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OPINION: Video: Still recession-proof?

By Michael Arrington -- Video Business, 2/23/2009


FEB. 23 | Consumers worldwide have weathered tough economic times over the past year and, as cash and available credit have tightened, they have altered their spending patterns accordingly. Michael Arrington of Screen Digest’s U.S. research arm, Adams Media Research, examines whether video can still be considered a recession-proof business.

In the U.S., a recession previously thought to have begun in the third quarter of 2008 was, in December of that year, back-dated by the U.S. National Bureau of Economic Research more than 12 months. According to the NBER, a peak in economic activity actually occurred in the U.S. economy in December of 2007, following a 73-month expansion that began in November 2001.

This merely made formal what many consumers had already realized—that finances had been tight for a while already and things would likely worsen before getting better.

The rule of thumb is that a recession is indicated by two consecutive quarters of contraction in Gross Domestic Product, of which consumer spending represents about 70%. Confidence is a key driver of consumer spending, and consumers haven’t had much of that lately.

Another factor is credit availability, and consumers haven’t had much of that either, despite a $700 billion financial bail-out in the U.S. and similar measures in other markets.

It’s a fair bet that consumers won’t be buying many houses, cars or big-ticket consumer durable goods until things improve again. These typically require a lot of cash or credit and a great deal of confidence in the continuation of one’s lifestyle. They are also likely to cut down on pricey dinners for the family and trips to regional amusement parks, and consumers will be looking for less expensive ways to keep the family entertained.

Historically, however, economic downturns have not tended to result in reduced spending by consumers on media. Screen Digest’s analysis of total media spending in the U.S. during recessionary periods makes clear that a bad economy rarely has much impact on per-household spending; in fact, consumer spending has often increased, even while advertising spending contracted.

But not all media-related businesses will be immune to the pains of this economic downturn. It is likely, especially if the contraction is as bad as (or worse than) many economists are predicting, that advertising spending will be reduced—maybe even in big-growth areas such as cable and the Internet. And, if the downturn reaches the economic depths plumbed in the early ’30s—which few economists have yet suggested—there may even be net declines in small-ticket media fare.

Barring a repeat of those dark times, however, in general, consumer spending on media is likely to weather the storm fairly well—though it may shift around a bit between movie tickets, packaged media and subscription networks.

A look at the short history of U.S. consumer spending on home video rental and retail shows that growth in this sector has done very well indeed during the three recessions since the first videocassettes hit retailer and rental shelves.

During the 17-month recession of 1981-82, consumer spending on videocassette rental and purchases was coming off of an introductory high. Although growth rates were in decline, actual spending nearly doubled between 1981 and 1982, rising from $465 billion to $824 billion. Without the recession, that growth would likely have been even more pronounced.

The nine-month recession of 1990-91 coincided with the natural maturation and accompanying declines in growth rates of the rental business. Although U.S. video rental activity remains among the highest in the world, growth in rentals essentially stopped during this period, never again rising into the double digits, as consumers moved on to other models, such as buying VHS cassettes, new satellite TV options, a growing videogame market and, in time, online content.

Subsequently, DVD, driven by a pricing model designed to stimulate impulse purchasing, helped the retail video market blast right through the nine-month 2001 recession.

However, the sudden drop-off in overall U.S. disc sales in the second half of 2008 leads us to believe that today’s more mature video retail marketplace may not be as resistant to recessionary pressures as in the past, and that the transition to Blu-ray Disc will not happen quite as smoothly as the move to DVD. Several factors play into this, including the lack of an installed base going into the recession.

DVD was in some 13 million U.S. and 5 million European homes prior to the recession of 2001—BD was in less than 1 million across both markets prior to this one, or 7 million homes if all PlayStation 3 games consoles are included. The short but bitter format war that followed its introduction, and the resulting slow rollout of BD-format content by studios, slowed consumer adoption of the new format and hampered sales, even as the DVD rental and retail businesses plateaued or declined.

Even so, the first half of 2008 was looking pretty good in the U.S., with an essentially flat rental market and surprisingly strong BD and DVD sales. Then, in the third quarter, the dramatic crash of U.S. financial markets and saturation coverage of what reporters took to calling “the worst economic crisis since the Great Depression” simply froze consumers in their tracks.

In effect, the consumer retrenchment turned what could have been a banner growth year for the new format into just a not-so-bad growth year, in which BD failed to gain back as much of DVD’s losses as studios and retailers had hoped. Late-year successes on the BD hardware front (with Wal-Mart selling out of both low-priced Black Friday promo models and everything else in stock) and blockbusters such as Warner Home Video’s The Dark Knight proved too little too late—at least in terms of pushing the 30 million-plus disc sales that had seemed possible earlier in the year.

Meanwhile, in Europe, hardware supply constraints earlier in 2008 meant that there were not enough entry-level BD players around to warrant the same sort of aggressive promotion as in the U.S. As a result, Screen Digest’s year-end estimates of European BD sales also fell short of the 14 million-plus forecast at the beginning of the year.

Perhaps the bigger challenge in 2009, however, will be DVD sales. In the last format transition, consumers started cutting back on VHS purchases ahead of buying a DVD player, so industry performance in the equivalent year of 2000 was anemic. Backwards compatibility makes things different this time around, but if the recession drags on, even rabid buying by BD homes could again be wiped out by DVD declines, further postponing any return to video market growth.

The resilience or otherwise of home entertainment in a recession is one of a range of topics that will be addressed at Screen Digest PEVE Digital Entertainment 2009, the leading conference for the international home entertainment business, which takes place in Paris on March 12-13. For further information, visit www.peve.screendigest.com.

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