DVD spells digital video decline


Persistent year-over-year declining sales of DVDs at Best Buy and Circuit City stores might portend trouble for the movie industry, according to a Wall Street analyst report released Wednesday.

Pali Research analyst Richard Greenfield, who raised concerns about the home video industry in October with a report titled "DVD Party is Over" and again last week, said Wednesday that "2007 appears even more ominous for film studios."

His latest beef comes courtesy of Circuit City Stores Inc., which reported a $16 million quarterly loss Tuesday, sending its shares tumbling 17.5% that day.

While many Wall Street observers focused on falling prices for flat-panel television sets, Greenfield keyed in on DVD sales at Circuit City and at its archrival Best Buy, which reported better-than-expected quarterly results last week.

"Based on company reports over the past four quarters at each retailer, five of those eight reported quarters have experienced negative year-over-year DVD comps," Greenfield said.

The analyst said that he is "increasingly confident that 2007 will be the first year that consumer spending on DVDs declines domestically."

With that prediction, Greenfield is at odds with other researchers.

PricewaterhouseCoopers predicts that the U.S. market for DVD sales and rentals, combined, will climb from $24.1 billion this year to $24.8 billion next year. When digital streaming and "other rentals" are added to the mix, the industry grows from $25.8 billion to $27 billion domestically.

Greenfield is underwhelmed by the prospect of digital downloads, fearful that movie companies are embracing the concept too quickly and will end up cannibalizing their DVD sales.

"We are concerned about the long-term damage the industry could incur from expanding the rental market via digital downloads (that expire) and/or video-on-demand," the analyst wrote in his Wednesday report.

"While the studios need the VOD/rental industry to support failed movies, we do not believe a greater emphasis on VOD/rental (vs. retail) is the answer to the industry's problems heading into 2007," he wrote.

The analyst is predicting good fourth-quarter results for movie companies "given a great DVD release schedule." It is 2007 and 2008 that worries him, and sales of next-generation DVDs, be they Blu-ray Disc, HD-DVD or both, won't help, either, at least not in the near term.

"Bottom line, keep an eye on 2007 film industry profits," he wrote. "We suspect the risk to expectations is increasingly to the downside, with downside risk growing into 2008 unless there is a notable acceleration in next-gen DVD sales and/or a more attractive business model emerges for digital movie distribution."