Really interesting research report from Lehman Brothers about how the Internet is affecting the entertainment industry. In short, the analyst concludes that digital revenue won't make up for the decline in traditional revenue, so entertainment companies are in trouble. It sounds a lot like the challenge facing newspaper companies as they try to transform their businesses for a wired world.

From the report:

"We believe the feature film and TV content businesses are on the verge of structural changes that appear destined to impact the core revenue and profits of Entertainment business models. In our view, the structural shift created by ubiquitous technological change -- a shift that has materially impacted the music industry -- could also disrupt the core economic models of the creators of the majority of film and TV content. So far, cannibalization from digital distribution has remained limited, as DVD sales were down only 4.7% Y/Y in 2007, according to the MPAA. But we believe "packaged media" is a declining business and find it difficult to quantify how new digital revenue streams could even begin to offset the $24 billion/year U.S. retail home video market -- a market which we believe has just entered secular decline... On the Television side, not only have DVD sales of TV shows helped recent profitability, but digital disruption of TV takes place in our homes in the form of DVR's, which are now roughly 26% penetrated in the U.S. and make traditional ad-supported broadcast television an increasingly ineffective way to advertise to consumers."

Here's the scary takeaway: "We of course hope that the industry can mitigate the structural problems that the Internet and digital distribution have presented to Hollywood, but at this time we believe the Entertainment industry itself may be unprepared for digital media as a disruptive technology."