DVD industry "used to be big," analyst bemoans

NEW YORK (Hollywood Reporter) - The U.S. DVD market might be headed the way of the silent movies if a new Wall Street report is to be believed.

With sales down for a second straight year, DVDs continue to lose their luster, while a deepening recession suggests entertainment conglomerate stocks won’t shine any time soon, Sanford Bernstein analyst Michael Nathanson bemoaned in a report released Wednesday.

After recounting the famous “Sunset Boulevard” scene in which a screenwriter tells faded silent-film star Norma Desmond, “You used to be big,” Nathanson concluded: “Sadly, the same might be said for the DVD industry.”

The analyst cited data from trade group Digital Entertainment Group, which show that U.S. consumer spending on home entertainment fell 5.7% last year to $22.4 billion, driven by a 6.3% decline in DVD sales direct to consumers (also known as “sell-through”). Within sell-through, Blu-ray sales gained traction, while standard-definition DVD sales dropped 9.5%.

Further analysis unearthed “a very troubling demand trend,” Nathanson said. Not only did sell-through demand deteriorate as the year unfolded, but the drop also “appears to be most pronounced among new releases,” with unit sales down nearly 20% in 2008, compared with a 6% decline in catalog titles.

Bernstein now estimates U.S. home entertainment spending to fall 7% in 2009, 6% in 2010 and another 7% in 2011.

Growth in Blu-ray sales momentum “is unlikely to stem the decline in standard-def units,” Nathanson concluded, before adding: “We fear that the current state of the DVD market will have negative near-term implications on media conglomerate earnings.”

After a hit to film unit profits, which could lead to weaker-than-projected results in the first half of 2009, the deterioration may lead to write-downs to account for the shortfalls, Nathanson predicted.

The DVD challenge is just another obstacle for the stocks of entertainment conglomerates amid the recession, according to the analyst.

“Investing in the media conglomerate stocks for the near-term is a challenge,” Nathanson said, arguing that their earnings are economically sensitive and ad and consumer spending rebounds have often lagged economic recoveries.

Nathanson’s report coincided with a bleak December retail sales report from the Commerce Department that seemed to confirm fears of a deepening U.S. recession.

December sales at U.S. retailers fell 2.7%, more than twice as much as projected. Compared with the year-ago period, sales fell a record 9.8% during the traditionally big holiday sales month.

The December results marked the sixth consecutive monthly retail sales drop, the longest downward trend since the government began tracking such data in 1992. For all of 2008, retail sales fell 0.1%.

Reuters/Hollywood Reporter