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OPINION: Recession speeds trends

By Alex Evans -- Video Business, 4/3/2009


APRIL 3 | The current recession is reshaping consumer spending. In recent years, the personal savings rate reached an all time low of 0%. It is now expected to rebound back to its historical average of approximately 7% or higher as access to consumer credit tightens and consumers are no longer able to rely on capital gains for household wealth formation. This will significantly reduce consumer spending.

The recession will accelerate secular trends that have been affecting entertainment consumption over the past decade.

The priorities of today’s home entertainment consumer have shifted, with cost efficiency becoming a top priority. Consumers increasingly prefer zero marginal cost media (e.g., Internet, cable TV) to transactional media (e.g., DVD purchases, DVD rentals, VOD). Consumers still seek choice and convenience, as evidenced by the success of Netflix and DVRs, but preferably with a value element.

L.E.K. Consulting developed a view on the effects of this new consumer behavior in a recent consumer study of over 2,000 U.S. TV households. On net, consumers reported lower time spent watching owned DVDs (-18%), watching rented DVDs (-10%) and viewing transactional VOD (-14%). In contrast, consumers reported a modest net increase in cable TV viewing (+2%) and a significant net increase in Internet usage (+27%).

In the survey, consumers also reported cost as the primary reason for their decline in DVD and VOD movie viewing. The results are consistent with the fact that each form of transactional movie viewing (sell-through DVD, DVD rental and VOD) is significantly more expensive on a cost-per-hour basis ($2 to $4) than “all-you-can-eat” entertainment platforms such as cable TV and Internet (effectively less than $1 on average).

The subscription rental model provides further evidence of the trend toward consumers prioritizing value in media consumption. In our survey, consumers reported spending net 20% less time with traditional rental vs. a net 21% increase with subscription rental over the past year. This is not surprising as the cost-per-hour for traditional rental is roughly $3.30 (for a typical $4.99 Blockbuster rental) or 75% more than the approximately $1.90 for the average paying Netflix subscriber (who spends ~$14 per month on a subscription to watch an estimated average ~five movies a month).

Where are the growth opportunities?

Our research provides some clues to the growth opportunities. Entertainment that is “free” (or at least free in the marginal cost sense) is experiencing the strongest growth. More generally, lower-cost entertainment alternatives will be outperformers.

1) Subscription-based services. Free is not the only way to withstand the recession. Subscriptions work in recessions too, as they can provide a zero marginal cost entertainment experience.

2) Used/traded. Already a big business on the videogame side, the secondary market for home video should see a lift as consumers seek lower price points and access to the alternative currency of trading-in.

3) Electronic delivery. Rapidly growing Internet usage alone should benefit electronic delivery of home entertainment (e.g., EST, iVOD). However, if the cost benefits of electronic delivery can be passed along to consumers, then the market could see an even more rapid expansion. The installed base of 40 million current generation videogame consoles still represents an underdeveloped channel.

What does it all mean?

While the sale of packaged media to consumers will continue to be a large business for the foreseeable future, studios, retailers and other market participants will need to be increasingly creative and flexible in the business models they employ in order to drive growth. This challenging consumer environment demands new approaches. vb

Alex Evans is a VP in global strategy consulting firm L.E.K.’s Media & Entertainment practice. He advises studios, retailers, private equity investors and others on home entertainment issues.


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