Digital killed the video star…..

By Martin Peers

This industry drama is worthy of Hollywood.

Like music before it, and lately the book industry, major film studios are grappling with the transition from distribution of physical DVDs to electronic delivery. It is a change the studios need to make, to cut costs and curtail piracy.

Another benefit: regaining control of pricing. The studios let that genie out of the bottle with their decision to use low prices to promote consumer purchases of DVDs, rather than keep the video business primarily rental through high wholesale prices.

That worked for a while: Studio film revenues from video sales nearly tripled between 1997 and 2004 to $9.5 billion, boosting total film revenues 72%, estimates Adams Media Research. But DVD sales fell back to $8 billion last year.

Meanwhile, the downside of the low-pricing strategy is now evident. It allowed the emergence of Redbox, which buys DVDs cheaply and uses vending machines to rent them for $1 a night and then sell some used for $7. Its approach threatens the high-margin market for DVD sales, which despite its decline still accounted for 43% of film revenues last year, as well as traditional rental rivals, which share their revenue with the studios.

Because of the first-sale copyright law, which lets anyone resell or rent a DVD they have bought, there isn’t much Hollywood can do about Redbox, except embrace digital distribution and regain more control of the product.

Already, the weekslong gap between release of a movie on DVD and for on-demand rental on cable-TV or the Internet is shrinking — or disappearing.

About 30% of major-studio movies released so far this year for on-demand viewing were available simultaneously with the DVD release, up from 14% in 2007, according to In Demand Networks, a cable-industry joint venture.

Studios get about 70% of the electronic rental price, more than what they get from DVD rentals. But worries that simultaneous on-demand release could cannibalize more-valuable sales have caused studios to hold back electronic release of megahits likely to sell well in DVD.

That strategy won’t solve the Redbox problem. Another option: offering electronic purchase of movies before the DVD release.

Services such as iTunes, Amazon and Vudu sell movies online at prices that deliver higher margins to the studios than even physical sales, because there isn’t any manufacturing involved.

For that strategy to work, the studios need to widen the array of services that offer electronic purchases, to include cable TV, for instance.

Admittedly, the mass market won’t transition away from DVDs for years. But by doing what they can to make electronic delivery attractive, the studios can regain control of their product.


[Video Star]