Sunday, August 22, 2010

Are we at the end of the blockbuster film era?

NewTeeVee is reporting on a research report written by BTIG analyst Richard Greenfield, which states that the delays between the DVD release of feature films and their availability on cable VOD have collapsed from an average of 30 days in 2006 to five days in the first half of 2010. Now, most movies are being made available on VOD on the same day and date as DVD.

According to the article, Greenfield's belief is that movie studios have largely given up on protecting DVD revenues against VOD in favor of protecting the entire home video revenue stream against Netflix and Redbox. The typical price for a day-and-date VOD movie is $4.99 in SD and $5.99 in HD, and 70% of that revenue goes to the studio (versus 60% for conventional "windowed" VOD releases.) By comparison, Netflix's model is that they essentially pay the manufacturing cost for the DVD when they purchase it (often no more than a dollar or two (U.S.)) and then pay the studios a small amount every time a subscriber rents the title. Redbox purchases the DVDs at wholesale, and that's the only revenue the studios get; there's no revenue sharing beyond the initial purchase.

The problem is that the studios are making a lot less from VOD than from DVD sales, even though they don't have any manufacturing and shipping costs with VOD. Consider a DVD with a list price of $19.95; studios typically receive 50% of that, or $9.98. Manufacturing costs for most DVDs in the quantities that studios purchase them are $1 or less, so that leaves almost $9.00 for the studios for shipping and warehousing, advertising, royalties, etc.

Compare that with the $4.99 that cable operators charge for SD VOD films. Studios get 70% of that, or $3.50, and they have no manufacturing, shipping, or warehousing costs, but let's assume that shipping and warehousing adds $0.50 to their costs. That means that they get $3.50 from the VOD showing and $8.50 from the DVD sale. The $3.50 that they do get is much more than they get from Netflix or Redbox, but it's still $5.00 less than they get from DVDs.

The implications of this shift are much bigger than simply making less money per transaction. For more than ten years, DVD sales have been the profit engine driving the movie studios. Theatrical attendance has been dropping for years, and the only reason that the studios have been able to maintain their theatrical revenue stream has been increased ticket prices. The profits from sales of DVDs have enabled studios to dramatically increase their production and advertising budgets for feature films. These profits enabled studios to go ahead with films that cost $200 million or more to produce; their expectation was that with break-even performance in theaters, they could make a big profit from DVD sales.

Now, the DVD profit well is drying up, and Blu-Ray, which was once seen as the successor to DVD, isn't making up the difference and will likely never generate the level of revenues that DVDs once did. This explains the desperate push on the part of studios to adopt 3D. Theaters charge more for 3D tickets, and studios get as much as 80% of the ticket price for releases in their first few weeks in theaters. In addition, Blu-Ray supports 3D, and studios hope to push more Blu-Ray sales through 3D. However, the studios are at risk of killing 3D by flooding the market with cheesy post-production 2D-to-3D conversions.

Without the DVD profit engine, and without anything to replace it in the near term, studios are going to have to cut back on spending. That might mean betting more on blockbusters and their huge budgets, and cutting back the total number of movies they release each year, or maintaining the same number of releases and cutting back on budgets. Either approach means big changes for the movie industry.
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