Blu-ray Supply Chain Challenges

This week I had the opportunity to attend the Media & Entertainment Services Alliance (MESA) annual Entertainment Supply Chain Academy (ESCA)  in Beverly Hills.  As usual most of the discussion was on digital, digital, digital, which seems to be the overwhelming focus of all entertainment supply chain discussions these days.  However, there was one session on traditional physical products such as Blu-ray and DVD, which I found to be particularly insightful.  The session was presented by FutureSource Consulting, which has an amazing wealth of data and insights about the packaged home entertainment industry.  Below are some of the notes that I recorded during the session.  All of the data is from FutureSource.

Although the music industry recently reached a 50/50 split between physical and digital sales, the movie/TV industry is still seven to ten years away from a similar milestone.  Consider than during 2010, American consumers purchased 10 million Blu-ray players, 5 million PlayStation 3 consoles and 25 million DVD players.  There are only 120 million households in the US, which means that one out of every three households purchased a new player last year.  Translation?  Although, the preponderance of attention at conferences and in the media is on digital product sales, physical is still dominant. 

Another interesting observation was that DVD players outnumbered Blu-ray by a factor of 2.5 to 1.  Standard definition format is still dominant.  I suspect the very low price points of DVD players remains an attractive factor in the purchasing process.   However, it does make you wonder when the consumer electronics manufacturers will stop producing DVD players and just ship Blu-ray players to stores.  With Blu-ray players now retailing at $99 or less the transition to 100 percent Blu-ray cannot be far away.

FutureSource also discussed the overall “sell through” of movie products by category.  Almost 10 billion standard definition DVDs were sold in the US during 2010.  There were 2 billion Blu-ray discs sold, which was approximately 1/5 of standard definition DVDs.  Perhaps, most interesting is that fewer than 1 billion digital products were sold in the US.   The situation was similar in the UK.  Consumers purchased 2.88 billion DVDs versus only 320 million Blu-ray discs.  UK digital product sales were only 60 million.

FutureSource also compared industry investments in manufacturing capacity and new product development today against the peak of the DVD era.  For example, the number of new DVD titles released grew from 4,000 in the year 2000 to almost 15,000 at the peak in 2006.  New title introductions have slowed since 2006.  Last year between 10,000 and 11,000 were introduced. 

Blu-ray title introduction has not grown as quickly as DVD selection did.  There were only 135 new Blu-ray titles introduced back in 2006.  There was a tenfold increase between 2006 and 2010 with over 1300 titles released last year.  FutureSource is forecasting the Blu-ray title introduction will grow to 3000 by the year 2015.

Perhaps, the most interesting insight offered was the potential manufacturing capacity shortage that is likely to occur in the fourth quarter of this year.  The fourth quarter, particularly the weeks before the Christmas holiday, is the typically the largest selling season for packaged home entertainment.  Many new titles are released in late November and early December shortly before the holiday buying season.  FutureSource believes that the capacity of duplication facilities for Blu-ray could be less than what is necessary to fulfill demand this coming holiday season.  And the numbers are concerning.  Consider that the US had over 100 DVD duplication facilities at the peak of the era in 2006, but only 10 Blu-ray replication sites exist today.  Europe had over 150 DVD duplication facilities at peak, but only 17 Blu-ray sites today.

In a March 2011 press release FutureSource stated:
“With the growing demand for titles on the high definition format, Q4 2011 BD capacity utilisation will average more than 80% in North America and more than 75% in Europe. Taking into consideration production spikes during that period, the figure is dangerously close to the industry’s operating limit…”

The result of a shortage could be delayed launch dates or out-of-stocks for key titles.  The problems for the coming holiday season could be exacerbated by the introduction of numerous box sets.  These box SKUs feature three or more discs per SKU are particularly resource intensive for Blu-ray duplicators. 

Star Wars – Coming on Blu-ray this Fall

“Collectively, across the USA and Europe, the industry needs to invest more than $100 million in new plant and equipment this year in addition to upgrading older replication lines, in order to be able to meet the disc requirements of the content community.”

Blu-ray aficionados will need to plan ahead to ensure they can obtain all the new titles being introduced this fall.  The pre-order options available on sites such as offer die-hard fans a way to get in the front of the line for new titles.  And they provide the supply chain a healthy set of advance buying signals to forecast future demand.