Thursday, February 5, 2009

The DVD Death Spiral

BusinessWeek is running another article this week about the sudden collapse the major movie studios are witnessing in the DVD business model. Citing a 32% decline in DVD sales for the 4th quarter of 2008, the article claims that these studios are desperately looking for ways to boost revenue.

In a way it makes perfect sense that DVD revenue would be declining for studios. Just a few years ago the general practice for most film consumers was to build up a personal library of their favorite movies, supplemented by what was available on TV or at the neighborhood video rental store. Assuming an average consumer bought about 2 movies a month on average, this is about $30 to $40 a month per house-hold to be split between the studio, distributor, retailer and other parties.

Now many of these consumers are outsourcing their video collection to an online services such as Netflix. Charging low rates (for instance one plan is only $16.99 per month), they give the customer complete access to almost every movie ever made. This simultaneously saves the consumer money and vastly broadens the number of movies to be accessed. A winning formula all around for the consumer, but the studio and related parties have just seen their potential revenue cut in half.

In a way the Netflix model is a form of social insurance, where the company's customer base have agreed to get together and pool their resources to build a film library. This reduces the number of duplicate copies of any given movie in the population leading to a more efficient distribution of resources. As more and more movies become available for instant streaming and competing services raise the quality of service, even fewer people will think it makes sense to keep a private film library. So the question for the studio becomes, what do they do with the vastly reduced potential revenue?

One option is to cut costs, we will probably see a decline in the number of big budget summer blockbuster type movies if this is the case. For instance a cheap but well made indie flick that gains a few Oscar nominations may become a far more profitable movie goal when you can no longer count on millions of consumers to shell out $15 to $20 to add a particular movie to their own collection.

Another possibility would be to do the opposite. By focus on the experience aspect of movie watching and continue to build even bigger and more elaborate blockbusters, the consumer will be compelled to watch it in the theater to get the full experience. As theater attendance increases, the movie companies can at least partially offset the decline in DVD revenue. This could become an even more viable strategy as movie attendance grows in international markets increasing the total potential theater revenue the studio could achieve.

In any case, it should exciting to see the industry continue to evolve. I only hope that the movie studios do not stick their head in the sand and refuse to address this growing problem, or even worse attack the online video providers themselves in a vain attempt to protect their rapidly changing business model.

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