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Market Tension Continues to Grow

6 Nov, 2005 By: Kurt Indvik

Maybe it was just coincidence that the same week Goldman Sachs issued a report pointing to a downturn in the home video market's contribution of profits to the major entertainment conglomerates, Warner Bros. cut between 250 and 300 jobs at its Burbank, Calif., studios, across all its divisions, including Warner Home Video.

And maybe it was just coincidence that in the same week, Apple reported its new video offering at iTunes sold more than one million video download sales in just 20 days, while the 20-year-old Bradley Video chain in Northern California suddenly closed its doors.Of course, it was all coincidence, but one can't help looking for connections.

The Goldman Sachs report asks if its forecasted downturn in home video profits is “the end of the ‘golden goose’ for studios. Whether you see the glass as half empty or half full will color how you view a report that estimates home video profits for entertainment conglomerates like Disney, Warner, News Corp. and Viacom will drop from 26 percent in 2005 to 23 percent in 2006.

But the firm also estimates a high single-digit unit sales drop by no later than 2007, along with a continued expectation of lower box office revenue. There's little doubt Warner analysts have been picking up the same trends, prompting the studio to trim 5 percent of its staff last week. The alignment of Warner's home video with other new media properties under one division the previous week is a graphic example of the company “positioning itself for the future” — the reason it gave for last week's job cuts.

As far as Apple and Bradley Video, there's arguably zero connection, but I thought the juxtaposition poignant if nothing else. It appears the once-thriving rentailer was operating under Chapter 11 protection when it closed with little warning. At the same time, Apple's first million video digital download sales (including music videos, TV episodes and animated shorts) appeared almost effortless and is another indication of the robust prospects for digital download. I expect we'll continue to see all sorts of “positioning” maneuvers in the coming months as the tension grows between the legacy and new business sectors of the home entertainment market.

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