One high street retailer claims that some supermarkets are making a loss of £4 on the Christmas DVD bestseller, Pirates of the Caribbean: Dead Man’s Chest.

In this competitive market place, what future do the DVD and CD have? With the increasing popularity of music and film downloading, can these physical products survive? Where will this leave film studios, distributors and music companies? Helen Davis Jayalath, of Screen Digest, the media analyst, says that research she has conducted shows that the DVD is in decline.

In 2006, she says, the value of the DVD market was £2.16 billion, down from £2.2 billion the previous year — thanks to the lower supermarket and online prices.

While the volume of DVDs sold increased to 222 million units in 2006, from 211 million units in 2005, this was not enough to counteract the falling prices.

Ms Davis Jayalath predicts that the DVD market in 2007 will be valued at £2.06 billion, with the number of DVDs sold falling to 219.5 million — a decline in both value and volume.

“Up until 2006, value had increased enough to keep stimulating growth in the DVD market,” she says. “The increased volume is now no longer enough to maintain value. This is when it becomes a problem for the studios and distributors.”

The industry is hoping that the introduction of new formats, Blu-ray and HD-DVD, will be one way to fight the decline of the DVD, although most analysts remain sceptical.

Ms Davis Jayalath says: “These new formats are only going to be a success in Europe if they find another way of selling than purely on the back of improved broadcast quality. This works in the US, where broadcast quality tends to be inferior.”

The new HD formats have the ability to provide internet links and more interactive possibilities than DVD, but it is a chicken-and-egg situation, as there is not yet much demand for the formats in Europe.

“When the PlayStation 3 is launched in Europe in March, it will contain a Blu-ray player, which could boost the market,” Ms Davis Jayalath says.

The industry is also counting on the growth of legal film downloads — although, this is still an early-adopter market.

“There is a lot of hype about video-on-demand, but most of the time you can download only onto your PC and not make a DVD copy,” Ms Davis Jayalath says.

To make video-on-demand more appealing, the likes of Universal are offering a service whereby you can download a film onto your PC and also get sent the DVD in the post. Screen Digest expects the film download market in the UK to be worth £2.6 million in 2007 (up from £0.4 million in 2006), £8.4 million in 2008 and £28.9 million in 2009.

As for music, the digital download market is a lot more mature. Seventy per cent of the singles sales are digital, although downloads of whole albums account for just a few per cent of the market, according to the BPI, the music industry body CDs have become more popular with the 40-plus market, who pick up bargains with the weekly shop, while the younger generation prefer to download the latest tracks on to their iPods or other MP3 players.

A BPI spokesman says the volume of CD sales in 2006 is down 2 per cent on the previous year. But he thinks it is wrong to say that the CD market is in decline, believing instead it is simply “peaking”.

In addition, the BPI believes that any decline in CD sales is not a threat to record companies, just to traditional retailers, because music companies have successfully embraced online sales.

Joshua Heaton-Armstrong, an account director at the internet advertising business OMD Digital, agrees, pointing to the increase in the online marketing budgets of music companies as proof. “As music downloading becomes more popular, so does advertising online,” he says.

But the move online poses its own threats. Internet piracy has become an increased concern for both music and film companies. The industry is playing this down, saying it is under control and is not getting any worse, but pirates have been quick to find ways round the system.

(Additional reporting by Sarah Butler)

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