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Analysts Cite Shorter PPV Windows as Harmful to DVD Sales

7 Mar, 2006 By: Holly J. Wagner

Physical store rentals are not on the brink of extinction, and investors have overreacted to saber-rattling from media conglomerate CEOs about windows collapsing, according to an industry analyst report.

“Somehow, investors understood the suggestion of the collapse of the theatrical release window as implying the collapse of all windows,” Wedbush Morgan Securities analysts Michael Pachter and Edward Woo wrote. “In our view, the collapse of the theatrical window is to sell a greater number of DVDs. … Should the window between DVD release and the availability of a movie on PPV or VOD be similarly collapsed, we believe that consumers will have an incentive to wait until the film is available on VOD, limiting demand for DVD sellthrough.”

The analysts see more damage to DVD sales by shortening the PPV window to 45 days or less for hot titles. He cited Shrek 2 and The Incredibles as examples of titles that PPV may have cut short when they should have continued selling on DVD for longer periods of time. Larger-than-expected returns on both titles caused their suppliers, DreamWorks and Pixar, respectively, to lower guidance last year.

“We believe that reorders on both films were adversely impacted by the availability of the films on PPV too soon, and think that the studios will be far more cautious with big DVD releases in the future,” they wrote.

While rentals may have suffered along with the rest of the movie industry from a weak 2005 slate, better content should help turn things around for at least some players.

The analysts, whose firm does business with Blockbuster, believe that chain is the most ripe for a turnaround, having completed its major launches. The addition of online rentals could help the chain turn around this year, the analysts believe.

With titles priced around $25 a disc, high-definition formats may increase rental demand, depending on how quickly the technology is adopted, they wrote.

Netflix, they project, has about three years of growth left based on an addressable market of 25 million potential subscribers, split with Blockbuster and other online services. Lower subscription prices will ultimately hurt the online pioneer as it takes more and more subscribers to reach the same revenue as fewer, higher-end subscribers would generate.

Movie Gallery has the most to lose, the analysts said, because the company has no online business in America and stands to be pillaged when online rentals catch on in its markets.

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