<strong>OCT. 19 | PHYSICAL:</strong> Home entertainment consumer spending down 3.2% in third quarter

OCT. 19 | PHYSICAL: Third-quarter consumer spending on all home entertainment formats—DVD, Blu-ray Disc, digital distribution and cable/satellite VOD combined—outperformed most other consumer goods categories, dipping just 3.2%, to $4 billion, according to DEG: The Digital Entertainment Group.

The overall revenue reflects another quarterly gain for Blu-ray and for what DEG lumps together as “digital distribution”, comprising Internet and cable/satellite platforms, offset by continued declines in consumer sales of DVD.

The DEG analysis builds on data released by Rentrak Corp. earlier this month that showed U.S. consumer spending on rentals of DVD and Blu-ray surged 9.9% in the third quarter over the same period in 2008, with Blu-ray rentals up 44.5%, while consumer purchases of DVD and Blu-ray dropped an estimated 13.8%.

DEG also shows packaged media sell-through down 13.9%, although Blu-ray sales rose 66.3% to $161 million. For the year to date, Blu-ray sell-through is up 83% to $568 million.

Digital distribution, including video-on-demand and electronic sell-through, rose 18% for the quarter to $420 million, DEG said. That category is up 20% year-to-date, to $1.4 billion.

DEG said Blu-ray is now accounting for an average of 12% of packaged media sales for theatrical new releases. Some titles, however, have reached more than 30% on high-def, including 20th Century Fox Home Entertainment’s X-Men Origins, Wolverine and Warner’s Watchmen.

“Titles that appeal to the early adopter demographic continue to perform increasingly well on Blu-ray, representing upwards of 20% of all physical media sales,” Bob Chapek, DEG chairman and president of Walt Disney Studios Home Entertainment, said in a statement. “As the penetration of Blu-ray increases, we are beginning to see the same kind of response by mainstream audiences that we are seeing in early adopters.”

More than 17 million Blu-ray discs shipped in the third quarter, up 35% over the year-ago period, according to figures compiled by Swicker and Associates on behalf of the DEG.

Blu-ray set-top player sales rose 112%, with Blu-ray-capable players, including PlayStation 3 consoles, now in 11.7 million households. DEG says 80% have BD Live access.

Despite some revenue declines, particularly in DVD, DEG reported that consumer transactions for home entertainment products were up 6.6% in the third quarter, indicating continued stability given the current economic environment.

“We are pleased to see an uptick in the number of consumer transactions, indicating a continuing strong demand for home entertainment product,” said Ron Sanders, DEG president and president of Warner Home Video. “We are also encouraged by the dramatic growth of Blu-ray and the increases in digital distribution and rental in the third quarter.”

Much of the transaction growth is likely due to the resurgence of packaged media rental, which is being driven by $1 per night DVD rental kiosk run by Redbox and its ilk.

Over the weekend, Walt Disney Co. CEO Bob Iger at a conference hosted by the USC Gould School of Law and the Beverly Hills Bar Assn. addressed the challenge studios face in mounting Blu-ray as a successor format to DVD. He noted consumer demand for Blu-ray won’t stop the ongoing decline in traditional DVD sales since the average household already has 80 titles in its library—which the new Blu-ray machines can still play—so there’s not as much demand to restock as when DVDs took over for VHS.

Additionally, he noted, customers have far more choices these days.

That additional choice, with more formats than ever before being released in the home entertainment window, is why DEG now compiles statistics from a broad range of formats to get a full picture of home entertainment industry performance.

With the economy now showing signs of rebound, some home entertainment executives are expressing cautious optimism about fourth-quarter revenue.

Sony Pictures Home Entertainment president David Bishop said he suspects that fourth-quarter spending will be somewhat higher than the same frame in 2008, due to people recovering from last year’s holiday shock of multiple bank failures and home foreclosures.

He also is optimistic over the large stack of upcoming blockbusters to DVD/Blu-ray.

“There’s a combo of good titles for the growing Blu-ray format and people are just feeling overall more comfortable in spending their money than they were last fourth quarter,” said Bishop. “People do seem to be easing back into the buying habit.”

Even if the fourth quarter shows growth, however, it isn’t expected to be enough to pull full-year 2009 into positive territory.

Additional reporting by Susanne Ault and Variety’s Dave McNary

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