Blu Ray vs Movie Downloads

by Michael D. Sellers

For all of us out in indie outposts like MovieBank Studios, the prospect of legal movie downloads progressing to the point that they become the option of choice for non-theatrical viewing is something of a holy grail….if it happens, really happens, many of the barriers that make our work so difficult will be taken down, and an egalitarian utopia will finally exist. Well, maybe not quite that great — but the point is that when the day comes that Movie Downloads are the option of choice, the tyranny of “shelf space” will end and the netflix model of limitless shelf space and choices driven by viewer recommendations rather than studio advetising budgets will take over. If/when that happens, anyone who can mobilize the viewer recommendation process can prosper, and we take heart from that.

Over the last several years, the leveling off and decline of DVD sales has been a killer for us. Believe me, when overall DVD sales drop 3%, you can figure that the indie share of physical shelf space has dropped 15% or more because in a tight market, you can count on the studios to flex their muscle and achieve their profitablity by squeezing out the indies. It’s just the way of the world, and there’s no sense whining about it.

Against this backdrop — the industry projections are that DVD and box office will remain flat or in decline, but movie downloads should grow dramatically over the next five years. How dramatically is a matter of debate — but this is definitely seen as the grown area.

Except for the wildcard — which is, with Blu Ray now having thumped HD DVD more or less out of existence, is it possible that Blu Ray will catch on in a way that sets back the movie download growth?

That question — Blu Ray vs Movie Downloads — is starting to worry me because if the next growth area turns out to be physical media in the form of Blu Ray, and if this sets movie downloads back — then the loser in the equation will be the indies because Blu Ray brings with it all the old tyranny of shelf space, plus the mastering process is quite expensive, so much so that it doesn’t work well for many indie films because it’s a disincentive for distributors to take on smaller marginal titles–or if not a disincentive, then at the very least it means smaller advances for indies.

In the Feb 23rd edition of The Economist, some interesting thoughts on why the studios aren’t rushing to the movie download altar are put forward persuasively:

There are two broad reasons for Hollywood’s tardiness. The main one is the industry’s aversion to making big changes to its business model. In part this is because it takes so much risk in its day-to-day operations. “Every weekend, we sit on pins and needles watching to see if our films will flop,” explains a studio executive, “and that doesn’t encourage risk-taking in the business as a whole.” There is a less defensible explanation too: “Hollywood’s value system is not necessarily about growth,” says Dan Jansen, who runs the Boston Consulting Group’s media practice. “It’s about recognition for films.”

For the moment, most people are still happy with DVDs, so the studios have had little incentive to switch to an unproven new format. The DVD business is huge, bringing in $23.4 billion in America last year, against $9.6 billion from the box office. The studios are terrified of damaging that source of revenue. In 2006, when Disney made a deal with Apple to sell movies via iTunes, Wal-Mart, America’s biggest retailer, reportedly threatened to retaliate: the internet, after all, bypasses it. Wal-Mart accounts for about 40% of DVD sales in the United States and if it sharply cut shelf-space for DVDs, the lost sales would far outweigh new digital sales in the near term. At the end of last year Wal-Mart shut its ten-month-old movie-download site. Now that it no longer has a foot in the internet camp, studios expect it to take a harder line against any further efforts they may make to favour online distribution.

Not everyone agrees, however. Wal-Mart and other big retailers rely heavily on DVDs to bring higher-income people into their stores, says a studio executive. “So they don’t have a leg to stand on threatening to pull shelf-space.” For this reason, he believes that Hollywood should be able to cultivate online revenues without greatly disrupting its existing businesses.

In any case, there are now signs that the DVD boom has come to an end—which should also encourage the studios to worry less about Wal-Mart and to move faster online. After its growth slowed in 2005 and 2006, spending on DVDs fell by 3% in 2007 (see chart 1). Some in the industry are pinning their hopes on fancier, “high-definition” discs—another physical format—rather than on the web. But so far, sales of such discs have been minuscule—largely because of a war between two formats, HD DVD and Blu-ray. Although the war ended this week, when Toshiba said it would abandon HD DVD, high-definition discs are unlikely to bring growth back to the home-entertainment business.

So there we see it — the old forces still coming into play and putting the brakes on the rush to downloads, and with WalMart accounting for 40% of DVD sales in the US, we can expect it to continue to be a tough road to the digital Utopia we dream of.