VOD poised to push DVD pane
Higher VOD margins should entice studios to replace rental
By Jennifer Netherby -- Video Business, 2/1/2007
FEB. 1 | The DVD rental business could lose significant share to cable video-on-demand if studios close the window between DVD and pay-per-view, as is being tested, a new analyst report predicts.
Sanford Bernstein cable and satellite analyst Craig Moffett predicts that cable VOD revenue could grow dramatically from an estimated $1 billion a year in 2006 to $4.1 billion a year over the next few years if studios were to do away with the 30- to 45-day window between a film’s DVD release and its PPV release.
Studios still make more money on DVD sales than they would on a VOD rental, which has kept them from pushing VOD in the past. However, Moffett believes that if half of physical DVD rental revenue was replaced by VOD rentals, studios would gain incremental revenue so long as DVD sales didn’t fall by more than 9%.
Moffett says studios would get a 60% split of VOD revenue compared to the 30% they get from DVD rental revenue.
Moffett says the higher margins would give studios a strong incentive to push VOD. He predicts that studios could gain as much as $2.4 billion in incremental profits from increased VOD spending.
Studios are already testing a closed window. In December, Warner Bros., Paramount Pictures, NBC Universal, Disney, 20th Century Fox and Lionsgate began to test a day-and-date release with DVD for all releases with Comcast in the cabler’s Denver and Pittsburgh markets. Those studios are running a similar test with Time Warner in the operator’s Greensboro, N.C., market, Moffett said in the report. Time Warner also is testing a virtual library offering 2,000 movies.
The tests are being done to determine what impact a shorter window would have on DVD sales and VOD revenue. Cable companies believe a shorter window would convince more consumers to switch to VOD rental. Studios involved in the test, which is expected to run through February, are watching to see whether DVD sales are cannibalized, but they aren’t yet discussing their findings.
Moffett also noted that Disney has begun shortening the PPV window to a mere 15 days.
Rental retailers have been keeping a watchful eye on VOD tests. When the Comcast test was first reported, Blockbuster officials said they believed studios would be “cautious” on VOD so as not to hurt video sales or rentals. During its latest earnings call, Netflix CEO Reed Hastings said he didn’t think the Comcast test would have any impact on the rental business.
Moffett doesn’t show any evidence of how shorter windows have benefited sales of particular movies on VOD. But he demonstrates that VOD has made strong gains in the last year as cable operator Comcast and others have increased their offerings and as the windows have shrunk.
Moffett estimated that nearly half of all cable customers had digital cable by the end of 2006, and 84% of those digital cable customers had access to VOD. And many are trying it out—70% of Comcast digital subscribers have used VOD. In 2006, Comcast delivered 1.9 billion VOD streams, a 70% jump from 2005.
Adult still makes up the majority, 53%, of VOD revenue. Moffett predicts that Comcast’s non-adult VOD revenue will nearly double this year to $434 million.
VOD’s biggest opportunity for growth may be with high-definition content.
“Retailers, including Wal-Mart, are a key impediment to getting better, [earlier] windows for movies,” Moffett writes. “Their opposition to earlier [high-def] windows may be less vehement, however, if there are few retail sales at stake.”
