Analysts Predict DVD Sales Will Drop in '07

JEFF WELLS

A recent report by two Wall Street analysts asserts that 2007 will be the first year in which consumer spending on DVDs will decline.

Analysts Richard Greenfield and Mark Smaldon of Pali Capital, New York, stated that DVD sales will fall by 1%, due to the market reaching maturity and because of online and on-demand video sales undercutting in-store options. The study was based on negative sales figures reported by two major DVD retailers, Circuit City and Best Buy.

“Year-over-year sales declines are becoming the norm at Circuit City and Best Buy rather than one-time events,” Greenfield and Smaldon wrote. “Therefore, we are increasingly confident that 2007 will be the first year that consumer spending on DVDs declines domestically.”

Greenfield, the report's lead researcher, declined to comment on what the findings may mean for the supermarket industry. According to Gerry Kaufhold, an analyst with In-Stat, Scottsdale, Ariz., however, the report's main assertion holds true for supermarkets. He explained that consumers have built up their DVD libraries in the nine years since the format was first introduced. Now they're looking mainly to new releases and waiting for new HD DVD and Blu-ray technology to become more accessible.

“This is sort of the interim period,” Kaufhold said. “The DVD is mature, and the new technology is going to take some time before it starts to get high penetration.”

The Greenfield report stated that digital downloads and video-on-demand options, both of which usually cost less than a retail DVD, will also contribute to this year's decline. The analysts said that by pricing digital and on-demand titles lower than in-store DVDs, studios are cannibalizing sales.

“We believe the studios should be selling digital downloads at full-retail pricing or creating a premium priced digital download/video-on-demand experience closer to the theatrical window,” they wrote.

Last week Wal-Mart Stores said it was testing digital downloads of movies and TV shows.

DVDs and DVD players have seen meteoric sales over the past several years. This was great for the time, sources said, but eventually the market has to level out. According to Nielsen Media Research, New York, more than 80% of American homes today have a DVD player.

Despite any predictions of a decline, though, overall sales of DVDs remain strong.

“The growth rate may not be positive, but it's not substantially negative,” Kaufhold said.

Not all sources agree that losses in the category are imminent. Analysts at PricewaterhouseCoopers, New York, have predicted that DVD spending will actually increase in the coming year, from $24.1 billion to $24.8 billion.

Meanwhile, DEG: The Digital Entertainment Group, Los Angeles, has reported that total consumer spending on DVD rental and sell-through rose from $22.8 billion in 2005 to $24.1 billion in 2006, with rental growth seeing a greater percentage increase (about 15%, from $6.5 billion to $7.5 billion) than sell-through (about 2%, from $16.3 billion to $16.6 billion).

DEG also noted that spending on high-definition hardware is growing. However, total consumer spending on home video, including DVD and VHS, and rental and sell-through, dropped slightly from $24.3 billion in 2005 to $24.2 billion in 2006, DEG reported.

Bill Bryant, vice president, sales, Ingram Entertainment, La Vergne, Tenn., believes that DVD sales will continue to grow. He attributes this to the low-cost impulse options that supermarkets and other retailers stock.

“Catalog price points, particularly for the old DVD software format, will remain low enough to generate significant impulse sales for supermarkets,” Bryant told SN.

Sources said maximizing DVD sales will require that operators offer variety and numerous low-price options. Kaufhold said consumers are hunting for value right now. He cited Wal-Mart's graded pricing on DVDs as an effective way to deliver value.

Richard Cooper, video analyst with Screen Digest, London, explained that efforts to drive sales also come down to creative category management. He said that supermarkets should approach the DVD category as they would, say, produce.

“DVDs require the same level of attention as fresh produce,” said Cooper. “Fresh DVD titles need to be presented to consumers frequently, to prevent the selections and offers from becoming stale.”