Studios Caught Between Retailers and a Hard Place

Implications: Although DVD software growth has finally slowed, this packaged media business accounts for billions at retail and is a major factor in movie studio profitability.

Despite huge media attention, digital downloads of films account for a single digit share of the home media market.

Brick and mortar retailers control the choke point for the DVD business, and will continue to do so for at least another 3-5 years.


Analysis: Digital downloads are the wave of the future, but still far from meaningful to the film industry's financials today. In the meantime, the nation's largest retailers such as Wal-Mart, Target, and Best Buy dominate the market for home entertainment/packaged media and collectively generate billions in retail DVD sales.

Retail shelf space is a valuable asset, but costly to maintain. Each department (product category) within a big box chain is under tremendous internal pressure to boost operating margins. In this environment, the amount of space devoted to DVD is directly tied to wholesale cost charged by the studio and the resulting retail price that consumers pay.

If digital downloads accelerate downward retail pricing pressure on DVD, the merchants will demand lower wholesale cost or reduce their DVD inventory in order to maintain margin. Either outcome would be devastating for the studios.

The studios can easily afford to give a break in pricing for digital download because the volume of transactions is tiny. If the studios extend similar price cuts to national retailers, a studio could see tens of millions of dollars of profit evaporate.

While the sentiment expressed by Target is absolutely nothing new, the retailer has taken the highly unusual step of stating their concerns publicly. They have, in effect, thrown down the gauntlet.