Pali Research analyst Richard Greenfield predicts that in 2007, the DVD industry will suffer its first domestic spending decline.
"Bottom line, keep an eye on 2007 film industry profits," he wrote. "We suspect the risk to expectations is increasingly to the downside, with downside risk growing into 2008 unless there is a notable acceleration in next-gen DVD sales and/or a more attractive business model emerges for digital movie distribution."
Taking Best Buy (BBY) and Circuit City (CC), the reports showed that 5 out of the last eight quarters had negative year-over-year growth, according to Greenfield.
While Greenfield could definitely be right - and probably is - I don't think his medicine is the right prescription to deal with the problem.
He thinks that the industry is moving too quickly into the online movie download business, while I think they're moving too slow. There is no doubt that the transformation to online downloads will cause changes in the industry, but to wait for that to happen, rather than precipitate it themselves, is to have their future dictated by others.
Disney (DIS) has already aggressively tackled the problem with its partnership with Apple iTunes (AAPL), and is doing very well with it.
It seems the industry will just have to take some of the lumps that all industries take during transitional times. To do the same old thing of worrying about quarterly profits at the expense of long-term success is a bad strategy. Waiting for events to happen upon them isn't the way to go.
There will be some cannabilizing of sales; there's just no way around it. It may as well be done now, rather than later.
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