DVD industry down but not downbeat

Rentals increased 8.2%; Blu-ray purchases went up 83%

To outsiders, the DVD business appears in the toilet -- so why are home entertainment honchos smiling?

At the end of the third quarter, DVD sales were running about 13% behind last year, and even a fourth-quarter bump isn't expected to bring that gap down by much once the final numbers for 2009 are tallied.

And yet studio execs aren't nearly as glum as they were a year ago, when DVD sales were running 5% behind the previous year. What gives?

The recession, for one. The closing months of 2008 saw the banking and auto industries all but collapse, the jobless rate skyrocket and home foreclosures go through the roof. DVD sales might have plummeted this past year, but hey, so did everything else.

Even more significant is the realization that the old way of looking at things isn't necessarily the only way, or even the right way. Although DVD sales have fallen steeply, rentals -- spurred by a robust Netflix and Redbox kiosks -- have risen sharply, with an 8.2% uptick in the first nine months of 2009, according to Rentrak's Home Video Essentials.

Indeed, factor in dramatic gains in Blu-ray Disc sales and digital delivery, and consumer consumption of home entertainment might be at an all-time high -- a point alluded to three months back when the Digital Entertainment Group released those third-quarter numbers. Per DEG's figures, overall consumer home video transactions were up a solid 6.6% from the previous year.

"It's been a roller coaster of a year, but consumer demand for content is as strong as we've seen it," said Ron Sanders, president of Warner Home Video. "Rental activity has gained in this economic environment, which you'd expect, but so have Blu-ray and high-priced catalog sets. And digital continues its very strong growth."

The fact is, DVD is now a mature format -- it will officially become a teenager next year, celebrating its 13th birthday in March -- and much of the catalog that fueled early growth has been exploited. Consumers now own most of what they want to keep in their home libraries and have returned to renting what they merely want to watch, especially with the economy dinging paychecks.

To get them buying again, Hollywood is looking to Blu-ray, which experienced dramatic gains in 2009.

In the first nine months of the year, consumers spent $568 million on Blu-ray Disc purchases, 83% more than in the first nine months of 2008. Some 3.3 million additional players, including PlayStation 3 consoles, were sold in the same time frame, up 13% from the year-ago period.

The fourth quarter has been a watershed moment for the HD discs. Players were readily available for as little as $78 (at Wal-Mart), and catalog Blu-ray Discs could be had for less than $10 and new releases for less than $20.

Much of this was driven at retail, with dealers using the discs as loss leaders as they once did with DVDs. But it also reflects a changing mind-set among the studios, which is that premium pricing simply isn't going to fly. If the masses really are to transition from standard DVD to Blu-ray, studio execs grudgingly concede, the HD discs will have to be priced competitively.

"It's partially a timing thing," said analyst Tom Adams, president of Adams Media Research. "If a generation of Americans hadn't had the Great Depression fear thrown into them, it would be a whole different ballgame. But on the other hand, events like that do change attitudes, and I think it's clear that consumers are seeking out the bargain way of doing things."

To that end, the new focus in Hollywood is to make it as easy as possible for consumers to transition from standard DVD to Blu-ray Disc, with the tool du jour being to offer DVD and Blu-ray Disc in the same package.

As for rentals, studio execs are hoping the recent uptick was a product of the recession and that consumers will return to buying once the economy improves.

"The business is definitely being affected by the recession,' said David Bishop, president of Sony Pictures Home Entertainment. "It has brought about the 'trading down' to lower-cost rentals and subscription services and contributed to the first growth in the rental business in nearly 10 years."

This year, Hollywood reacted with shock at the Redbox kiosk rollout, which brought a total of 22,500 dollar-rental kiosks to supermarkets, drugstores and Wal-Marts. Angry studio execs blamed the cheap rental machines for cannibalizing DVD sales, and by the end of the year they had either taken Redbox to court or cut "sleeping with the enemy" deals to at least share in the spoils.

Looking to 2010, studios are keeping their fingers crossed that the Redbox phenom could be stopped cold by the courts or will burn out like a Roman candle once the economy recovers and the lure of Blu-ray gets people back into the habit of buying. There's also optimism about the prospects of 3D.

"We expect to see some level of recovery in 2010 and anticipate another near-doubling of Blu-ray sales again in the coming year," Bishop said. "While this still will not be enough to offset the decline in DVD, the addition of increased digital revenue should spur growth for the industry overall by 2011."