Buzz Watch: Disney Gives Grim Outlook For The DVD Business

Authored by Paul Sweeting on February 4, 2009 - 9:04am.

Well that was a downer from Disney yesterday in its fiscal Q1 earnings call. The DVD business is tanking, nothing else is taking up the slack and we have to spend less money making movies. The "conversion rate" for new releases (i.e. the ratio of DVDs sold per million dollars of box-office gross) is falling, consumers are buying fewer catalog titles, shelf-space is disappearing and prices are plummeting. And oh, yeah: the rest of businesses pretty much suck right now, too. It sure didn't sound like the happiest place on earth.

CEO Bob Iger sounded downright alarmed over the state of the DVD business:

So regarding DVDs and whether we are seeing cyclical or secular change, I think it is clear that the economy has an impact on DVD sales. And if you look at sales for the year, they worsened in the fourth calendar quarter, or our first fiscal quarter, significantly, suggesting that maybe there was a direct correlation between the cataclysmic events that occurred around the beginning of that quarter and DVD sales.

However, we have been taking a hard look at this business for awhile with the belief that as consumer choice grows, and we all know this to be true, if you look at the availability of games online as a for instance, or videos in multiple places, or multi-channel TV, you name it. That pressure on the business has only grown. And that consumers can afford, because of all that choice, to simply be more selective and potentially to buy things that they believe that they believe they are absolutely going to want to watch instead of things that might just be nice to have.

Just as a for instance, the average U.S. DVD household owns about 80 DVDs already and the avid movie buyer or user at home that has DVD player owns somewhere in the neighborhood of 135 to 140. That suggests that economy or not, that going forward people potentially will be more selective about what they buy because they already own a pretty decent collection.

So we are mindful of that. We believe that there are some secular changes affecting that business. We can't quantify it. We can't point, for instance, just at shelf space issues.

What to do? Iger's answer is to take as much cost out of the DVD business as possible, like expensive extras and distribution expenses:

Our goal is to ultimately spend less in total on films but because we are making fewer films and there is a greater percentage of those films that are what we call tent-poles, the average price for a film isn't necessarily going down significantly. We do believe, though, that the cost of both producing the DVDs, distributing and marketing the DVDs, needs to be addressed and that's exactly what we're doing with an eye toward not only reducing the cost, and what I will call the investment in extras for the DVD, but also focused on improving the price to value in relationships.

For instance, we are finding that when we sell a blue-ray DVD with a standard-def [sic] file and also a downloadable file, we can actually offer a price to the consumer that is viewed by the consumer as delivering greater value, which is enabling us to drive revenue at a level that is slightly better than we might have...But definitely the cost of, basically, the system needs to come down.

There is deep irony in this for Disney, or at least there ought to be. Disney played a critical role in bringing the industry around to adopting Blu-ray Disc over HD DVD as the next-generation optical disc format, despite the cost and speed-to-market advantages of HD DVD. In particular, Disney was a vocal advocate of the greater storage capacity available on Blu-ray discs to accommodate a new generation of data-intensive interactive bonus features it considered essential to enticing consumers to make the leap from standard DVD. Now, of course, the studio is looking for ways to take the cost of extra features out of "the system."

There's a fair amount of hindsight in that assessment, of course. I doubt even HD DVD advocates, at the time, anticipated the precipitous drop the packaged media business experienced in the fourth quarter. But some sort of downturn in the market was inevitable, as Iger now acknowledges in citing the data on household saturation. Cost and timing could only become more critical over time.

An archived recording of the full Disney Q1 earnings call is available here.

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Paul Sweeting

Paul Sweeting is the Editor of Content Agenda, a business-to-business brand dedicated to the nexus of content, technology and business. This piece was originally published on Paul's blog "Media Wonk" on Content Agenda and is posted on DMW with the author's permission.

Image by joyrex

Published in DMW Daily, February 4, 2009

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Comments

Consumers are confused!

Submitted by anonymous (not verified) on February 5, 2009 - 4:55am.

Another issue is that Blu-ray has confused people. Should I invest in more DVDs or wait for favs to be released on BDs? Should I even invest in BDs with its uncertain future? Is another format going to displace both DVD and BR (ie, a memory card format akin to SlotMusic)? Etc...end result: stagnation. The studios can blame themselves for their excessive greed and adopting Blu too hastily.