DVDs Are Dying, and There's Worse News Ahead for Hollywood

Movie DVDs
Movie DVDs

It's been nice knowing you, optical disc.

DVDs -- and even their more modern Blu-ray siblings -- are gradually fading to black.

It was really just a matter of time. The VHS cassette had its fun. LaserDisc partied on the fringes. Why should the DVD be any less transitory a technology?

Movie studios have known this for some time. They've seen sales of blockbusters and box office duds alike flounder during the home-market window. They've pointed at scapegoats. "Netflix (NFLX) is the problem!" "Coinstar's (CSTR) Redbox kiosks are the enemy." "Down with online piracy and the terrible torrent sites!"

However, moves to circumvent those perceived market-share sippers have fallen flat. Many studios have brokered deals with Netflix and Redbox to delay the availability of rentals. Hollywood has gone after file-swapping websites.

The results haven't been encouraging. Nomura Securities analyst Michael Nathanson estimates that home-video revenue -- excluding licensed streaming deals -- fell from $18.3 billion in 2010 to $17 billion in 2011.

Hooray for Hollywood? Nope. Blu-ray for Hollywood? Not really. It's time for a catchier jingle.

Doomsday for Hollywood

It's been a little more than two years since Time Warner (TWX) approached Netflix with a tasty proposition. If the video service would hold off on offering new DVD releases to its growing base of subscribers for a full 28 days, Time Warner would provide it with cheaper copies of the movies. Netflix agreed. A month later, Redbox inked a similar deal.

Time Warner knew what it was doing, claiming that 75% of its DVD sales were during a new release's first four weeks on the market. Making sure that Redbox wasn't offering $1 a night rentals and that Netflix wasn't blurring the value proposition with its unlimited monthly plans was worth the discount that it would be offering the companies.

Earlier this year, Time Warner tried to get Netflix, Redbox, and now Blockbuster to agree to 56-day release windows. Would doubling the delay accomplish what the original 28-day window could not? Time Warner ultimately soured on the whole proposition, forcing rental companies to turn to third-party distributors for full-priced disc purchases.

Renters Rant

If sales are slipping, surely rentals must be going through the roof. Well, not exactly.

It's not a shocker to find Blockbuster in trouble. DISH Network (DISH) acquired the leading rental chain out of bankruptcy last year and it's still closing down underperforming locations. NCR (NCR) -- which had licensed the Blockbuster brand for its Blockbuster Express kiosks -- agreed to sell its entertainment business to Coinstar earlier this week for just $100 million.

However, even Netflix is finding it hard to keep DVD renters happy. Netflix shed more 2.76 million DVD plan subscribers in its latest quarter, even though it added plenty of streaming subscribers. Netflix now has twice as many streaming subscribers as it does those waiting for its red envelopes to arrive by mail.

Coinstar's Redbox is the lone grower here, but its outlook isn't very promising. Coinstar sees revenue climbing just 17% in 2012, even though it raised prices by 20% three months ago.

Folks aren't buying DVDs. Folks aren't renting DVDs. What's going on?

California Streaming

Digital delivery should be a godsend to Tinseltown. The ability to beam movies directly to viewers offers studios the chance to make their entire catalogs of celluloid available to customers with Web-tethered televisions and gadgetry.

Unfortunately, outside of Netflix's digital smorgasbord, some of tech's biggest companies have struggled to market piecemeal premium streams and outright downloads.

Film buffs aren't buying DVDs, Blu-rays, or digital downloads.

What's the only thing that could make things worse for Hollywood? What would happen if you stopped going to the local multiplex?

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Well, that's already happening. You have to go back to 1995 to find the last time exhibitors sold as few tickets as they did in 2011. Theater owners experienced back-to-back years of declining receipts for the first time in more than two decades.

If you think DVD sales were soft in 2011, just wait until 2012 plays out when last year's flicks hit shrink-wrapped DVD cases at a retailer near you.

Even optimists have known that DVD's days as a video platform are numbered. However, they figured that higher-priced Blu-rays -- much to the delight of television and movie studios -- would take the baton and run with it.

Unfortunately, the future is throwing studios a curve. It's not just that streaming is quickly becoming the consumption outlet of choice. The same folks who once would spend hours watching theatrical content each week are fine settling for shorter YouTube clips and watching videos uploaded by their Facebook friends.

The playing field hasn't been entirely leveled, but consumers are now settling for "good enough" video to fulfill their appetite for entertainment.

Get nervous, Hollywood. It may not be just the DVD that's dying here.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article, except for Netflix. Motley Fool newsletter services have recommended buying shares of Netflix.

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