DVD Backend Is Dwindling

Recession hitting already soft marketplace

Expected ancillary revenue from DVDs plays a significant part in modeling many television program budgets. Well, at least it used to.

DVD sales were falling even before the recession, and now consumer spending cutbacks are hurting the category even further. While the DVD marketplace is more a mainstay of the film business, it had become a nice back-end profit driver for television in recent years. But the softness in the space is now affecting profit projections, so content providers are hoping digital and international can help make up theDVD falloff.

“We're keeping a watchful eye on the DVD market obviously, and we are being overly cautious about how we project DVD revenues going forward,” says Sony Pictures Television President Steve Mosko. “It's a concern, but our economics aren't built on the DVD market like the feature film business.”

Monterey, Calif.-based Adams Media Research projects that consumer spending on what it calls “video retail,” because it still includes VHS as well as traditional DVDs and Blu-ray discs, will fall from $14.5 billion to $13.4 billion in 2009. Merrill Lynch had more bad news. In a recent report, analyst Jessica Reif Cohen noted that new DVD releases were down 20% in the fourth quarter, though she says first quarter will do better. Merrill Lynch projects that sales will be down 5% overallin 2009.

The sales declines are something big media companies are watching carefully, since DVD projections help determine cost structure. Viacom's chief executive Philippe Dauman says his concern is to what extent the recession changes consumer habits long-term.

“You saw a pretty significant decline that was very clearly recession-related,” he says of the fourth quarter. “Now if people change their habits over a long period of time, does that recession-induced trend accelerate any secular trends that may be out there? That remains to be seen.”

Speaking at a recent investment conference, Time Warner CEO Jeff Bewkes echoed the hopes of content providers that as traditional DVD revenue declines, other new sources of revenue will continue to pick up. “The standard DVD business that has been a huge growth engine has been slowing down and maturing, but the new businesses, whether it's Blu-ray or electronic VOD for rental or sell-through, are picking up quite nicely,” he said. “I'm not saying revenues from those have to exactly match DVDs as they decline…but we shouldn't rush for the exits yet on that.”

Reveille managing director Mark Koops also hopes the new revenue streams will offset DVD softening: “The market is more fractured, but there are [other] revenue streams that will ultimately more than make up for DVD percentage drop.”