The DVD industry rose to a breathtaking level nearly as fast as any entertainment medium in history. The basic technology for the product was created in the early 1990s. DVDs were not available in the US until 1998, but it only took another five years for them to outsell VHS products. After a short and spectacular run, the reign of the DVD is coming to an end.
Research firm Strategy Analytics reported that DVD sales dropped 9% worldwide last year. The drop may be worse this year. The major studios, which count on DVD sales for a large portion of their revenue, have begun aggressive layoffs because of the trend.
There was great hope that high definition Blu-ray products would revive the industry. However, they have only slowed its demise, as sales of Blu-ray players have been modest.
24/7 Wall St. looked at the DVD industry, its history, and competition to see why the DVD business has begun to deteriorate so quickly. The reasons turn out to be an odd mix of supply-and-demand, and a wave of what business school professors call “disruptive technology.” Early DVD sales were driven by people who wanted to build libraries of dozens of their favorite old films. Once that period was over, DVD sales depended more on interest in movies which were recently produced. That cut the potential market for yearly sales significantly.
But, the real wound to DVDs was advances in technology. Netflix, with its 16 million subscribers, offers streaming video versions of the films in its huge library. Its customers do not have to get DVDs at all. Netflix recently said that nearly two-thirds of its DVD rental subscribers use the streaming service the company offers for free. The company even offers a product that is only streaming video.
There are several services that compete with or compliment Netflix. The largest, which has been advertising supported until recently, is Hulu. Hulu is the largest Web destination for quality feature length videos, offering a huge library of TV episodes, many of which are available the day after they air on standard TV. Hulu also has an impressive group of financial backers, which includes NBC Universal, Walt Disney, and News Corp. The company has licensing agreements with more than 235 content providers.
The one important enemy to DVDs which 24/7 has not included in this list is piracy – most of it through online video sharing operations like BitTorret and Pirate Bay. These services are routinely shuttered by law enforcement, and individuals who participate in their use are occasionally prosecuted. But, that does not entirely prevent other such services from cropping up over and over again.
These are the 24/7 Wall St. Five Businesses That Killed The DVD report. As the reader may note, the tide against the aging technology grows more powerful by the day.
1) Cable TV & Video on Demand
Since 2000, cable companies have offered streaming video to the home via Video on Demand services. As VOD became more widely available and easier to use, adoption grew. According to research firm Digital Entertainment Group, the number of consumers using VOD in the fourth quarter of 2009 increased 63%, compared with a year earlier. And VOD, together with digital sales of movies, accounted for roughly 10% of the $20 billion in home entertainment spending in 2009. There were about 500 million VOD sessions through cable and satellite television packages in the same period, according to In-Stat Principal Analyst Keith Nissen.
Recently the DVD-by-mail rental giant Netflix began offering a monthly rental plan that is limited to movies accessed over the Internet. The plan offers streaming video to PCs and Internet-enabled video devices, excluding physical DVD rentals altogether. The company’s decision marks a watershed moment in how people view movies at home. It is a testament to the fact that streaming video has begun to replace DVDs as the preferred method of video consumption in America. The company reports that its 17 million subscribers watch more hours of Internet-streamed video each month than they do through mailed DVDs. An analyst at Wedbush Securities estimates that, on average, the number of DVDs customers receive by mail has dropped from five to six per month last year to four to five per month this year. According to Sandvine’s Fall 2010 Global Internet Phenomena Report, Netflix streaming accounts for 20 percent of all Internet downloads – not just video downloads, all downloads. And while Netflix is far and away the market leader in feature-length video streaming services, video rental streaming services like Vudu, Amazon’s Unbox, and even Blockbuster’s streaming service, add to DVD’s decline.
3) Internet-Enabled Blu-ray & TV
In an effort to hedge their bets against the disk, manufactures have already embraced video delivered over the Internet. Only two years ago, almost no DVD or TV manufacturers provided Internet access to video. By 2009, 80% of Blu-ray DVD manufacturers had introduced players that could also show Internet video. Similarly, according to electronics research group iSuppli, over 25% of TVs sold last year were Internet ready. This year, iSuppli estimates that Internet-enabled TV shipments will reach over 27 million units – an increase of nearly 125%, compared to 2009.
4) Apple TV
As high quality feature-length video becomes more readily available online, dedicated video player devices, called set-top boxes, are becoming increasingly popular. This September, Apple Inc. announced the release of its second-generation Apple TV. In the past, CEO Steve Jobs has referred to the first-generation version as just a “hobby.” By mid-October, however, the company announced that it had sold about 250,000 units of the second-generation device. According to JMP Research analyst Alex Gauna, this puts it on pace to sell one million units per quarter – roughly a quarter to a third of iPad’s sales. Roku, another popular set-top box which streams movies offered through services like Netflix and Amazon’s Unbox, has already enjoyed modest success, selling several thousand units since its launch in 2007. Currently, Roku is ranked in the top ten most popular electronics on Amazon.com. Other devices that have recently been released, including Google TV and Boxee, are also enjoying brisk sales and present even more options for the consumer interested in an Internet-to-TV solution.
DVD sales for TV shows have declined 14% from mid-2009 to mid-2010, according to Nielsen. During the same period, the popularity of Internet video providers such as Hulu has increased. Hulu, which offers TV episodes online from most of the major networks, including NBC, Fox, and ABC, was once considered stillborn. Today, it is the only Web site that offers feature-length video content that it is in the top ten by views per month, according to comScore’s October report. The report also provides that the average Netflix viewer watches nearly 3.5 hours per month, second only to You Tube’s average of 4.5. According to Hulu CEO Jason Kilar, the company will generate $240 million in revenue this year – almost entirely on advertising – up from $108 million in 2009, and $25 million in 2008. The site receives 30 million viewers and generates 260 million TV episode and movie streams each month.
-Douglas A. McIntyre, Michael B. Sauter, Charles B. Stockdale