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Goldman Sachs Report Predicts DVD Decline

3 Nov, 2005 By: Holly J. Wagner

The catalog DVD gravy train is over.

That is the conclusion of a Goldman Sachs analyst report that set off a flurry of industry debate recently.

The report does not so much conclude that home video sales are falling as assume it, based on recent sales trends, and interpret how it affects the overall revenue picture at the four media conglomerates it studied: Viacom, Time Warner, The Walt Disney Co. and NewsCorp. Executives at those companies and the Digital Entertainment Group did not respond to requests for comments.

The report states DVD sales so far have relied on consumers building libraries of movies. Now that they have done so and household penetration has reached about 80 percent of VCR homes, catalog sales are destined to decline. As a result, media giants will have to look to other sources of revenue to make up the difference.

Goldman Sachs analysts estimate that, of the four companies, NewsCorp. is at greatest risk from a downturn because home video contributes an estimated 30 percent to the corporate bottom line. Disney is the least exposed, with just 18 percent of its revenue coming from home video.

Among the assumptions underlying the analysis:

  • DVD sales for all studios average about 60 percent new release and 40 percent catalog (theatrical and TV product) each year.

  • Household buy rates will slip from 18 units per household per year today to 16 or 17 units per year in 2006 because DVD household penetration will hit 90 percent of VCR homes by 2007 and the early adopters will slow their library building and purchases of catalog titles.

  • "Overall, we anticipate that new formats such as TV DVD and high-definition DVD will not meaningfully slow the secular downturn," the analysts commented.

  • Regarding specific studios, the report estimates that Disney's home video profits were down 6 percent in 2004 and will be down 21 percent this year and another 7 percent in 2006; NewsCorp's home video profits grew by 26 percent last year and will grow by 9 percent this year, then decline by 1 percent in 2006; Viacom's home video profits grew by 23 percent last year and will grow by 35 percent this year, then grow by 14 percent in 2006; and Time Warner's home video profits grew by 10 percent last year and will grow by 12 percent this year, then decline by 1 percent in 2006.

    DVD unit sellthrough growth in the U.S. this year will be 10.2 percent, down from 33.3 percent in 2004 and 51.4 percent in 2003. Next year, unit sales are expected to grow just 1.2 percent, then shrink by 8.2 percent in 2007.

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