Watching Movies at Home Beats Going to Theaters (NFLX, CSTR, AMZN, DISH, WMT, SNE)

In 1999, about 92% of $13.2 billion in home entertainment spending went to VHS tapes.That percentage fell to zero in 2009. In 2010, spending on DVDs, Blu-Ray discs, and streaming video totaled $18.8 billion, of which $14 billion was spent on DVDs, $2.3 billion on Blu-Ray discs, and $2.5 billion on streaming. Also in 2010, total box office receipts came in at about $10.6 billion.US consumers are spending nearly 50% more to stay home and watch movies that they either buy or rent. It should be no surprise, then, that the movie studios want to rake off a bigger share of the home market. That’s what forced Netflix Inc. (NASDAQ: NFLX) to raise its price for streaming video, and is forcing Coinstar Inc. (NASDAQ: CSTR) to boost prices at its Redbox kiosks by 20%. Other streaming video players that don’t own production companies, like (NASDAQ: AMZN), Dish Network Corp. (NASDAQ: DISH) with its Blockbuster acquisition, and Wal-Mart Stores Inc. (NYSE: WMT) and its Vudu acquisition, could soon feel the pinch as well.In the first nine months of this year, consumers have spent about $12.3 billion on staying home to watch movies, according to a report from the Digital Entertainment Group. The report notes that Blu-Ray players are now present in 33.5 million US homes and that sales of Blu-Ray discs are up 58%. The players have fallen to below $100, making them more attractive to consumers, and forcing makers like Samsung, LG Electronics, and Sony Corp. (NYSE: SNE) to fight for slim margins or to add costly features that consumers either don’t want or don’t understand.

So far in 2011, consumers have spent $464 million on streaming content, a larger total than the $406 million spent on digital downloads, what the report calls electronic sell-thru. Total spending on digital content grew 33% year-over-year. Quarter-over-quarter growth topped 55%. Total spending on rentals, including video-on-demand, grew by 3.4%, and sales of DVDs and Blu-Ray discs, including electronic sell-thru but not streaming, have fallen by -13% year-over-year.

Movie studios and their management may be many things, but stupid is not usually among them. Even though streaming content represents just a small portion of current consumer spending, it is the only sector with double-digit growth. And it has plenty of room to continue growing. Disc sales and electronic sell-thru accounted for $6.9 billion in sales in the first nine months of 2010. That total has fallen to $6 billion this year.

So if consumers are staying home and sales of discs are falling and rentals are barely growing, it only makes sense that media producers will try to front-run the move to streaming. The consumer blowback directed at Netflix should rightly have been aimed at the media companies. Of course Netflix could not have done a worse job in announcing and implementing the fee hike, but that isn’t the issue.

Netflix may have lost a ton of subscribers and seen their revenue and forecasts fall, but that doesn’t change the basic landscape. Streaming video, and its cousin Internet TV, are the future. What’s not to like about streaming high-definition movies into your own living room as many times as you want for less than the price of a single movie ticket or a single disc?

Paul Ausick

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