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Economy Drives ‘Risky’ Studio Embrace of Electronic Rental

8 Jun, 2009 By: Erik Gruenwedel

video on demand

A combination of the economic recession and a weak release slate have dimmed packaged-media sales and prompted a rental renaissance, heretofore viewed as a necessary evil by studios.

Pali Capital research estimates consumer spending on DVDs is down about 4% since Jan. 1, a slight improvement from the 5% decline for the full-year 2008, but worse than the 2% growth in the first half of 2008 before the economy cratered.

Faced with increasingly reluctant consumer spending on entertainment (outside the movie theater), studios have upped their pursuit of cable video-on-demand (VOD) revenue on new releases day-and-date with DVD and Blu-ray.

Indeed, Comcast last week said it would extend by 24 hours the VOD window on select titles beginning later this month. Other cable operators are expected to enact similar trial strategies.

The economics on electronic rental can’t be ignored: Margins on a typical VOD title can reach 70% compared to 30% for standard DVD, which results in about $2 in incremental revenue, according to Pali.

“With rental growing and retail sales falling, the studios have little choice but to try to improve the profitability of the rental ‘priced’ transaction business,” said Pali analyst Richard Greenfield in a note.

The electronic rental option, however, also presents a double-edge sword as it can shift the market away from higher-revenue DVD sellthrough to lower-revenue rental. In addition the average DVD renter takes two titles (regardless of quality) per visit to Blockbuster, Movie Gallery or Hollywood Video — twice the uptake on VOD.

“Consumers are less likely to watch failed movies on VOD,” Greenfield said.

The analyst said that while the extended VOD rental window may enhance the distribution channel with consumers, it required the permission of pay-TV channels such as HBO, Showtime and Starz, which have exclusive contracts with the studios.

Pali said the contracts remain an integral obstacle to Netflix acquiring upgraded content for its Watch Instantly streaming service.

“We believe the change in viewing period from 24 to 48 hours appears highly unlikely to influence whether or not a consumer subscribes to HBO or Starz, not to mention that movies are increasingly less relevant to the success of pay TV anyway, with original programming having become the key driver of cable subscriber growth and retention,” Greenfield said.

Independent analyst Rob Enderle said the extended cable VOD rental window would have little effect on Netflix, which he said targets a different consumer — unless Comcast begins to offer movies under a subscription model.

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