The Playstation Store can be accessed from the PS3 gaming console

According to an analyst at Lehman Brothers, one of the largest investment firms in the world, the video entertainment industry will soon fall victim to the digital age much like the music industry.

Anthony DiClemente said that, “Shifts from physical to digital will disrupt the marginal economics of the TV and movie businesses, just as it did for music.”

“To date, we have argued that until a capable video distribution player device finds a user-friendly means of transferring Internet-based movies and TV shows to the living room HDTV screen, the traditional home video model remains safe. But given 1) recent declines in standard-definition DVD sales reported by the big box retailers, 2) new strategies from Apple that may emphasize lower-priced movie options including the more popular iTunes rentals; 3) a recent strategy from Sony that underscores the value of distribution as opposed to content; and 4) given the increasing likelihood of PC/TV integration, this status quo argument is bound to failure, and no longer tenable, in our view. We humbly believe the long tail argument of why packaged media ‘will last longer than you think’ is also untenable, as investors who have touted the structural benefits of the newspaper, radio/TV station, and broadcast TV businesses have all recently observed.”

His comment can be derived from the recent Dow Jones figures:

The stocks of the five major entertainment companies received major blows. The Walt Disney Co., News Corp., CBS Corp., Time Warner Inc. and Viacom Inc. fell slightly more than market at closing. Disney shares closed at minus 82 cents, or 2.7 percent = $30.08; Viacom shares closed at minus 74 cents, or 2.5 percent = $28.96; News Corp. shares closed at minus 13 cents, or 0.9 percent = $14.63; and Time Warner shares closed at minus 20 cents, or 1.4 percent = $14.49. CBS took the most damage by falling to $17.73, 87 cents less, which is a 4.7 percent dip. The TV network’s current share is actually 50% down from last year’s July numbers.

DiClemente added that the average profit of these companies from selling “physical” DVDs and Blu-ray discs is roughly $10.59. But when they sell the same movie through iTunes’ online video store they only get $9.29 profit, which is 12 percent less than the physical DVD or Blu-ray sale.

Aside from the lesser profit from disc sales, these media companies, according to DiClemente, are also losing big to the more convenient online movie rental services. From their “rental by mail” concept, Netflix, the largest DVD rental site on the internet, now offers online streaming rentals in the United States. They have approximately 8.2 million renting subscribers. And the profit the studios get from this method is estimated to be around $1.81 to $2.44, which is 77 percent less than selling the actual title.

“Owning a collection of movies in this new digital world is really just not that cool for young adults in the target demographic that we look to for the future of the business,” DiClemente said.

This is exactly the same thing that happened to the music industry; no one wanted to keep CDs piled up in their rooms. People preferred online purchases than can be stored in their computers.

As for the recent fall of CBS, DiClemente said the main culprit were the digital video recorders (DVRs) like TiVo and ReplayTV. Because of them, viewers are increasingly skipping ads - creating less advertising profits.

Overall, the digital revolution is making it difficult for these companies. He even failed to mention the sales lost to piracy which - like DVRs - let people watch their favorite TV shows without the fuss of commercials. More and more people are getting their shows online, having less need to actually turn on their TVs.

To counter this recent trend, TV networks like CBS and ABC (owned by Walt Disney) have distributed some of their syndicated shows online. But because of the smaller audience, execs said that revenue from online ads is but a small fraction compared to the profit of TV broadcast.

Some analysts, however, believe that this recent fall in stock prices are caused by the bigger economic crisis facing the entire country - and the entire globe for that matter. Although they agree that a total technological shift is fast approaching, they feel that there is no immediate need for panic.

An analyst for Cowen & Co. believes that the video industry is far more prepared for the shift than the music industry was. Music companies were “caught completely flat-footed by digital distribution,” said Doug Creutz.

“Studios have worked very hard to get in front of this thing,” he added.

Sony Corp. is one of those leading the way into the digital future. It announced last month it will deliver movies and TV shows to Sony Bravias online before they release the DVD and Blu-ray version. The first movie to be distributed this way will be Will Smith’s “Hancock,” which was produced by Sony Pictures. Also, with the emergence of high-definition, Sony is also planning on adding a digital download service for PlayStation 3 console owners who are already downloading games and other content thru their exclusive online store.

We think the bottom line is that there is a net loss with the emergence of the digital era, but it’s not like their losing that much anyways. They are probably losing much more to piracy than to digital. And it’s not like they can’t do anything about it. Digital is a welcome global shift to the future. All they can do is adjust accordingly, like what Sony is doing. Release to digital before the DVD. It might sound like it will do more damage but in fact it’s more beneficial. Since the digital release is now more convenient to purchase, then it’s okay to take the hit with the profit because you’re reaching far more customers in this method anyway.