January 22nd, 2007

No doubt, there are big threats to the replication business as it stands today. Recently, Pricewaterhouse Coopers and Understanding & Solutions (U&S), seeing the writing on the wall, offered results of studies they have done regarding physical media versus online distribution. But the findings aren’t as bad as you might expect.

The biggest threat to physical media comes in the form of downloads, which were up from 3 million per day in December 2005 to 100 million/day by July 2006. However, there is a way for content providers and replicators to capitalize on those downloads. U&S offered some ideas. “Content owners should be trailing YouTube for promotional purposes and ad revenue share ideas.” They cite a recent CBS television experience. Some 300 clips were downloaded which lead to 30 million views in the first month. TV ratings were up after a YouTube posting. “Movie promotion seems inevitable,” they said. Ultimately, leading to more video sales.

A Look At The Numbers
PriceWaterhouseCoopers has put theories into numbers everyone can understand: money numbers. The Global Entertainment and Media market will increase from $1.3 trillion to $1.8 trillion in 2010. The U.S. region, while slower than others, will still grow at 5.6%. Overall, global consumer/end-user spending will grow by 6.8 percent. Video games will be one of the fastest growing segments. Filmed entertainment will grow at an annual rate of 5.3%.

Recorded music will average 5.2% annual growth. Global spending on recorded music rose by 1.2% in 2005, its second consecutive increase following four years of decline. Growth in digital distribution and movie music drove the recovery in each market, offsetting further declines in spending on physical formats in most territories. Digital and mobile content will continue to have a significant impact on overall spending, accounting for 41% of total growth over the next five years.

According to U&S, 70% of music on MP3 players is audio CD. Over 35% of record company revenues will be digital by 2010.

In 2006, the movie industry had a bad year overall, starting at the box office. When all sales are calculated, DVD sell-through volumes for the year in the U.S. are expected to be flat after a decline in the first three quarters of the year. Of course, not all countries are experiencing decline. India, China, Russia and Brazil saw increases from 8-49%. However, new platforms and formats will generate home video revenue grow in the U.S. this year into the near future, predicts U&S.

In terms of downloading, Broadband availability is key. Broadband household penetration in the U.S. was 48% in 2006, and expected to be 67% by 2010. In terms of what is available today, average Broadband speeds are 1-2 Megabits per second (Mbps). By 2010, that number will be 8Mbps. To put that into perspective, if the device offers a download time of 2Mbps, a 40-minute television show will take 16 minutes to download. At 8Mbps, that show will take 4 minutes to download. At 2Mbps, a high-definition movie will take 8 hours and 2 minutes to download, and at 8Mbps, it will take 2 hours and 5 minutes.

The Future
Most everyone agrees that physical formats are not going away. PriceWaterhouseCoopers said, high-definition DVDs will stimulate in-store video spending. DVD prices will continue to fall in the near term, but as HD videos gain market share, prices will increase. It is anticipated that total home video sell through will increase at 6.9% compound annual rate.

With the advent of the new game consoles, the revenues in this area are expected to grow by 5.6% on a compound basis through 2010, according to PriceWaterhouseCoopers.

U&S offers some ideas for the future direction for replicators. Of course, there is the obvious opportunity with high-definition formats. Manufacturers also need to offer additional logistics services; new product manufacturing, utilizing skills and specializations; get into new market territories as well as digital distribution.

According to Dave Rubenstein, IRMA’s Chairman of The Board, the bottom line is that packaged media already has a deep user base with multiple users, and purchasing packaged media is “a habitual behavior. Shopping is a tactile not virtual experience.” Consumers, he says, like to collect CDs and DVDs, and give them as gifts. Additionally, “digital media still has a significant hurdle to overcome before it becomes practical and easy to use. There is not enough bandwidth, and in terms of high definition content, it is best served by optical media.” Aside from technical issues, retailers support DVDs because they are the largest driver of studio profits and retailers like DVDs because they are a major store traffic driver.

The message behind all of these talks and statistics? Hang tough. Business models are changing, but the business is still there for innovative companies.