=DJ FUND MANAGER: Venture Capitalists Bank On DVD Mkt Growth
By Marietta Cauchi
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--Private-equity firms are grabbing a slice of the tremendous growth in the DVD market.
Since their debut in 1997, DVDs have rocketed in popularity and are behind an astronomic rise in worldwide spending on filmed entertainment - a trend that is expected to continue until 2008, according to PriceWaterhouseCoopers (PWC.XX).
The total spent on filmed entertainment, which includes box-office receipts, was $75.3 billion last year and is expected to grow by 7.5% a year to $108 billion in 2008, said Robert Boyle, head of PwC's European entertainment and media group and author of the report.
"DVDs and especially online subscription is ultimately the important area, with room for massive growth still to come in Asia and Latin America as well as Europe and the Middle East and Africa," he added.
U.K.-based Apax Partners & Co. Ltd. (APX.YY) invested in the sector last year, backing the founders of U.K. specialist DVD retailer Silverscreen Holdings with a GBP13 million seed investment.
The success of the model has been swift, and Apax led a second funding round of GBP20 million in February, money that will be used to support Silverscreen's expansion from six retail shops to a national chain of some 180 stores over the next three to four years.
The whole market is growing, fueled by low-cost DVD players, personal computers and broadband Internet, according to George Coelho of California-based Benchmark Capital, backer of online DVD rental service Video Island.
"Already 14.1 million households in the U.K. alone own a DVD player, and over a million of these households rent a DVD every week," he said.
DVDs are being rented or sold in two manners: through physical shops and on-line.
While the U.K. online rental market is the largest in Europe, it remains just a fraction - less than 10% - of what the U.S. market is, so there is plenty of scope for growth, he adds.
In the U.S., online rentals already accounted for $289 million of the total $8.2 billion rental market last year and are likely to grow to $605 million this year and $1.9 billion in 2008, California-based Kagan Research said in an Associated Press report.
Last month, Video Island merged with U.K. market-pioneer ScreenSelect, jump-starting consolidation in the fragmented sector.
The new business combines Video Island's mass-market reach via third-party online services, such as Tesco PLC (TSCO.LN) and Microsoft Corp.'s (MSFT) MSN, with ScreenSelect's focus on individual home subscriptions.
For as little as GBP14.99 a month, ScreenSelect allows subscribers to watch as many DVDs as they want, with subscribers having a revolving library of three DVDs at any one time. The DVDs are ordered online and delivered with the postage prepaid, together with a prepaid return sleeve to send them back.
Benchmark Capital's Coelho said the company has plans to expand both brands across Europe and that he expects this will be done both organically and by acquisition. There are plenty of smaller online players around, he said.
The merged company is also well-placed to take on competitors such as U.S. Netflix Inc. (NFLX), which already delivers to 2 million homes in the U.S. and plans U.K. entry this year, and high-street Blockbuster Inc. (BBI), which just launched a rival by-mail service.
Meanwhile, outright sales of DVDs are being boosted by deluxe packages and clever placement in supermarkets and department stores.
It is early days in the industry and plenty of space for DVD retail players to co-exist with their online counterparts, Coelho said.
An obvious analogy is Amazon.com Inc.'s (AMZN) entry into the book sector - some people prefer the shop experience while many more will use both services.
"Some DVDs have to be bought initially before being available to rent, and there are some you will want to own as opposed to just rent," Coelho said.
Amazon co-founder Simon Murdoch was recruited to help ScreenSelect founders William Reeve and Alex Chesterman, who set up the company in 2003 believing that high street movie-rental could be "amazoned."
Meanwhile, the big film producersrely heavily on the market, with about half their revenue coming from the rental and sale of DVDs, Coelho added.
Potential threats to growth in the DVD market such as cable and satellite networks offering pay-per-view movies are dismissed by analysts.
"There used to be a strict exclusive period of six to 12 months after a public cinema screening before films were available for sale. Now DVDs are being released more and more quickly and at cheaper prices, which is making the network operators unhappy," Dresdner Kleinwort Wasserstein analyst Richard Menzies-Gow said.
He also said it will be some time before downloading of films from the Internet takes off and threatens the DVD market. U.S. Netflix has plans for such a service, but consumers need both broadband and the facilities to stream onto a TV screen - and the penetration isn't widespread yet, Menzies-Gow said.
(Marietta Cauchi, formerly an international media lawyer and a reporter on legal affairs, has covered fund management and private equity for Dow Jones Newswires since 2002. She can be reached at: 44-20-7842-9260 or marietta.cauchi@dowjones.com.)
(END) Dow Jones Newswires
September 07, 2004 06:48 ET (10:48 GMT)- - 06 48 AM EDT 09-07-04
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