Viacom's (NASDAQ:VIA) Paramount Films business makes money through box office ticket sales, DVD sales and TV licensing of its films. In recent years, the DVD business has been the most profitable part of the film industry with many films becoming profitable only after the film is released on DVD. Viacom's recent Q3 earnings indicated that DVD revenues declined 21% year-on-year for the quarter.
Historically, Viacom's US DVD pricing increased from $21 in 2005 to $22 in 2008. We currently estimate that pricing will continue to increase to $26 by the end of our forecast period due to on-going adoption of Blu-ray HD DVDs which are currently priced above regular DVDs.
However, adoption of Blu-ray DVD players has been slow to date, with only 7% of US consumers owning a Blu-ray DVD player, according to a recent poll conducted by Harris Interactive. Furthermore, DVD alternatives such as internet video (YouTube, Hulu) and video on-demand continue to gain consumer attention. For example, Comcast's (NASDAQ:CMCSA) video on-demand views (both paid and free) have increased from 1.4 billion in 2005 to 3.3 billion in 2008, and we expect this figure to reach 9 billion by the end of the Trefis forecast period. Netflix (NASDAQ:NFLX), the DVD rental company, has been investing heavily in on-demand delivery, both online and through digital boxes, in anticipation of the long-term shift away from DVDs.
Overall, upgrades to Blu-ray DVDs have not had the impact that the Viacom and other media conglomerates had hoped. With DVD sales stagnating or declining, a significant profit driver for big media is at risk.
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