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DVDs Lose Their Shine

Sandy Brown

The home-movie business could face more pressure thanks to a host of emerging technologies being rolled out by cable operators and an onslaught of new video applications.

As cable companies like Time Warner's (TWX Quote) Time Warner Cable explore enhanced services like video on demand and mobile video partnerships, some industry hard hitters believe the DVD could soon go the way of the VHS.

Time Warner Cable Chairman Glenn Britt, speaking at a UBS Warburg media conference in New York this week, shrugged off worries about threats to the cable business by saying new video platforms could end up hurting the DVD market more.

Asked if he felt the video-capable Apple (APPL Quote) iPod was a threat to cable, Britt responded that he sees it more as "a substitute for purchasing DVDs than as a threat to the cable industry." He also touted the various advantages of new DVR technologies that Time Warner and rivals like Comcast (CMCSA Quote) are spending millions to roll out.

If a set of DVD sales misses at major animation studios Dreamworks (DWA Quote) and Pixar (PIXR Quote) earlier this year are any indication, the lucrative DVD market could mature more quickly than the entertainment industry, which still enjoys nice margins on DVDs, would like.

"All kinds of distribution platforms are cutting into a reasonably finite media consumption pie," says one media strategist, who adds that DVRs are one piece of it and the iPod is another.

Cable companies and large content companies are partnering and rolling out more comprehensive video services. There is little question that mobile video is taking flight on cell phones via Apple, Cingular, Verizon Wireless and Sprint/Nextel (S Quote).

GE's (GE Quote) NBC Universal said this week it is partnering with Apple to provide some of its hit shows like Law & Order available for download. Meanwhile CBS said it is partnering with Verizon to provide some of its popular series, like CSI and Survivor, on Verizon's wireless v chip phone this month.

Warner Music Group's (WMG Quote) Edgar Bronfman Jr., whose industry has arguably borne most of the brunt of technological change in recent years, said at the UBS conference this week that he sees the media business falling into three buckets as things sort themselves out: content providers, aggregators and distributors.

Bronfman says that content producers, like Warner music, will get proprietary margins, while aggregators (he cited NBC as an example) act as a service and will get service margins. But he warned that distributors like phone companies and cable operators will be stuck with commodity margins.

For the consumer, the choice of paying $4 to watch a movie through a cable system vs. $19.99 to own it on DVD might increasingly compromise the historically high margins enjoyed by the DVD producers, aggregators and distributors looking forward.