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Blu-ray Projected to Surpass Digital Dollars

27 Jan, 2009 By: Erik Gruenwedel

The transition from packaged media to digital distribution for movies and TV shows may be further away than many think.

Sales of Blu-ray titles are projected to increase 150% to $2.9 billion this year from $1.1 billion in 2008, according to research firm Media Control GfK International. That’s nearly twice the $1.5 billion generated by digital last year, which included VOD and broadband.

Digital distribution is expected to top $3.5 billion and represent 15% of the home entertainment pie by 2013.

Michael Paxton, analyst with In-Stat in Scottsdale, Ariz., said wider proliferation of movie streaming and downloading is hamstrung by broadband limitations in households.

“The bandwidth required to stream any type of HD video is way beyond what most households have,” Paxton said.

He said the scuttlebutt for years suggested downloads and streaming would replace packaged media.

“The convenience factor is still not there for streaming media, unless you are watching on a laptop and it is the only option you have,” Paxton said. “The packaged media business model is one that the consumer is very comfortable with.”

That said, Paxton doubts Blu-ray will replace standard DVD, but he also doesn’t believe it would suffer the fate of laserdisc.

Blu-ray is projected to reach 11% of packaged-media penetration by the end of the year, up from 4% in 2008, according the Media Control.

Other analysts (and digital proponents) questioned Blu-ray’s perceived strength, while others said the format’s premium pricing inflated revenues.

“They have to be leaving out the cable and satellite industries to get to that kind of conclusion,” said independent analyst Rob Enderle. “We are likely to see a number of reports like this as the Blu-ray marketing organization works to counter the perception that BD simply ramped too late and still hasn’t hit critical price points.”

Phil Leigh, analyst with Inside Digital media in Tampa, Fla., said the BD revenue projections are misleading because the format currently generates a premium on a per unit basis, compared to standard DVD and digital.

“I’m not sure I believe the revenue forecast,” he said.

Richard Doherty, director of The Envisioneering Group in Seaford, N.Y., said the concerns were moot since BD prices continue to fall as streaming costs rise.

He said streaming costs facing Netflix, Hulu, Blockbuster or CinemaNow are rising exponentially and ultimately have to be underwritten by the end user, which they currently aren’t.

“It’s costing Netflix and other Internet providers ‘tens of cents’ to watch any given movie,” Doherty said. “You watch 90 movies in a month and [they’re not] making any money.”

Reed Hastings, co-founder and CEO of Netflix, said the combination of partnering with consumer electronics manufacturers and reduced disc usage by subscribers would help stymie escalating streaming costs.

Netflix spent more than $11 million on streamed content and catalog acquisitions in the fourth quarter ended Dec. 31, according to a regulatory filing.

“We should be able to keep increasing our content investment while at the same time growing earnings,” Hastings told investors.

Doherty said the current economic recession put expansion plans for the Internet, which included broadband proliferation, on hold. At the same time, demand for streaming has risen leading some cable operators such as Verizon, Comcast and AT&T to consider capping or placing a monthly surcharge on consumers.

“Streaming is going to get costlier and less compelling experience to a lot of people,” Doherty said.

He said President Obama pledged making broadband access in U.S. homes a more economical option, from $15 to $20 per month, compared to about $35 per month, currently. Households that are used to streaming and downloading a lot of content may see their monthly bill increasing to $45 or $55 per month.

“The accelerant to what happens next is predicated by where the President’s stimulus dollars go in the next 90 days to nine months,” Doherty said.

Indeed, Obama created a mild panic in the Silicon Valley last weekend during his first weekly radio address, when he failed to mention a $6 billion stimulus campaign promise earmarked for broadband expansion.

Om Malik, founder of the GigaOm blog network, told Yahoo! Finance that technophiles shouldn’t jump to conclusions about the omission. At the same time, he said he hoped the funds — part of Obama’s proposed American Recovery and Reinvestment Bill — don’t just fall into the hands of Comcast, AT&T and others.

“Instead, the stimulus money should go to smaller companies in areas where there is a broadband problem,” Malik said. “Push to separate services from the pipes and increasing competition in a true capitalistic fashion.”

While broadband proponents wrestle for funds, Blu-ray disc prices continue to fall.

BD pricing dropped 14% in 2008 to an average retail price of $28.93, which still represented a $13.19 premium on standard DVDs, according to Media Control.

Indeed, Sony Pictures Home Entertainment, in a weekly newspaper circular, offered instant $3 discounts on 15 titles, including Pineapple Express, Hancock, Underworld: Evolution, Step Brothers and Nick & Norah’s Infinite Playlist, the latter of which streets Feb. 3.

Analyst Doherty said Blu-ray would become even more affordable after Sony’s recent announcement it would build a disc replication facility in China. He said movies should cost less to replicate and package, which would translate into more attractive new and catalog release prices.

“[Catalog is] what really saved DVD over the past 10 years,” Doherty said.



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