower prices afforded digital are appealing to a small percentage of consumers. But lifeline to home entertainment? That’s another issue.

“They are putting too much stock in that data point,” Pachter said. “I don’t think most consumers will embrace movie ownership in the cloud. But I could be wrong.”

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