Media
The Pause Button 2: YTD
DVD Sales Down Less than
Expected, Rental Revs OK
What's Changed
’09 DVD Sales Declines From -15% to -10%
’09 DVD Rental Declines From -1.5% to Flat
Investment conclusion: This report follows our initial
deep dive into the home video market in January, and
while we have tweaked our forecast, our underlying
thesis remains the same. First, DVD sales declines are
here to stay, and we expect 10-12% declines annually
through 2012 despite slow but steady adoption of
Blu-ray players. Second, we believe that the emergence
of new digital distribution platforms will help offset some
of the EBITDA pressure in the film business from falling
DVD sales, but that with the exception of cable/sat/telco
video-on-demand, these platforms are 2-3 years away
from fully offsetting slowing physical sales. Finally,
across all platforms we see a secular shift (which began
in 2005) away from sell-through and into rental.
Evidence of this shift is seen in the 11% YoY decline in
1Q09 DVD sales but 1% growth in DVD rentals.
What's new: Our ’09 home video market forecast is less
severe at only down ~1-2% versus down ~4-5% in our
prior forecast. YoY comps ease in 2H09 on the DVD
front. Looking further out, however, we have assumed
greater DVD pricing pressure and a slower ramp in
emerging on-demand/online platforms. This leads us to
lower our estimate for ’10 home video revenue from 4%
growth to a 1% decline.
Where we differ: We remain optimistic that higher
contribution profits from digital distribution (less
manufacturing cost) can help avoid a multi-year EBITDA
decline for the studios in home video. We believe this is
more optimistic than consensus. Studio managements
are focused on fewer releases, and lower marketing and
talent costs. Industry consolidation is likely over the next
several years, in our view.