Ryan Lawler over at Contentinope and R. Scott Raynovich at Seeking Alpha make note of Lehman Brothers (
News -
Alert) analyst Anthony DiClemente's prediction that the video business is headed where music went before it: which is to say a structural change that erodes profits for packaged media.
His basic argument is that digital distribution could crush TV and movie companies in the same way that online music seems to have upended the music business. If so, then content no longer would be king.
That's an eminently debatable point, but in a business as large as video and film, and with the precedent of music uppermost in an executive's mind, it cannot be dismissed.
DiClemente notes that so far, the effect of digital distribution has been relatively small, with DVD sales and rentals falling "only" about five percent year-over-year from 2007. But the analyst believes that in the coming years, an accelerated decline for DVD sales is "more likely than not."
Some would argue that is not really an issue, since revenues lost in one distribution venue would simply be recouped in another digital delivery format. DiClemente isn't so sure, though.
In the short term, DVD revenues will decline faster than the digital delivery business picks up.
"When we analyze the movie business, we simply have not seen enough evidence that suggests that monetization of digital media can be profitable enough quickly enough to outpace the speed of decline in revenue/profits from traditional forms of media delivery such as ad-supported TV/radio broadcasting and packaged media (i.e., DVD sales)," DiClemente says.
That's bad news for content owners, particularly large content owners. There's even worse news, though. DiClemente posits that audio and video content is becoming commoditized, and that the entertainment landscape may be flattening or "fragmenting."
As a result, DiClemente writes that "being a mainstream Entertainment content creator and producer may not be as profitable in the long term as it once was for the six largest players in the traditional Hollywood oligopoly."
Media stocks have been crushed this year, and Wall Street has been piling on. On Monday, Lehman Brothers analyst Anthony DiClemente issued a research note downgrading the entire industry (see here), pointing to the potential long-term adverse effects of digital distribution. Is it all over for traditional media?
DiClemente's main thesis is that the decline in "packaged media" — such as DVD sales — will outpace the growth in digital media sales. "The question is the rate of decline; we believe the decline in packaged media revenues will dramatically outpace growth in digital media revenues in the next two years," writes DiClemente in his report. Set aside for the moment that DiClemente's own investment bank is under siege — and that all of Wall Street is melting down. Let's focus on whether media Armageddon is occurring.
There are possible differences between music and video content, though. The packaging of music in "album" or "CD" format has been rejected, in large part, by listeners, who now prefer to buy single songs, more on the model of the 1940s or 1950s when "singles" dominated record purchases.
"Movies" cannot be parsed that way, though episodes of TV shows can be. So far, there is not evidence that film and TV are harmed by network-based delivery methods. DiClemente is saying that such optimism is unwarranted; that the shock will come as the Internet siphons off more entertainment revenue.
There are a couple of ways this could happen. One is simple substitution. To a great extent, video games, user-generated content, social networking, reading, sports and other leisure pursuits are substitutes for video consumption. The key constraint turns out to be "time."
Time spent doing one activity means time is squeezed out for other activities. Piracy is the other issue. Though it seems less likely to me, one could postulate that lots of valuable content will evade copy protection and be viewed for free.
A third issue is that legal content, monetized by rights holders, begins to shift towards the "buy singles" model of music, not the "CD" format. If consumers easily can buy and watch just the shows they really have high interest in, demand for packaged linear video services could take a bit of a hit.
DiClemente is concerned that digital distribution changes will "disrupt the core economic models of the majority of film and TV content."
To be sure, revenue will shift gradually from DVD delivery to network delivery. That does not seem to be the issue, as rights holders are compensated in either case, and the cost of digital distribution, plus the revenue splits, are more favorable to rights holders in the digital delivery scenario.
DiClemente's thesis presupposes that people will be watching less video overall, though, as the shift occurs. Either that, or that digital rights management will fail often enough that former "paid" views become "free" views.
Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.
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