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Analysis: Disc’s ‘Blu’ Ace Card

29 Aug, 2012 By: Erik Gruenwedel

‘USA Today’ story suggesting streaming will supplant Blu-ray mixes apples and oranges

In the clamor to embrace digital distribution of home entertainment — underscored by the rise in subscription video-on-demand services such as Netflix and Hulu Plus — some observers appear to ignore the enduring appeal of Blu-ray Disc.

In an Aug. 24 USA Today , the article intones that Blu-ray’s six-year-old odyssey as heir apparent to home entertainment workhorse — the DVD — is in jeopardy due to the burgeoning market for SVOD and streaming. The story attributed the threat to burgeoning digital revenue, which includes electronic sellthrough (EST), transactional VOD and SVOD, surged more than 77% in the first six months of the year to $2.4 billion compared with $1.3 billion during the same period last year.

Yet, $1.1 billion of that digital revenue came primarily from Netflix. While Netflix continues to add streaming subscribers — ending its most recent fiscal period with 24 million in the United States — the majority of those subs are watching repurposed TV shows and not feature films. That’s because studios won’t license theatrical releases — especially blockbusters — to SVOD platforms until all other higher-margin distribution channels such as packaged media, electronic sellthrough and rental have been exhausted.

Case in point, Netflix earlier this year touted exclusive streaming deals with The Weinstein Co. for Oscar-winner The Artist and Epix for Disney/Pixar’s Marvel’s The Avengers (Sept. 25), among others. In reality, both titles won’t be available for streaming until well past their retail windows end sometime next year.

Those windows include rental whereby titles are available at video stores, transactional video-on-demand on cable and the Internet, and eventually kiosks with its varying street-date embargoes.

“We did attempt to cover [in the USA Today story] the point about the type of content that SVOD services like Netflix typically make available older films and programs like episodic television shows,” said Andy Parsons, SVP of corporate communications for Pioneer Electronics and chair of the BDA promotion committee in the United States. “Blu-ray and DVD provide access to the latest titles, which are not available through streaming sites.”

Parsons said he continues to stress that streaming and discs can co-exist due to their unique compatible roles in home entertainment. He said Blu-ray is best for home theater use featuring the best resolution video and audio, while DVD is good for secondary screens such as a bedroom or in a car. Parsons said Digital Copy and Ultraviolet give consumers use of the content in places where discs may not be as convenient to use, such as on a plane or hotel room through the use of a tablet or smartphone.

The executive said Blu-ray/DVD/Digital combo packs give consumers the aforementioned benefits in a single package. Parsons add that typical Blu-ray player supports all of media types (CD, DVD, BD, streaming) in a single device – underscoring the notion that this is not a zero sum game.

“One medium does not have to go away to make room for the other; we just have more ways to make use of our content, which is a pretty great thing,” he said.

However, the perceived shift in consumer consumption to digital is noteworthy as Hollywood readies for the fourth quarter when packaged media — notably major film and catalog releases on Blu-ray — is expected to significantly impact studio bottom lines.

Lionsgate, which released box office hit The Hunger Games Aug. 18 as its first Ultraviolet title, said it expects to generate two-thirds of its profit from from disc sales in Q4. Indeed, Hunger Games sold more than 3.8 million discs its opening weekend at retail. Santa Monica, Calif.-based Lionsgate said home entertainment revenue (including digital sellthrough) surged 57% in its most recent fiscal period spearheaded by five major theatrical releases launched at retail on disc and electronic.

Sony Pictures Home Entertainment is readying Laurence of Arabia 50th Anniversary Collector’s Edition for release on Blu-ray — a process that reportedly took years to accomplish.

“I think people who know the film will be surprised at the leap in quality we’ve taken with this restored version on Blu-ray,” Grover Crisp, EVP with Sony Pictures Entertainment, told USA Today.

Other major releases out on Blu-ray entering the fourth quarter include Titanic (Sept. 10), Indiana Jones: The Complete Adventures (Sept. 18), Sunset Boulevard (Nov. 6) and Catch Me If You Can (Dec. 6) — all from Paramount Pictures Home Entertainment. Walt Disney Studios Home Entertainment Blu-ray releases include Cinderella: Diamond Edition (Oct. 2) and Finding Nemo (Dec. 4). Warner Home Video releases Harry Potter Wizard’s Collection (Sept. 7). Sept. 25 Fox releases Bond 50: The Complete 22 Film Collection, and Universal offers Alfred Hitchcock: The Masterpiece Collection.

Consulting firm PricewaterhouseCoopers projects that Blu-ray sales will surpass DVD by 2015. Indeed, Blu-ray, spurred by catalog, grew double-digit rates in the second quarter with consumer spending on the format up 13.3% compared to the same period last year. Catalog titles increased 26%, further cementing the notion that Blu-ray has become the standard in home entertainment.

The number of Blu-ray homes continued to rise, with 1.4 million Blu-ray players (inclusive of BD set-tops, PS3s and HTiBs,) sold in the second quarter, bringing the total household penetration of all Blu-ray compatible devices to more than 42.1 million U.S. homes.

Eric Wold, analyst with B. Riley & Co. in Los Angeles, said a stable disc sellthrough market helps dispel studio concerns that lower-margin kiosk rentals represent a negative influence at retail. Wold believes demand for packaged media will remain strong for the next six years until consumers get comfortable with the concept of owning movies digitally in the cloud through Ultraviolet.

“To truly halt disc [sales and rental], studios would have to lower VOD pricing, which I believe is highly unlikely,” he said.

Michael Pachter, analyst with Wedbush Securities in Los Angeles, said success of kiosk rentals underscores the enduring appeal of physical discs.

Pachter eyes a relatively stable sellthrough environment going forward — only declining gradually if digital access to more recent movies becomes a strategy among studios. He thinks disc rentals in kiosks and stores do not weaken sellthrough, and in fact, elongate the demand for discs.

“I don’t think physical rental is negatively correlated to sales,” Pachter said in an email. “They are not quite independent, but rental is not a substitute either.”

About the Author: Erik Gruenwedel

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