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Digital Delivery Makes its Mark on 3rd Quarter Home Entertainment Results

This week’s home 3rd quarter results for the home entertainment industry marked a steady note that digital delivery was making its mark on the business profiles of the industry’s leading companies and business indicators.

Netflix Now a Streaming Company that “Also” Offers DVD-by-Mail

The digital drumbeat began midweek with a direct and telling remark by Netflix co-founder and CEO Reed Hastings who told analysts that “Q3 represents our fourth consecutive quarter of more than one million net subscriber additions. This growth is clearly driven by the strength of our streaming offering. In fact, by every measure, we are now primarily a streaming company that also offers DVD-by-mail,. At the same time, the introduction of our streaming offering in Canada in late September has provided us with very encouraging signs regarding the potential for the Netflix service internationally.”

Announcing that its total subscribers are approaching 17 million, representing a 52 percent year-over-year growth, Netflix also reported revenues for the third quarter of 2010 was $553.2 million, representing 31 percent year-over-year growth from $423.1 million for the third quarter of 2009, and 6 percent sequential growth from $519.8 million for the second quarter of 2010. Percentage of subscribers who watched instantly more than 15 minutes of a TV episode or movie in the third quarter of 2010 was 66 percent compared to 41 percent for the same period of 2009 and 61 percent for the second quarter of 2010.

In Q4 a majority of Netflix subscribers will watch more content streamed from Netflix than delivered on DVD. With that transition in the business from mostly DVD to mostly streaming, this will be the last quarter the company will report this metric.

DEG Releases 3rd Quarter Figures

Also this week, numbers released yesterday by DEG: The Digital Entertainment Group indicated that digital distribution was a bright spot in a home entertainment consumer market that slipped 8% in the first three quarters of the year to $6.5 billion. Digital distribution posted gains, rising 23% to an estimated $1.7 billion. In the latest quarter, according to DEG, digital distribution accounted for 13.5% of total consumer spending on home entertainment, a higher percentage than in any previous quarter.

Despite the overall spending decline, studio executives point to several encouraging signs for a business that has been hammered by the lingering recession as well as a maturing market for packaged media.

Consumer purchases of Blu-ray Disc software reached $1 billion by Sept. 30, an 80% increase from the first three quarters of 2009. Video-on-demand (VOD) rose 20% to $1.2 billion, while electronic sellthrough — mostly movies sold through Apple iTunes — soared 37% to $432 million.

“While we continue to encounter tough market conditions, there are a number of positive trends emerging, particularly in some of the industry’s key growth areas,” said DEG president Ron Sanders, also president of Warner Home Video. “Blu-ray continues to show strong growth in every category, new release packaged media sellthrough is up, and digital distribution is gaining significant momentum as we move into the fourth quarter.”

Through Sept. 30, consumer purchases of new theatrical releases were up 4% — and the fourth quarter is traditionally the time when most of the big summer movies are released on disc.

Amazon Continues to Score with Kindle Sales

Meanwhile over at Amazon.com growth continues unabated with net sales increasing 39% to $7.56 billion in the third quarter, compared with $5.45 billion in third quarter 2009. Excluding the $83 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales would have grown 40% compared with third quarter 2009.

Although numbers were not broken out, Amazon began shipping its new Kindle this quarter, the bestselling products on Amazon.com and Amazon.co.uk. More new generation Kindle devices were ordered in the first twelve weeks of availability than in the same time frame following any other Kindle launch. In addition, in the twelve weeks following the introduction of the new generation of Kindles, customers ordered more Kindle devices on Amazon.com and Amazon.co.uk than any other product.

Technicolor Shows both Digital and Physical Media Growth

Meanwhile, over at Technicolor the 3rd Q stats also reflect a growing digital delivery business as well as good news on the physical front as the revenues from the Warner Bros. DVD and Blu-ray replication business start to show up on their balance sheet.

In the second quarter of 2010, the company established a new division —Digital Delivery— to increase its capability to capture the growth resulting from the shift to digital distribution. The Digital Delivery business group brought together the Connect division, the supplier of broadband gateway products and set top boxes, with the Digital Content Delivery Services activity, which provides media and library services for the management of premium content. The group reported a 14.6% uptick in business to $505 million from $440 million last year at this time. Digital Content Delivery Services activities mainly benefited from a recovery in Media Services revenues, which slightly increased year-on-year, an encouraging improvement compared to the trend noted in the first half of 2010, principally as a result of increased volumes for Compression & Authoring and Localization (dubbing and subtitling).

Good news on the physical media front as well for Technicolor as its third quarter of 2010 combined DVD and Blu-ray volumes increased by 22% compared with third quarter of 2009, driven by the start of the Warner Bros. agreement in August, along with continued growth in overall Blu-ray volumes. During the third quarter, the DVD Services business won several new contracts from existing and new customers, including Microsoft and Elevation Sales. Volumes were up to 342 million units from 281 million units last year.