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Analyst: Rental to Surpass Sellthrough in 2013

14 Feb, 2013 By: Erik Gruenwedel

Blu-ray Disc and digital not enough to offset DVD sales declines

Home entertainment is returning to its rental roots, with purchases of physical and digital content expected to account for 49% of consumer spending this year compared with more than 51% in 2012, according to BTIG Research analyst Richard Greenfield.

Total consumer spending on home entertainment is expected to reach $17.9 billion, down 0.4% from $18 billion in 2012, according to industry and BTIG data.

The projections, if correct, would mark the first time rental revenue topped sellthrough since 2000 when sales of movies and TV DVD began a meteoric rise to the top of the studio food chain as consumers flocked to own content.

Total sellthrough, which includes DVD, Blu-ray Disc and digital, is expected to surpass $8.8 billion compared with $9.1 billion in rental spending. Sales projections are down 4.8% from 2012 when consumer spending on sellthrough topped $9.2 billion.

The decline is primarily driven by a projected 15% drop in DVD sales to $5.2 billion, offset by 6% rise in Blu-ray purchases to $2.5 billion and 40% surge in electronic sellthrough to $1.1 billion.

Indeed, sales of movies and TV shows topped 60% of consumer spending in 2009 — a percentage that dropped to 53% in 2011 as Redbox and subscription video-on-demand began to undermine the sellthrough market.

SVOD revenue is expected to surge 30% this year to $3 billion, while transactional VOD grows 13% to more than $2.2 billion. Kiosk rentals will grow revenue 10% to $2.1 billion, offset by 30% drop in by-mail (to $881 million) and 32% decline (to $827 million) in video store disc rentals.

In a Hollywood panel discussion earlier this month, Michael Lynton, CEO of Sony Corp. of America and Sony Pictures Entertainment, said consumers are parting with the notion of owning content.

“It’s more about access to content,” Lynton said. “People are breaking the emotional hold of ‘I have to have own it if I consume it.’ Once it shifts, a lot changes and it is happening pretty quickly.”

BTIG’s Greenfield says studios have three options to staunch waning sellthrough, including tweaking release windows, lower unit pricing and UltraViolet.

The analyst says movies should be released into retail channels six to eight weeks after theatrical compared with the current 14 to 15 week gap.

“With Comcast’s ownership of Universal and Warner’s Bros. recent management change, we would hope to see real progress in 2013 toward shortening windows, despite the continued tacit collusion of the movie exhibition industry,” Greenfield wrote.

He said 20th Century Fox Home Entertainment’s push to price Digital HD releases at $15 is still too high, and should be lowered to less than $10. The analyst added that while the cloud-based UltraViolet digital storage platform has registered millions of accounts, it remains lower on the to-do list.

“We believe windowing and price are far more important problems to solve than functionality,” Greenfield wrote.

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