So far my sales of Disney has held up pretty well, down just a bit, while News Corp has fallen about 5%. Disney might be getting a boost from some initial reports that ABC is writing upfront business at decent CPM increases, maybe even large enough to offset potentially double digit down ratings guarantees and thus produce a small increase in upfront sales. It is also possible that investors are beginning to anticipate the next Pixar film, Wall-E, due at the end of June and are putting the disappointing North American box office for Prince Caspian in the rear view mirror. Caspian continues to outperform the first Narnia film in overseas markets where it has opened cushioning the downside. More confidence in the economy also helps given Disney’s exposure to advertising AND theme parks. Regardless, I see upside in the shares as limited and downside of 15-20% in the event that the “media recession” spreads to national TV advertising. I don’t like the risk-reward tradeoff so I am on the sidelines.
One thing that I have been hoping would provide a boost to Disney, News Corp, and the other studio owners is the settling of the next generation DVD war in favor of Blu-ray. Given library rebuilds and higher DVD prices, Blu-ray will eventually push DVD growth back into positive territory. However, a recent report by SNL Kagan suggests that thus far Blu-ray players remain slow sellers….

….According to SNL Kagan, Blu-ray player sales remain sluggish even though the format war has been settled for more than four months. The problem is most likely that the players are still too expensive. Kagan notes that Blu-ray players on Amazon.com were selling for $300 to $1,000 on June 3. Clearly that is too high a price to trigger mass adoption when current DVD players work just fine and are fully penetrated in American households. A weak consumer economy does not help matters nor does the huge selling push on smartphones priced at $100 to $500.
The worry for the studios is that player prices do not come down to $200 or less for this coming Christmas. That currently looks like it may be the case which means that mass adoption is put off until Christmas 2009 and significant Blu-ray DVD sales wait until 2010.
Kagan data shows that U.S. home entertainment sales fell 3.2% in 2007. At the wholesale level, DVD revenue inched up 0.6% implying that pricing is under pressure as consumer interest in DVD purchases wanes. Christmas sales of new titles were mediocre despite the all time box office record in 2007 driven by a slew of blockbuster films last summer including five films grossing $291 million or more. The most popular titles in 2007 sold between 10 and 14 million DVD units (Transformers was #1). In 2006, the most popular titles sold between 15 and 20 million units (Disney had the top three titles with Pirates 2, Cars, and Narnia 1). In 2005, the top selling title was The Incredibles, also from Disney, sold 19 million units.
Back in February, shortly after Blu-ray won the format war, I wrote a column for RealMoney.com outlining the potential upside for the studios of mass adoption of Blu-ray players. I outlined the potential upside as follows:
“Content creators can benefit in two ways from Blu-ray. First, Blu-ray DVDs are priced at a premium. If Time Warner merely exhibits substitution of one Blu-ray DVD sold for one regular DVD sold, the company could pick up tens of millions in extremely high-margin revenue. There is not a lot of argument about this concept, although it is possible that Blu-ray pricing collapses more quickly than is generally assumed. But this would probably take place only if Blu-ray DVD player sales massively accelerate such that the uptick in units sold offsets the reduced pricing.
A second way for the content creators to benefit is if current home libraries of DVDs are upgraded to Blu-ray. One great benefit of creating content is that technological change in the delivery system allows you to resell your library again and again.”
In my earlier column I suggested that in a few years, 20 million households might have Blu-ray players and repurchase five already owned standard DVDs. At Time Warner’s recent wholesale price of $10, that is $1 billion in incremental revenue to the studios, a meaningful amount against Kagan’s estimate of $10 billion in wholesale revenues in 2006 and 2007.
The bottom line is that weaker Blu-ray sales in 2008 create another headwind for the big entertainment conglomerates. With cracks showing in national TV advertising, tough comparisons at the box office, double digit declines in TV ratings at the big four broadcast TV networks, and a weak consumer, loss of an incremental driver is an unwelcome development and provides another reason to be cautious committing investing dollars to the big media stocks.