Parks Associates Blog

Thursday, December 21, 2006

Do Digital Downloads Kill the Next-gen DVD Formats?

We received this interesting inquiry from a reporter working on this particular angle. We figured that we'd blog our entire response for you to read. Hollywood is facing a tough challenge in deploying its next-gen disc formats at a time in which box office receipts are growign anemically and the DVD cash cow is showing signs of reaching its peak. We covered Hollywood's challenges and offered our own analysis and suggestions in our recently-completed report Internet Video: Direct-to-Consumer Services.

Our Response
We really don’t see digital downloads hurting Blu-Ray/HD-DVD sales, at least in the short term. There are numerous reasons for this. First, we don’t anticipate that the studios are going to release much of their first-run content (particularly the high-value films) to the download market, instead preferring to see if they can add margin to this content by releasing it on the next-gen formats. We anticipate that you’ll actually see more catalogue/library content move to digital downloads, where 1) the economics make more sense (studios aren’t looking to necessarily sell thousands of copies of their older content); and 2) resistance from their retail partners will be nil (Wal-Mart and Target would still like to move the first-run content on DVD at a decent margin).

Some of the other challenges with the downloads are the long time that it takes for the consumer to get a movie. A consumer who will be seeking all of the benefits and extra features that the larger-capacity next-gen DVDs will offer won’t find the director’s commentary or outtakes on a download. Although the extra features may not be a primary driver for the vast majority of consumers to run out and buy a DVD, they’ll be important, particularly if the studios get smart with their creative development and perhaps offer (where appropriate) complementary content and applications on the discs, including (but not limited to) games, other trailers, perhaps some shorter clips of content, etc. Consider the tie-ins that could be done with the six Star Wars movies and the game content that has been created based of George Lucas’ franchise.

Finally, one of the biggest variables that may hinder the widespread growth of the next-gen formats may simply be consumer resistance to the idea of upgrading their large movie collections to a new format. The music industry did a great job of moving listeners from vinyl to the 8-track (although who wants to admit that they owned one now?), to cassettes, and finally CDs. The movie industry got us all to change out our VHS tapes to DVDs. So, now there’s a substantial challenge ahead of the industry to convince consumers that the next-gen discs offer so much additional value that a consumer not only will make the actual Blu-Ray/HD-DVD choice when buying a new movie, but also may consider replacing his or her existing collection of movies with the upgraded versions. That’s going to be one tough row to hoe.

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