Movies

How Home Entertainment Companies Are Navigating the Streaming Apocalypse

Now that the streaming apocalypse is fully upon us, how are people in the home-entertainment business coping? Mostly by reducing expectations for those once lucrative discs.

With revenue shifting toward established subscription video-on-demand services such as Netflix, Amazon and CBS All Access, and even more competition from Disney Plus and Apple TV Plus, studios are increasingly pinning their hopes on their own streaming offerings, while targeting collectors for purchases on any format of their choosing, be it disc, digital or a combination. Other companies have found new opportunities for niche streaming services and ad sales on apps.

Studios are still pushing discs for sale, piling on bells and whistles in hopes enhanced offerings will appeal to viewers that want to see special-effects extravaganzas in the highest resolution possible, or luxuriate in their favorite movies or shows without having to worry about occasional buffering or spotty availability on streaming services. The holiday shopping period is traditionally a prime time for studios to promote souped-up movies and TV shows for purchase, and this year is no exception: Warner Bros., for example, recently released what it billed as the “ultimate makeover” of “Wizard of Oz” on Ultra HD Blu-ray with 4K resolution. There are plenty of standard Blu-ray collections available for purchase as well.

Kathi Chandler-Payatt, executive director and entertainment industry analyst for the media entertainment practice at market research firm the NPD Group, says there are enough hardcore collectors to keep the newer disc formats viable in the streaming age.

“[Collectors] want to make sure that not only do they get the best experience, they’re guaranteed an experience, and they don’t have to get it on Disney Plus in a format that is potentially not 4K,” she says.

Sales for 4K UHD are relatively tiny, but they are growing. U.S. spending on 4K UHD discs rose 11% during the first nine months of the year, according to studio-backed org DEG — The Digital Entertainment Group. The bigger problem is that overall sales for discs dropped at a faster rate: During the comparable period, they fell 18.5% to $2.3 billion. It’s only when you add in digital purchases, what the industry calls electronic sell-through, that the picture improves slightly: Overall purchases dropped around half as much — 8.66% to $4.2 billion through Sept. 30.

When you take discs out of the equation, there’s growth on the sales side: Electronic sell-through grew 6.7% to $1.9 billion through the first three quarters of this year, and was up 13.1% during the third quarter, when it brought in nearly $700 million in U.S. consumer spending.

Just because people aren’t buying physical media doesn’t mean they’re not amassing collections of movies and TV shows, says Marcy Magiera, editor for DEG.

“People are increasingly buying digital copies of their favorite entertainment,” she says. “Is that as huge a business as DVD was? No, not yet. It’s a whole different world than it was when DVD ruled.”

In 2005, DVDs generated $16.3 billion in sales, accounting for 64% of the home video market. Last year, disc sales barely passed $4 billion, or just above 17% of total U.S. home entertainment spending, per DEG.

Another sign of the fading appeal of discs: Samsung announced earlier this year that it would no longer introduce any more 4K Blu-ray player models on the U.S. market.

DVD began losing its luster when the Great Recession hit in 2008, bringing with it a dramatic drop in consumers’ discretionary spending. At the same time, streaming video started to come on consumers’ radar. Blu-rays had hit the market in 2006, but never took off the same way as the older disc format. In 2018, only $1.8 billion in Blu-ray discs were sold, with DVD accounting for $2.2 billion in sales.

“From the height of DVD through to it being worth really nothing, it was just a handful of years,” says attorney Robb Klein, who co-leads Sheppard Mullin’s entertainment and digital media practice. “It literally just disappeared, almost overnight.”

The drop-off created a ripple effect throughout the industry that has been a boon to some and a bust to many. It was an especially big blow to independent filmmakers who relied on DVD presales for a large portion of their financing.

Netflix, the company arguably most responsible for killing the DVD boom, started out as a mail order disc rental business in 1997. It introduced its streaming service in 2008, but its DVD business was still humming at the end of 2011, with 11.04 million subscribers. As of third quarter 2019, Netflix has just 2.28 million subscribers to its disc service in the U.S. In contrast, it has 60.62 million streaming service subscribers domestically and 158 million globally.

But that huge growth has come at a steep price. The company’s massive spending to create and acquire content for its streaming service has left it with a staggering $12.43 billion in debt, according to its most recent quarterly earnings report, up from $10.36 billion at the end of 2018.

As old media titans launch competitive streaming services, they’re feeling the fiscal pinch, too. In November, Viacom reported that its adjusted operating income fell 21% from $736 million to $581 million year-over-year in the third quarter, due to increased investment in content, “including a higher number of series produced for multiple platforms, as well as the company’s direct-to-consumer streaming services.”

One man who benefited from physical media’s fall is Rich Hull, who launched his Spanish-language streaming service Pongalo in 2014 from the rubble of the DVD makers that put out multiple-title Mexican movie discs sold at such stores as Walmart.

“A lot of those guys took on way too much debt at a time when debt came a lot easier, and when the DVD market crashed, they were getting crushed under all these loans,” says Hull. “So I went to all their lenders and said, ‘I’ll give you pennies on the dollar for that loan that’s secured by those movies.’ Netflix, Hulu and those guys were not around at the scale they are now, so it seemed like those digital rights were not really worth anything. So I probably picked up $50 million of production value of movies for around a million bucks.”

Similar to popular English-language streaming services such as Xumo, Tubi TV and Pluto TV, Pongalo offers viewers a monthly ad-free subscription for $5.99, but most choose to watch for free, with ads.

“In early days, we probably tried to bombard them with ads in the hopes that they’d buy a subscription to get rid of the ads,” says Hull. He sold the company to Discovery Communications-backed Vix in August and now serves as the parent firm’s chief strategy officer. “Now, we not only try to not bombard them with ads, we also try not to bombard them with the same ad.”

Ads are also big business for Roku. The company, which made the first streaming player for Netflix in 2008, now makes less money on device sales than it does on what it terms “platform revenue,” which includes money generated by the AVOD apps it carries.

“A flat subscription fee doesn’t scale unless you get more subscribers, but ad revenue gives them much more ability to be profitable because it scales with views,” says Chandler-Payatt.

The category with the biggest growth in U.S. home entertainment spending should come as no surprise: subscription streaming. According to the DEG, U.S. consumers spent $11.6 billion through the third quarter of this year on SVOD, a 22.9% gain from the same period in 2018. That boost more than overset a 5.9% drop in VOD revenue (to $1.5 billion) and helped boost total digital spending to nearly $15 billion through the third quarter — a 17% increase.

Those are notable gains. But Ted Schilowitz, the first-ever futurist-in-residence at Paramount Pictures, cautions Hollywood denizens to keep one thing in mind: “Not everybody lives in the most advanced technology bubble,” he says. “The people who work in certain sectors where they’re just bombarded with all the latest technology and all the latest options forget that not everybody has high-speed bandwidth, not everybody has the most advanced displays.”

In other words, there’s still a market for discs, just not nearly as big a one as even a few years ago, and ample reason for studios to chase after streaming revenue themselves.

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