An assessment of Europe's DVD market

According to Screen Digest’s just published annual report European Video: Market Assessment and Forecast to 2010, consumer spending on DVD in 2005 (retail and rental) plateaued at €11.48bn and should be falling to €10.71bn by the end of 2006. This year, Europe will total 142m DVD households.

Sales’ growth rate is slowing

Retail DVD sales continued to grow in 2005 albeit at a slower rate than in previous years. Volume sales of DVD increased by 13 per cent to 647m units, accounting for 94 per cent of total European video sales. However, the gain in volume sales failed to translate into spending as the average price of a retail DVD in Europe declined by around 12 per cent in 2005.

In total, European consumers spent €9.15bn on buying DVDs in 2005 compared to €9.25bn in 2004. Western Europe accounted for 98 per cent of total European spending on retail DVD in 2005. In spending terms, the largest five European territories accounted for more than three quarters of the total European market, with almost 70 per cent generated by the top three countries. Germany, France and the UK.

Of the five Central and Eastern (CE) European countries analysed, Hungary was responsible for the largest share of spending in the region at 26 per cent, although it accounted for just 0.4 per cent of total European spending.

Russia boasted the greatest gain in DVD spending, with value sales in 2005 almost three times higher than in 2004 at €35.4m. The Russian DVD market was boosted by a dramatic increase in the penetration of DVD hardware which climbed over 20 percentage points to 26 per cent in 2005.

By the end of 2006 DVD volume sales are expected to have reached a plateau. Screen Digest is forecasting European unit sales to be flat in 2006 at 645m units compared with 647m in 2005. A steady decrease in average prices will encourage a decline in spending of around five per cent. This will be compounded by the deterioration of the VHS business, which in some markets will have disappeared altogether by the end of 2006.

Moreover, with the new hi-def disc formats due to arrive in November 2006, the European market will not begin to feel the benefit of Blu-ray Disc and HD-DVD until at least 2007. Nevertheless, whilst Screen Digest does not believe that hi-def video will significantly boost volume sales, the ability to charge premium prices for the new formats will help raise average prices for the first time since DVD launched, boosting spending over the forecast period.

It should be noted that the DVD forecasts in Screen Digest’s report include this uplift from the sale of high-definition video formats.

Rental market continues to decline

Spending on European DVD rental grew steadily in 2005, but is no longer recording the double digit growth seen in previous years. Consumer spending on DVD rental rose by nine per cent in 2005, compared with 36 per cent growth in 2004, to reach €2.45bn.

This reflects decrease in the average number of rentals per DVD household. DVD rental tie ratios (the number of DVDs rented annually per DVD household) in Western Europe declined by nine per cent in 2005, with consumers now renting seven titles on average compared with eight in 2004.

The decline was even more pronounced for the total European market (-16 per cent) due to the failure of DVD rental transactions in CE Europe to grow at the same rate as DVD hardware adoption. Rental accounted for just 21 per cent of video spending in Europe in 2005 as the retail sector continues to erode its share of the total market.

The European video rental market is expected to continue to decline during the remainder of 2006. Screen Digest is forecasting a 14.4 per cent decrease in total rental spending in 2006 and an 18 per cent decline in transactions over the same period.

Online DVD rental services expand

The online DVD rental sector continued to grow in 2005, generating €123m in consumer spending or five per cent of the total video rental market, compared to two per cent in 2004.

The online DVD rental market showed continuing growth over the first half of 2006. By the end of the year, Screen Digest anticipates that the DVD-by-post sector will account for nine per cent of total DVD rental spending in Europe. This is expected to rise to around 27 per cent by the end of the forecast period as the traditional market remains in a downward spiral.

Of note, a number of key players in the online DVD rental market expanded their local operations into wider Europe in 2005.

The hardware landscape

Penetration of DVD hardware reached 53 per cent in Europe in 2005 which translates into 122m DVD households. These figures are based on TV households equipped with at least one stand-alone DVD Video player or DVD recorder. They do not include households equipped with a DVD enabled games consoles or PCs.

Around 105m of Europe's DVD households are concentrated in the Western region where DVD penetration reached 65 per cent on average at the end of 2005.

The largest installed base belonged to the German market; it reached 26m in 2005. It was Russia that made the greatest strides in terms of DVD hardware in 2005, with our research indicating that penetration climbed by an incredible 21 percentage points to 26 per cent.

This is relatively low compared to the European average but, nevertheless, Russia's installed DVD base is now one of the largest in Europe at 12m, larger even than that of Spain - one of Europe's big five video markets - which has 10m DVD households.

Screen Digest is forecasting DVD penetration to reach 73 per cent on average in Western Europe by the end of 2006 which translates into around 119m households. We anticipate that there will be stronger growth in the less developed Central and Eastern European territories, where DVD penetration is expected to exceed 33 per cent in 2006 on average, giving the region an installed base of about 23m units. Total European installed base will thus reach 142m DVD households.

Budget product depresses average prices

The European retail video market witnessed a further fall in average DVD prices in 2005; prices have now been falling for seven consecutive years, ever since the format was launched. The average price of a retail DVD decreased by just over €2 from €16 to €14 which translates into a reduction of around 13 per cent, compared with a 12 per cent decline in 2004.

Whilst price pressure continued on video product in the traditional retail market in 2005, the growth in volume sales of budget product also helped depress total spending. In France, for instance, budget DVDs (product priced below €3) represented 16 per cent of total DVD volume sales in 2005 but just two per cent of spending.

Cover-mounted DVDs as a promotional tool is a fixture in Germany and in the UK, where the number of cover-mounts reached epic proportions in 2005 and 2006, in the wake of the controversial decision by newspapers to give titles away for free (instead of charging a nominal premium over their usual publication price).

According to Screen Digest analysis, UK national newspapers gave away at least 130m DVDs in 2005, compared to sales of 211m units through retail channels. By the first quarter of 2006 the number of cover-mounted discs (53m) was almost identical to the number of mainstream unit sales (54m).

Screen Digest is forecasting that the average price of a retail DVD in Europe will fall by five per cent in 2006 compared to a 12 per cent drop in 2005. The arrival of the hi-def disc formats is expected to gradually reverse this trend - between 2006 and 2010 we anticipate that the higher prices levied on the hi-def discs will actually cause average prices to record a compound annual growth rate (CAGR) of 2.2 per cent.

Non-traditional retailers and digital delivery in the ascendency

The shape of the traditional retail video market in Europe is shifting. It is no longer dominated by the specialist retailers and consumer electronics stores that pushed the DVD format in the early years following its launch.

Instead, generalist stores and supermarkets are increasingly at the forefront of Europe video retail. Mass merchants have become popular amongst consumers by combining the convenience of a wide product range with a below-average price point for DVD as they use DVD as a loss-leader to generate store traffic and boost sales of core product.

This is exemplified in the UK where mass merchants carved out a 27 per cent share of DVD volume sales in a market with a historically strong specialist sector. The ascendance of such retailers is even more pronounced in Spain where supermarkets represented 43 per cent of the local DVD market in terms of unit sales. This trend is not evident in all European territories however.

Just as significant as the changes in bricks and mortar distribution channels was the continuing ascent of digital delivery in 2005. Internet video-on-demand services have been arriving gradually in Europe since 2000, and 2005 witnessed the launch of several new platforms.

Screen Digest forecasts that 2006 would prove to be a watershed year for movie downloading. This market is expected to expand rapidly, particularly as content providers begin to grant DVD burn rights.

However, the market is still small in comparison with the DVD business; in 2006 Screen Digest expects total European spending on digital retail to reach just over €5m. Even by 2010, digital distribution is likely to account for just six per cent of total retail DVD spending.

For information on the report, visit www.screendigest.com...

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