More gloom on economic horizon

Consumer spending down for fourth consecutive month

NEW YORK -- Going into the Thanksgiving weekend, latest economic data pointed to a deepening recessionary trend in the U.S. that is squeezing consumers' wallets, and entertainment analysts raised more concerns about further declining DVD sales momentum amid the downturn.

Consumer spending, which provides about two-thirds of U.S. economic activity, fell 1% in October, the Commerce Department reported Wednesday. It was the fourth consecutive monthly decrease and the biggest drop since the 9/11 attacks in 2001. September had recorded a decline of only 0.3%.

Adjusted for inflation, consumer spending fell 0.5%, the first fifth monthly decline in a row since the 1991 recession.

In more bearish economic news, a widely followed survey by Reuters and the University of Michigan showed consumer confidence fell to a 28-year low in November amid an increase in layoffs and still-falling house prices.

Both reports cast further clouds over the important holiday shopping season, which traditionally kicks off on Black Friday, the day after Thanksgiving.

Also on Wednesday, Miller Tabak analyst David Joyce reduced his financial estimates for the Walt Disney Co., citing weakening advertising and consumer trends. Among other things, he cut his studio entertainment revenue estimate for the company for the fiscal year from $7.41 billion, or a slight gain, to $7.29 billion, a 0.8% decline.

A day earlier, Barclays Capital analyst Anthony DiClemente suggested that in the current downturn, the acceleration in DVD sales of the 2001/2002 slowdown would not be replicated. "Given the new dynamic of widespread broadband deployment (an added cost for many consumers to begin with), we believe the cyclical pressures of the economy could exacerbate the more recent secular shift to the Internet/digital, where cheaper and easier Web content means consumers may be more successful in exploring fragmented forms of free or low-cost entertainment alternatives," he said. "Blu-ray and packaged media is likely not immune from economic weakness."

He expects a 9% decline in standard-definition DVD unit sales in 2009 to 913 million after an estimated 7.5% decrease this year. DiClemente said he is "skeptical" that Blu-ray will return overall home video sales to a year-over-year growth pattern any time soon. Despite growing Blu-ray sales, overall sell-through DVD revenue will fall 7.4% this year and another 10.6% next year to less than $10.4 billion, he projects (see chart).

DiClemente suggests content producers should "err on the side of making TV and movie content easier to access for online users" and "reduce operating expenses faster for home video sales/distribution channels," among other things. He also suggests studios accelerate the shift to "day-and-date" video-on-demand releases and "focus on an expeditious resolution with Screen Actors Guild."

Meanwhile, the weak economy will not have "a material noticeable impact" on video games sales, BMO Capital Markets analyst Edward Williams says in a new report. Nonetheless, he does expect some temporary effect this holiday shopping season, even though hardware cycles are the main determinant for industry momentum, he argues.

"These cycles carry significantly more weight on the growth of the industry than do overall macro economic trends," he says. "That said, as we get to the seasonally biggest month of the year, December, where much of the activity is for gift buying, we expect the overall economy to show some influence on the industry."
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