End Of The Reel
Demand Will Continue Falling For DVD, Game & Video Rentals
By IBISWorld analyst Agata Kaczanowska
As seen in the ABA Journal
With consumers embracing the latest entertainment and video technologies, such as streaming media, video on demand (VOD) and downloadable media, the DVD, Game and Video Rental industry has been severely neglected. Because the industry only includes physical media rentals, it is hard-pressed to compete with these cheaper, more convenient media formats. Some industry players, however, like Netflix and Redbox, have adapted to the competition. Netflix has pioneered mail-order and streaming movie rentals outside the scope of this industry, and Redbox has made physical media rentals more affordable and convenient by placing automated rental machines in nearly 30,000 US locations. Despite these popular innovations, industry revenue is expected to decline at a five-year annualized rate of 9.8% to $6.6 billion in 2011. Declines in household disposable income significantly deflated household expenditure on movie and game rentals since late 2007. Although consumer spending started picking up in the past year, industry revenue is estimated to drop 12.4% in 2011 as income and spending growth pushes more people to invest in set-top boxes and other devices that allow streaming and on-demand media.
Just as VHS became a thing of the past, profitability disappeared for many rental stores in 2008. Financing became tight and consumer spending dropped as people lost their jobs in the midst of the economic crisis. Subsequently, increasing Internet speeds and more compact digital files have made streaming video possible for many Americans, so a significant proportion of consumers switched to video streaming through subscription services. For instance, in 2010 Netflix reported that for the first time the majority of its subscribers viewed more streaming videos than DVDs. The fluctuating consumer spending and external competition will, therefore, contribute to a 15.1% annualized fall in industry enterprises to 4,288 in the five years to 2011. Industry profit also took a hit over the period.
Risk in the DVD, Game and Video Rental industry is forecast to be high over 2012, with a 6.6 score on a nine-point scale. The primary negative factors affecting this industry are a decline life cycle stage and high competition. Overall risk will be slightly higher than the previous year—a result of unfavorable movements in time spent on leisure and sports as well as external competition. Growth risk is at a very high level because of the projected 13.0% decline in industry revenue over the five years to 2016.
This industry is in a declining lifecycle stage as indicated by recent falls in industry revenue and profitability, alongside continuing trends of industry consolidation and store closures. As a result, the industry's contribution to the economy is diminishing and is expected to decline at an annualized 10-year rate of 12.8% through 2016, which pales in comparison to average GDP growth of 1.8% per year during this time.
Competition from internal and external forces is a main factor contributing to the decline of this industry as players struggle to keep pace with their rivals and maintain market share. Significant price-based competition exists for industry players on new sell-through releases and other stock titles. Movie distributors have implemented changes in their release strategies, particularly on the sale of blockbuster movies from a broader range of retailers. Such amendments include films being sold at the same time they are released for rental, which has hurt revenue for industry players.
Online rentals also pose a competitive threat to the DVD, Game and Video Rental industry. Netflix, a former major player, has pioneered subscriptions for streaming movies, which is a major substitute for physical media rentals. Digital cable and satellite operators offer multiple channels and VOD services to subscribers that compete directly with DVD and video rentals. As more devices, including gaming consoles and tablets, become compatible with and effective for streaming media, they suck revenue out of this industry.
In order to remain up-to-date with consumer needs and to ensure financial viability, industry players will need to set themselves apart from other competing media. Differentiating factors include better customer service and a different selection of media. Stores may focus on collecting movies filmed locally, for example, or certain genres that are popular in the area. Such stores remain in demand because their niche and sometimes rare movie selections are not generally found in the catalogs of major players like Redbox or Blockbuster. In response to changing technology, many major operators have also already diversified into internet movie downloads and movie rentals through mail or from kiosks.
Coinstar Inc. entered the industry at its peak with a business model that continues to thrive and compete with online media. The company introduced kiosks that rent DVDs and Blu-ray discs. Through this model, a limited number of DVD titles are available for rent in stores (supermarkets, for example) via vending machines that accept credit-card payment. This automated point-of-sale is cost effective because it limits the amount of inventory that the operator has to manage and it’s automated nature cuts out employee costs.
Redbox began in 2007 with several locations and has expanded to more than 26,000 locations in the United States. Rapid location additions are expected to boost revenue at an annualized four-year rate of 259.8% through 2011. The convenience of locations and the low movie price point are key to competing with online movies. The kiosks offer one-day movie rentals for only $1, which severely undercuts competition for the average consumer. This low price is possible because kiosks are extremely low maintenance. Redbox’s profit is about 11.2% of revenue, but because major player Blockbuster has been expanding its reach with Blockbuster Express kiosks, Redbox will face higher competition in the coming years.
The penetration of streaming media and VOD is projected to grow, keeping the industry in its downward spiral. This cycle is expected to worsen because as rental stores close and reduce mail-rental options, consumers will be forced to switch to the alternative. In the five years to 2016, IBISWorld forecasts a 13.0% annualized contraction in revenue to $3.3 billion.
In the shorter term, improved consumer spending is expected to buoy industry revenue. Americans held off spending on DVD and Blu-ray products because of high unemployment and uncertainty during the recession, but in 2012, people are expected to make the equipment purchases they postponed. This return is expected to temporarily slow the free fall of disc rental rates, with a lower estimated drop in industry revenue of 10.4% in 2012.