DVDs are dead, long live online video

editor's corner

Jim O'Neil

Mark 2012 as the year that spelled the end of physical media for movies...or at least the year that online movies passed them by.

For the first time ever, according to new research from IHS, Americans are on track to consume more movies on Netflix (Nasdaq: NFLX), Hulu, Amazon (Nasdaq: AMZN) Instant Prime, etc. than on VHS, DVDs and Blu-ray discs combined. And, said IHS, those numbers don't include pirated films.

America's appetite for online video, whether it's over-the-top through an unmanaged network or across a managed network as a VoD offering, is unbridled.

The IHS Screen Digest Broadband Media Market Insight report said Americans are likely to pay for 3.4 billion online movies this year, up 2 billion over a year ago, and nearly half again as many over the Internet as the number of movies watched on physical media last year, about 2.4 billion. Online video transactions and videos are also set to continue increasing in the years to come, while physical video sales are expected to decline or stagnate in comparison.

"The year 2012 will be the final nail to the coffin on the old idea that consumers won't accept premium content distribution over the Internet," said Dan Cryan, senior principal analyst of broadband and digital media at IHS. "In fact, the growth in online consumption is part of a broader trend that has seen the total number of movies consumed from services that are traditionally considered ‘home entertainment' grow by 40 percent between 2007 and 2011, even as the number of movies viewed on physical formats has declined."

The research includes retail sales and rentals of VHS, DVD and Blu-ray discs. Stats for online video include electronic sell-through (EST), Internet video on demand (iVOD) and subscription video on demand (SVOD).

Back to that U.S. appetite. IHS said Netflix and Amazon Prime unlimited viewing models were major drivers of the increased online viewing trend.

The report said, subscriptions in 2011 accounted for 94 percent of all paid online movie consumption in the United States. Only 1.3 percent of units consumed were bought on an ownership basis via electronic sell-through.

But, said IHS, viewers still will spend more time actually watching movies on physical media than online movies.

For the moment, that may be because the buffet is a little too old; it needs a content refresh to keep eyes longer.

Whatever the cause, IHS forecasts viewers will watch 3.2 billion hours of online movies, compared to 4.3 billion hours of DVDs and Blu-ray discs.

Hollywood, obviously is scared to death. As viewers abandon pricey discs for online fare, the studios are seeing their already shrinking revenues shrivel some more. Physical media yields a payout of roughly $4.72 per play, online just 51 cents, or $11.1 billion compared to $1.7 billion for online. That pattern, said IHS, is expected to extend through 2016.

IHS said Netflix, Amazon and Hulu all had huge years in 2011, with Amazon seeing its nascent entry-which when it launched was viewed as a somewhat lame value added play for its discounted shipping service--develop into a major player in the space.

Bottom line, here's the threat that IHS sees coming down the road: Viewers are fine with watching older (and cheaper) content by the handful from subscription services that cost $8 a month, and they're going to watch more of it over time. That, in turn is going to erode the time they have to watch higher-value content, even if it's online in the form of newer releases available through EST. That's a threat to plays like Apple's (Nasdaq: AAPL) iTunes and others. It has to be worrisome to studios that have placed their bets on UltraViolet, when that's given up for dead because of consumer apathy.

IHS says physical media's death will be a lingering one, a terminal patient holding on for just one more Christmas, one more anniversary. For my money, this is one case in which the doctors are too optimistic.

America's appetite for online video isn't too different from our obsession with fast food. Despite the health risks, bland food and plastic décor, we gorge on it.

Likewise, online video: It's not always the best available, not always the newest, but it's cheap and bountiful.

Pass the remote, and lemme have some more fries.--Jim

P.S. We're hosting a breakfast panel on Connected TVs at this year's NAB in Las Vegas. We've got room on the panel for one more content owner who wants to talk about the potential benefits and challenges of connected TV technology. Drop me a note here if you'd like to join the panel. The shindig is set for 7 a.m., Tuesday, April 17 at the Renaissance Hotel, which is right next to the Las Vegas Convention Center.  Friday is the final day for early bird registration. You can register and find out more about the event here.

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