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Blockbuster, Netflix and the end of movies as a product

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Something funny happened this week when I read the news about Blockbuster (S DISH) shutting down all of its stores. For a split second, I thought: Wow, this means I can buy lots of DVDs at discount prices. Then I remembered that I don’t own a DVD player anymore.

Okay, that’s not entirely true. I do still have one, but it’s tucked away in the basement, and hasn’t been used in years. Instead, I stream everything. Netflix, (S NFLX) Hulu and the occasional VOD rental from services like Vudu (S VUDU) or Google (S GOOG) Play have kept me busy enough to also make me forget about those few hundred DVDs that I still own. And if I really ever wanted to watch something from a disk, I could always use my Macbook. (S AAPL) But honestly, I don’t remember the last time I did that.

I know what you’re thinking. How does one guy’s habits make a trend? It’s true, my setup and my TV and movie viewing habits may not be representative of mainstream America, but a closer look at the numbers shows that I may not be that far ahead of everyone else:

  • First, there’s Blockbuster. The chain used to have 9000 stores at its peak, with a total revenue of $5.9 billion in 2004. This week DISH said it was closing Blockbuster’s remaining 300 stores. In Q2 of 2013, Blockbuster’s revenue was down to $120 million.
  • Sales of physical media peaked a decade ago, with U.S. consumers spending $24.9 billion on DVDs, Blu-ray discs and VHS tapes in 2004. In 2012, that number was down to $8.46 billion, according to numbers from the Digital Entertainment Group. Hopes that Blu-ray would pick up as DVD declined largely haven’t materialized.
  • Netflix’s DVD subscriptions also continue to decline, from close to 14 million subscribers in 2011 to just 7.15 million in Q3 of this year.

But the end of Blockbuster isn’t just about the decline of physical media. It’s about the end of movies as a product, as consumers quickly adapt to a world of digital access. And that’s a trend that should really scare Hollywood, much more than those going-out-of-business signs that are popping up at remaining Blockbuster stores all over the country.

Studio executives would like to believe that they can get consumers to purchase and collect movies again if they add some bells and whistles, like cloud access and exclusive online content. It’s the premise of UltraViolet, the more-or-less industry-wide cloud storage locker. Ultraviolet provides streaming access to both digitally purchased movies as well as digital copies of plain-old DVDs, and it’s being heavily promoted by both studios and retailers like Walmart, BestBuy (S BBUY) and Target. (S TGT) But two years after launch, still only 15 percent of consumers even know about UltraViolet.

That’s why Hollywood is also pushing to make digital purchases more attractive, even if that means sabotaging other business models. Prices for so-called VOD rentals (movies that you can access for 24 to 48 hours) are going up while digital sales (digital files that are yours to keep) are becoming cheaper. Revenues from digital sales are increasing as a result, reaching $274 million in Q3 of 2013, and  up from $178 million in Q3 of 2012.

More than 80 percent of digital movie revenue comes from rentals, not sales

That’s impressive, until you compare it to the $25 billion consumers spent on physical media ten years ago. And it becomes even less significant when you consider that TV show episodes are only available as digital sales. I regularly “buy” episodes of shows like the Walking Dead, only to never watch them again, simply because there is no option to rent.

The Digital Entertainment Group, a trade association that tracks revenue in this space, doesn’t differentiate between movie and TV shows when talking about digital sales, but an industry insider told me that between 80 and 90 percent of all digital movie revenue comes from rentals, not sales.

That is, of course, until you also factor in subscriptions, which dwarf the entire sector. Netflix alone clocked $700 million of digital revenue in Q3 alone. Amazon’s (s AMZN) contribution is a little harder to calculate, but the company said that it added “millions” of paying prime subscribers last quarter, thanks in large parts to its video service.

All of this goes to show that the way in which people consume their movies is rapidly changing. Studios would like consumers to go back to a pre-Blockbuster era in which movies are bought like physical products, at a price that came with a healthy profit margin. But Blockbuster’s demise is just one more reminder that physical products are disappearing, and with them, the concept of ownership.

Instead, consumers value convenience and access. The idea that you have to buy a movie in order to watch it may soon be as forgotten as that DVD player in my basement.

Image courtesy of Flickr user  yapsnaps.

11 Responses to “Blockbuster, Netflix and the end of movies as a product”

  1. Bill Perrault

    A few thoughts since I’m in the business and live this every day…

    1. Physical is not dead yet! Its still a very robust business. The demise of Blockbuster is more about a consumer shift to by mail rental and kiosks. Blockbuster was late to both parties.

    2. Digital is still very much a work in progress. Many consumers still report problems with streaming. You think by now it would be better but its really not. Most consumers given the choice would rather download a video file and have that file available to them on a hard drive. The industry cannot financially live long term on subscriptions (Netflix) & VOD (rentals). It needs consumers to want to own again. Agreed that owning a digital movie to date has not been compelling. That is because the collectable factor is not there. There is a provider out there that has recreated the collectable factor of a DVD for digital. Your product sits on a shelf, you have all of the bonus materials and chaptering. Check out . If we can demonstrate to the consumer all of the reasons you wanted to collect DVD’s can now be experienced digitally and your content is available to you everywhere, then consumers will want to own again and we all win.

    • Bill Perrault, I looked at the platform purple link you provided and frankly it leaves me scratching my head. I saw nothing on the site that supported your assertion of being able to satisfy collecting and universal streaming… I saw only another streaming service; one I’ve never heard of and whose content seems to be exclusively self-help videos.

      iTunes, on the other hand, has what you seem to be talking about. I can get movies with extras and chapters, just like with physical media, and I can either stream or download for later offline viewing. I can rent or buy, though rental prices are excruciating. (A problem shared by (Amazon, Vudu and others.)

      The drawback being DRM and being locked into the Apple universe. I happen to like Apple products so that isn’t painful for me, but I have Amazon videos that I can’t load into iTunes and watch on my AppleTV even though I’ve paid for them. I see your purple system allows play on AppleTV via a Mac or IOS device, but that isn’t the preferred way. A Purple app for the AppleTV would be better.

      Bottom line, as one commenter pointed out (and as was a bane in the music business) is DRM. If I can’t “buy” a digital video from Amazon and load it into iTunes or put it on portable media to play for the kids in the minivan, it is of limited value to me and will always make me think twice before paying. Apple wisely dropped DRM for music and I can take it with me anywhere I want to go. That needs to happen with video.

  2. jmburger

    The author is right on target. The sad fact is that industries don’t recognize coming tectonic shifts in consumer demand early enough to kill their successful physical model. The beginnings of shifting consumer behavior often happen when the industry has never made more money on current products. Take the music industry – not the silly divertive “piracy” argument. Rather, the shift in consumer consumption that happened in 1998-2000. The labels had an opportunity to grasp the golden ring of digital distribution, but they were looking back from where they came. By 2000, music as a product was at its high watermark (despite the easy to use, popular Napster – put out of business Feb. 2001).

    Putting one or two good songs on a piece of polycarbonate with 10 filler songs at very low cost and selling it for $15-20 seemed like the only way to distribute music. Finally, after several abortive (some say half-hearted effort to duplicate physical model) music industry attempts at digital offerings, Apple launched the successful iTunes.

    Unfortunately, the music industry didn’t realize they were returning to the traditional roots of music – a service. It was only after Edison invented recording on plastic cylinders, that music became a product. For eons before music was a service. The Internet offered, and was rejected by the record labels, the opportunity to capture a huge group of consumers that loved music. Imagine Napster users as subscribers those consumers could be sold much, much more beyond digital downloads. But the record labels’ mental attitude appeared to be to search for a way to keep music as a product, rather than accept that the old physical model was dead.

    As the author noted, the video physical market peaked in 2004. That was the time for the movie studios to kill the physical distribution market. Instead, they were lured by Blu-ray, but hi-definition did not result in the same replacement fever of DVDs for VHS. UltraViolet was a heroic effort lead by two people (one movie studio and one IT executive) with the foresight to see physical was going away. Unfortunately, it took too long to launch (for many reasons) and it is a purchase model only – so far. There are other issues hung around the studios neck that makes the transition hard – vestiges of the “windowing” model of movie distribution. But make no mistake, the consumer wants to consume video, when, where and how she wants – and it isn’t by buying pieces of polycarbonate. Whether they can be convinced to “buy” bits remains to be seen.

  3. The sad thing is people are becoming way to comfortable with the digital world. I recently got married and all our wedding pictures were posted on a digital website, which was great pricewise, since we could access them anytime we wanted to and we’d never lose them-or so we think? I suddenly had a thought, while to most brainwashed consumers, it may seem almost wild and inconceivable, so did landing on the moon at one point. I saw a future where the internet went down. Even if you don’t think this is possible (I’m majoring in networking and I can tell you as time goes by and hackers get smarter, it’s possible) lets say the website shuts down. This would mean that all our memories of that day were gone. I then saw me and my wife in our future house, opening a box in the basement to find all the pictures were still there in physical form and it dawned on me that nothing beats reality. A physical picture will last longer than a digital one because you can’t make a physical object disappear in thin air. You people who are feeding off this digital owning are killing the physical industry. There are films that took decades to finally come to DVD and may never see a digital streaming moment unless they are “popular”. That’s my rant. Take it or leave it,

    • I agree it is sad that people are becoming way too comfortable with the digital world. I’d love to be assured that a physical picture will last longer than a digital one, but haven’t you ever heard of your pictures being ruined by water, fire, kids, pets, or the mould in that basement? So it’s probably better to have both physical and digital versions. As for DVDs, I like to have them in the house, kids making stacks and castles out of them while looking for something to watch. It’s fun.

    • It’s called fear. Let go. Attachment in this world is our problem. Like Ann said, a fire, or water can damage your physical stuff. If a fire ruins your whole house including your computers, you can still access your pictures and movies through another computer. Wake up and allow the world to change:)

  4. i buy if it’s something i really enjoy. don’t forget, Netflix doesn’t have EVERYTHING for downloading. the real problem has always been pricing. they’re always too expensive! why? and don’t tell me it’s be cause it costs a lot to make it. we all know about those “factories overseas and mexico made”. greed in my opinion is what killed buying movies. the same thing happened with music cds.

  5. The folks that posted before me are absolutely right. I would definitely consider buying digital copies of movies and TV shows (in fact, I would love some of the convenience of it) if and ONLY if:

    1. There is no DRM. Absolutely no deal while they use DRM. I suspect there are a LOT of people who feel the same way.

    2. The price is comparable to physical media, or, preferably, cheaper to account for lower costs to the distributor and lesser ability to resell pre-owned movies.

    3. I love the movie or TV show.

  6. The pricing for “buying” digital movies just doesn’t make any sense. Let’s take “The Lord of the Rings” for example.

    I can:
    Rent it for $2
    Buy a new DVD for $5
    “Buy” it on demand for $10 (SD) or $12 (HD)

    Now, there’s some convenience value to having it on demand vs a DVD, but there’s also some clear costs: I can’t re-sell it or watch it off-line, and I’m yolked by DRM to whichever library I purchase it from.

    Even so, I honestly don’t even *want* the DVD — I’d much rather purchase a digital copy. But I’ll be damned if I’m going to pay that much of a price premium for it.

    The end result is that I either rent it or go watch something else on Netflix. And the studios just lost a sale.

  7. People would always rather rent than buy. It’s why people check books out of a library before they consider buying them. People only have so much space, and why not spend it on what you love instead of something that really doesn’t do it for you? Even with the cloud, I know I would rather spend $3 renting a movie I may or may not like than wasting money on something I’ll never watch again.

    But if I love that movie, heck yeah, I’ll spend the money on it, as long as I can access it whenever I want.

  8. It’s simply too expensive for me to buy every movie I want to watch at home. I do buy Blu-Rays and DVDs on a selective basis. The movie studios killed the DVD/Blu-Ray rental business by placing stupid restrictions on when Netflix and Blockbuster could start renting new films. In the process the studios killed Blockbuster and Netflix’s rental business. I’m thinking about canceling my Netflix disc subscription and becoming an Amazon Prime member. The studios only have themselves to blame for declining physical media sales.