Film Fund-amentals: The Sky is Falling (Maybe)

Yes, it’s official. According to the Digital Entertainment Group, DVD sales dropped 9% and rentals followed at a flat-liner pace. While sales of Blu-Ray discs managed to offset some of this loss (they increased significantly), it has not been enough to produce a positive increase in the business.

Since most movies currently make a sizable amount of their profit in the DVD market (sometimes anywhere from 100% to 200% above their theater box office), these figures are producing some debate. Is the sky falling, or is this merely heavy rain?

Several things are worth keeping in mind while reading these figures. The home market is changing. Contrary to the recent spike in box office ticket sales (the spike is really artificial and merely represents the gross take of a few films), most people now watch movies at home and will continue to do so. The real question is, how are they getting the DVDs?

The traditional rental market is in a state of retrenchment. The once “cool” act of going to the rental store to pick up movies has been increasingly replaced by the cheaper (and easier) process of either using vending machines at the local grocery store or pharmacy or by joining mail order systems such as Netflix. Netflix (and several other companies) are also pursuing direct downloadable delivery systems for the well-wired consumer. Eventually, you will probably be able to pick up a few DVDs while getting your car greased at the local Jiffy Lube. The market’s delivery systems are in a massive state of flux.

Likewise, an upgrade in technology will not (especially in the current economic climate) work. Though a sharp increase in Blu-Ray shaved off some critical points in the recent drop, Blu-Ray itself is not moving along as fast as it was hoped. There are some pretty clear indications that people are becoming more resistant to upgrading every couple of years (in other words, buying all new stuff). The electronic industry has largely operated with a business model that resembles Detroit and has a huge stake in getting people to re-equip on a regular basis. But as Microsoft discovered with Vista, this trend is slowing down. Sure, the image on Blu-Ray is better. So what? The same was true with Betamax.

In turn, DVD sales have hit a really big problem. People are realizing that it is pointless to buy a disc that you may only watch once, toss in the back of the TV cabinet and never see again. So they are focusing their purchase of DVDs on items that they really, truly, definitely intend to watch multiple times (even if the discs still end up at the back of the cabinet).

Which means that rentals will still be a powerful force within the industry even though they will also continue to decline. In turn, a state of change in the mode of delivery will extensively reshape the market in ways that are still hard to predict. The current economic situation will favor the methods that are most cost-effective and least dependent upon increased consumer expenditure in terms of equipment and technology.

In other words, the DVD market will continue to be the economic backbone of the motion picture industry, but the entire industry is also going to economically change. So you just have to be braced for some really heavy rain.

— Dennis Toth