In a long research report today, Moffett makes the case that the cable industry and the movie studios alike could be big beneficiaries from growing consumer acceptance of video on demand. He notes that a key development to making that happen is “a dramatic shortening of traditional VOD release windows,” the time period in which movies are made available for sales or rental on DVD, but before they are released for digital distribution. Moffett says cable operators are experimenting with earlier windows, “reflecting an urgent desire on the part of the studios to experiment with alternative distribution venues, and to maximize rental margins in the face of slowing DVD sales growth.”
Moffett notes that Comcast (CMCSA) has been experimenting in two markets - Pittsburgh and Denver - with five major studios offering movies on demand on the same day they are released on DVD. Time Warner Cable (TWX) is doing a similar experiment in Greensboro, N.C., where it is also trying out a new “virtual video store” with more than 2,000 titles available for rent, about the same number in the average Blockbuster store, according to Moffett.
Moffett notes that the economics are far more favorable to the studios for VOD than for physical rentals. He says that in a rental model, revenues are split 70/30 in favor of the retailer; in a VOD model, the revenue split is 60/40 in favor of the studio.
One issue that concerns the studios is the possibility that earlier availability of VOD release could reduce DVD sales, which are more profitable than either form of rental. But given how much more profitable the VOD model is for the studios than the DVD rental model, he says, the math still works: he calculates that in a world in which 50% of DVD rentals shifted to VOD, the studios would have to lose more than 10% of their DVD sales before they would offset the added profits from increased VOD rentals.
If the shift to VOD plays out as Moffett theorizes, it would have consequences for several groups of companies. Certianly, it would not be good for Netflix, Blockbuster or Movie Gallery (MOVI), though Moffett does not actually talk about the impact on those companies in his report. He thinks it would be good news for the movie industry, which is facing the prospect of a big slowdown in DVD sales; a complete switchover to VOD rental from physical rental would mean an extra $2.4 billion industry wide, he calculates. Moffett contends it would be a plus for the cable companies, Comcast (CMCSA) being the most obvious beneficiary, but not the only one; VOD is both a money maker for cable and a point of differentiation from the satellite television providers. And he says it could be good news for the companies that make VOD infrastructure, including SeaChange (SEAC), Concurrent (CCUR) and Rentrak (RENT).