Is the DVD party over for Hollywood? Probably not yet. But the days when movie studios could reliably count on money gushing in from DVD sales could fast become a thing of the past, at least if Walt Disney (DIS) CEO Robert Iger's thinking is correct. During a conference call on Feb. 3, when Disney reported weak quarterly results, Iger became the first studio executive to acknowledge publicly that sluggish DVD sales may be more than simply a bad recession sapping retail sales. "We have been taking a hard look at this business for a while with the belief that as the consumer choice grows," consumers will "simply be more selective" about what they choose to buy, Iger said.
Those are tough words for most studio moguls to swallow. As recently as 2006, DVD sales were a reliable source of money and a hot-growth industry for Hollywood, with consumers buying more than $16.3 billion worth of DVDs. Since then, the rate of DVD sales growth has tanked, falling by 32% in the fourth quarter of 2008, according to the Digital Entertainment Group. With DVD sales accounting for as much as 70% of a film's profits, according to Barclays Capital (BCS) analyst Anthony D. DiClemente, those were previous bucks. With a healthy marketing push from both consumer electronic makers and Hollywood, the industry did sell $750 million worth of Blu-ray disks in 2008, but that was hardly enough to overcome the 14.5% fall in overall DVD sales last year. Now if more choice drives consumers away from DVD—and Iger mentioned online games, "videos in multiple places," and cable TV—that business model is fast becoming endangered.
Studios Get a Thinner Slice
The problem is that studios get a smaller piece of the action each time someone downloads a flick or watches it on a cable system's video-on-demand service. Entertainment consultant Douglas L. Lowell, who models earnings projections for studios, figures the studios get roughly $10 for a DVD sold in retail markets. By comparison, they get roughly 70% of the $4.99 that Comcast (CMCSA) charges to watch a movie on video-on-demand service or the $9.99 to buy the flick on Apple's iTunes service (AAPL).
According to Lowell, another big problem is the popularity of Netflix (NFLX), for which consumers pay up to $16.99 a month for unlimited numbers of DVDs either shipped via mail or available to stream online. "The erosion in studio revenues only got worse when the movie industry became a revenue-sharing partner with a subscription service," he says. And things may just go downhill from here, from the studios' perspective. Online downloads are only in their infancy, although everyone from Amazon (AMZN) to Netflix is beginning to market them to consumers. According to Iger, DVD aficionados, who traditionally built libraries of their favorite flicks, may have tapped out—avid users can have as many as 80 already, says the Disney chief—making it tougher to get them to pony up for a DVD for the latest hot flick.
What's Hollywood going to do? For his part, Iger argues that "the cost of both producing the DVDs and distributing and marketing the DVDs needs to be addressed" and that "the cost of the system needs to come down." Still, he says, the Disney brand name gives his company some advantages with family buyers, and when Disney loads up its newer version high-definition Blu-ray DVDs with a standard version and a downloadable version, it often finds that it can charge a bit more. Not every studio can say the same. But like Bob Iger, most are likely to be realizing that the DVD goose is no longer able to lay as many golden eggs.
Grover is Los Angeles bureau chief for BusinessWeek.