A Crack in the Blu-ray Pot of Gold

Three years since its launch, the format still only generates about 6 percent of total home entertainment revenue.

Last Updated: October 13, 2009 @ 6:41 PM

Dreamed up back in the halcyon days of DVD, Blu-ray was supposed to be the format that saved studio home entertainment.

It hasn’t gone exactly as planned.
More than three years since its U.S. launch, the savior format still only generates about 6 percent of total home entertainment revenue.
As a comparison, DVD at age 3 commanded fully 20 percent of home entertainment revenue back in 2000, when the standard format had been VHS — according to industry tracking service the Digital Entertainment Group.
“The market is not being driven by Blu-ray right now,” conceded Brad Hackley, vice president of Rentrak, another tracking service. “The bulk of the transactions are still coming from standard-definition DVD.”
Last week, Rentrak released data that seemed to supply some long-awaited hope to a home entertainment business that has precipitously declined about 10 percent since peaking in 2004.
According to Rentrak, revenue from rentals of traditional DVD and Blu-ray movies and TV shows had increased 8.2 percent to $5 billion through the first three quarters of this year.
Rentals of Blu-ray high-definition disc titles, meanwhile, increased 52 percent to $313 million.
However, while the uptick seems like good news, it actually illustrates continuing problems for the major studios, which have convulsed amid the lack of DVD revenue growth in recent years.
For one, the increase in revenue from disc rentals doesn’t make up for a huge decrease in the higher-margin sales. Indeed, despite the fact that the DVD rental market spiked 6 percent in the first half of this year, the overall home-entertainment market declined 3.9 percent to $9.7 million, according to Digital Entertainment Group.
The reason? DVD sales, which command the lion’s share of growth, declined 16 percent to $5 billion.
For their part, studio officials have blamed low-priced rental services — notably kiosk operator Redbox — for undermining the once buoyant DVD sell-through business. Studios including Fox and Universal have argued that not only are their rental prices too low – $1 a unit in the case of Redbox – but they’re flooding the market with used discs, exerting significant downward price pressure on DVD sales.
Just as key to these overall declines, however, has been the failure of Blu-ray to become a significant home entertainment business driver.
Even if Blu-ray were to double the $750 million in sales and rental revenue it generated for the studios in 2008, it’s still unlikely that the overall business would remain flat with last year’s total revenue figure of $22.4 million.
For their part, studio home-entertainment executives say trying to convince consumers to re-invent their library in the middle of a recession hasn’t been easy.
“We anticipated a higher growth curve, but the economy has had a lot to do with that being a lot slower than we thought it would,” said Lionsgate president Steve Beeks to industry trade Video Business last month.
As a result, both titles and players have been steadily discounted at a rate far exceeding the rate experienced by DVD in its youth.
Blu-ray players are expected to be available for under $100 this holiday shopping season, while a number of titles will sell for less than $10.
“Blu-ray hardware and software prices are coming down faster than anyone wanted them to,” said consumer electronics analyst Richard Doherty of the Envisioneering Group. “The discounting of Blu ray titles has accelerated much faster than the first five years of DVD.”
Blu-ray backers hold out hope that discounted player and movie prices might spark consumer sales in much the same way that DVD began to fly off the shelves back in the recessionary holiday season of 2001.
The building of libraries has accelerated quite a bit since the discounting started,” Doherty noted.
But for Blu-ray, there are other problems beyond the economy.
For one thing, virtually all modern disc players now are designed to “upconvert” DVDs so that they look good on big-screen LCD TVs. As a result, Blu-ray backers have had to sell value-conscious consumers on the benefits of true hi-def – but that’s an uphill battle, to say the least.
Also, the entire physical disc business — both DVD and Blu-ray — is being undermined by the also-nascent Internet download and cable/satellite VOD channels.
“Even value-priced at $9.95, a Blu-ray sale is a lot more profitable for the studios than any cable pay-per-view transaction,” Doherty said. But the convenience of on-demand is making it hard for viewers to resist.
Perhaps most daunting of all, the market remains somewhat confused by a product that – born into a format war with HD DVD – has been a bit vexing from the start.
“One in four people still don’t understand that Blu-ray players play back regular DVDs,” Doherty added. “There’s still a significant factor of consumer confusion.”

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