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Virtual Delivery Seen as Death to Discs

Hollywood will win the war against illegal downloading but the battlefield will be littered with casualties, including the DVD and CD formats as physical means of distributing video and audio, according to a Forrester Research study released Tuesday.

The study predicts that in five years, CDs and DVDs will start to go the way of the vinyl LP as 33% of music sales and 19% of home video revenue shifts to streaming and downloading.

Part of that stems from the continued proliferation of illegal file trading, which has caused an estimated $700 million of lost CD sales since 1999. But it will be due more so to efforts by the studios, cable companies and telcos to finally deliver legitimate alternatives like video-on-demand, Forrester researcher Josh Bernoff said.

“The idea that anyone who has video-on-demand access to any movie they are interested in would get up and go to Blockbuster just doesn’t make any sense,” Bernoff said. “(The decline) begins with rentals, but eventually I think sales of these pieces of plastic are going to start going away because people will have access to whatever they want right there at their television set.”

While consumers with VOD capabilities should grow within five years from 10 million to 35 million, or about a third of all U.S. television households, the association that represents disc makers does not believe that output will slow.

In fact, the Princeton, N.J.-based International Recording Media Assn. estimates that the number of DVDs replicated each year in North America will increase from a current 1.4 billion to 2.6 billion by 2008.

CD replications, though, are forecast by IRMA to fall by 15%-18% in the next five years, about half the rate of decline estimated by Forrester.

“The consensus in the manufacturing business is that there will be a decline, but we don’t see as drastic a decline,” IRMA president Charles Van Horn said. “We see growth (in video and DVD), and I don’t think it will be because there are more pipelines to feed. It will be consumers buying discs.”

Analysts also caution that the shift from hard copy to virtual distribution could be more gradual.

“People like walking into the store and seeing the product. It’s part of the entertainment,” Barrington Research Associates analyst James Goss said. “The studios would be just as happy to sell something in a streamed form or a hard disc form. But once you download it to your computer, you’re probably going to burn it onto a CD or DVD, so you’d end up with the same optical storage issues.”

The Forrester report lists a number of winners and losers from the expected changes.

Among the beneficiaries are Internet portals that enable on-demand media services, broadband suppliers such as cable and telcos and the creative community, which would profit from the removal of manufacturing and distribution costs and constraints. AOL Time Warner’s decision to sell off its disc manufacturing plants was said to be proof of this trend.

Media conglomerates could be among the losers if they do not have control of emerging means of distribution like VOD, Forrester said. Such retailers as Tower Records and Blockbuster will certainly feel the pain as sales and rentals shrink, though they may be able to sustain business by associating themselves with newer on-demand services. Major retailers including Wal-Mart and Best Buy are expected to survive by shifting CD and DVD floor space to sales of media devices.

The shift could also present several opportunities for companies if they move quickly.

Television companies have about three more years to release shows on DVD. By 2006, it is estimated that negotiations will start to focus on making content available on cable and Internet “basic VOD” tiers.

Movies studios are also urged to press the development of Internet-based alternatives to cable VOD for movies-on-demand.

“On-demand media services have the potential to turn pirate losses into gains even as they break the disc-based shackles that now hold back entertainment,” the report concludes.

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