DVD or download?

DVD or download?

Early adopters may think that movie downloads are cool but it’s too soon to declare the death of the DVD.

By Paul R. La Monica, CNNMoney.com senior writer
June 26 2006: 12:44 PM EDT

hollywood_dvd_movie.03.jpgNEW YORK (CNNMoney.com) — How are you going to watch movies at home in the future?

you going to download them on your computer and then watch them on your
TV or an iPod? Continue to buy or rent DVDs? Order them through a video
on demand service from your cable company?

are many possibilities. And with that, a lot of confusion on Wall
Street about just who will ultimately wind up making the most money
from movie downloads.

Clearly, the so-called "content providers"
– media companies that produce and distribute films – should be
winners, assuming they are able to find the right price that will
stimulate healthy demand while not sacrificing profits.

As movie download services become more popular, some predict the demise of the DVD.
deathmatch? Shares of Netflix and Apple have both taken a hit lately as
the market tries to figure out who will emerge as the winner in the
movie distribution market.

Clearly, the so-called "content providers"
– media companies that produce and distribute films – should be
winners, assuming they are able to find the right price that will
stimulate healthy demand while not sacrificing profits.

investors don’t seem willing to make any major bets on just who will
emerge as the winner from a distribution standpoint just yet.

Downloads will go mainstream…but not tomorrow

Consider that shares of Apple (Charts),
which is in talks with major movie studios about the possibility of
selling movies on its popular iTunes store, have fallen nearly 20
percent this year.

There has also been speculation that Microsoft
is in discussions with media companies about selling movie downloads.
In addition, there has been chatter that Microsoft (Charts) may also want to begin selling a mobile hardware media device to challenge Apple’s iPod.

And shares of Netflix (Charts),
the online DVD rental service, have fallen more than 11 percent in the
past month and a half, partly due to concerns about increased
competition from Apple down the road.

Part of the recent
uncertainty could be due to the fact that all the talk about movie
download services becoming prevalent in the near-future is probably a
bit overdone.

"There is no doubt that digital distribution is
coming sooner or later. But sometime we get excited and think it is
coming sooner than it is," said John Barrett, director of research with
Park Associates, a market research firm focusing on digital
entertainment and communications trends.

As such, one analyst thinks that it’s way too premature to ring the death knell for the DVD…and Netflix for that matter.

continue to believe that DVDs will remain the primary distribution
medium for movies for the next 5+ years," wrote Cowen & Co. analyst
Jim Friedland in a recent report.

He added that he did not think
an iTunes movie service would have a significant impact on Netflix
sales in the near-term simply because he thinks DVDs are a better way
to watch a movie. "iTunes videos are great for use on a plane, but
offer low quality video and sound," he wrote.

Still, it seems
likely that over time the technology issue will be taken care of and
people will not be able to tell the difference between a movie on DVD
and something they have downloaded.

"While the lack of video
home-networking solutions limits the ability to watch programming on
the TV today, newer solutions introduced over the next few years could
greatly expand the appeal of video downloads and steaming media," wrote
Safa Rashtchy, an analyst with Piper Jaffray in a report on Monday.

Apple may not be the winner

this doesn’t necessarily mean that Apple will make a huge killing from
movie downloads. First off, while many techies and media folk are all
atwitter about the prospect of buying movies from iTunes, the reality
is that iTunes is still just a small contributor to Apple’s sales.

the first two quarters of the company’s latest fiscal year, less than
10 percent of Apple’s total sales came from its "other music related
products and services" unit, which includes iTunes.

And Phil Leigh, senior analyst with Inside Digital Media, an independent research firm, said that Yahoo! (Charts) and Google (Charts) will probably become more formidable competitors to Apple in the online video market.

are going to see new winners and the likely candidates will be Yahoo
and Google. You’ll be able to search for video in the way we search for
text now and some videos will be free and ad supported and some may be
sold," he said.

David Card, an analyst with Jupiter Research,
agreed that it may not be easy for Apple to replicate the success it’s
had with music in the movie market.

"Music is portable. But there is only so much demand for portable long-form video," he said.

adds that there already is a fair amount of competition in the movie
download business from services such as Movelink and CinemaNow in
addition to video on demand services from cable and satellite TV

"Even if Apple were to get into the movie business, I
don’t think they’d carry as much as pull. You want movies on the big
screen and there are a lot of other options for doing that," he said.

In other words, don’t throw away your DVDs or cancel your Netflix subscription just yet.

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