Netflix and Redbox gained in 2010 as DVD sales slid

LOS ANGELES (Hollywood Reporter) - After a calamitous 2009, which saw home entertainment spending drop 5 percent as Americans struggled with tough economic times, 2010 wasn’t all that bad.

Sure, total consumer spending is likely to be down again, as dramatic Blu-ray Disc and digital delivery growth still isn’t enough to make up for the lag in DVD sales -- which as of the end of the third quarter was running about 12 percent behind the previous year, according to an analysis of numbers provided by DEG: The Digital Entertainment Group.

But a new reality has settled on Hollywood, rooted in the acceptance that the double-digit growth the industry experienced in the early 2000s will never happen again, at least not for packaged media -- and that Netflix and Redbox have altered the landscape for not just the rental sector but for the entire business.

“Consumer confidence is coming back but will never return to 2006 levels in this generation,” said John Marmaduke, president and chairman and CEO of Hastings Entertainment, a 147-chain of multimedia superstores headquartered in Amarillo, Texas. “People are living without what they can live without, as they discovered it wasn’t such a big sacrifice.”

Complicating matters is the fact that thanks to Netflix and Redbox, renting a movie has never been easier or cheaper, and that’s bound to have an impact on consumer purchases, particularly in these economic times. At the same time, Netflix has become one of the power players in digital delivery, to the further detriment of packaged-media sell-through.

Steve Beeks, president and co-COO of Lionsgate, called 2010 “the year of transition.”

“We saw explosive growth for Blu-ray sell-through and on-demand platforms, each of which will approach or surpass $2 billion in spend,” Beeks said. “It’s the year in which consumers had more choices than ever, from standard-definition DVD to streaming. It’s also the year in which studios forayed into burgeoning new-media platforms, such as social games and apps, which offer a new growth opportunity, as well as the year the industry truly embraced the idea of looking at the whole pie when referring to home entertainment.”

There was a transition from physical media to digital delivery, from brick-and-mortar rental to alternatives like Netflix and Redbox, from 2D to 3D. Perhaps most significantly, 2010 saw a transition from what had always been a consumer product to a consumer experience -- the experience of watching a movie or TV show where, when and how you wanted to. And the cheaper and more convenient, the better.

“Given the weak economy, it’s no surprise that there has been a secular shift to rental, chiefly subscription and kiosks, over the past year,” said Craig Kornblau, president of Universal Studios Home Entertainment. “Looking ahead, one of our biggest challenges will be finding lucrative ways to offset this loss in sell-through by aggressively growing our VOD and iVOD businesses. Additionally, marketing will continue to be very critical to our success in educating consumers about their options.”

In terms of offering cheaper and more convenient home entertainment, no one did it better than Netflix, the subscription rental service that pushed past Blockbuster to become the No. 1 renter of prerecorded media. By the end of the year, Blockbuster had filed for bankruptcy, while Movie Gallery, the nation’s No. 2 brick-and-mortar rental chain, had liquidated.

At the time of Blockbuster’s September bankruptcy filing, Netflix’s share of the rental market was not only significantly bigger than Blockbuster’s but rivaled that of the entire brick-and-mortar sector. By then, Netflix had an estimated market share of 36 percent, according to Home Media Magazine market research. Redbox, with its chain of more than 20,000 rental kiosks, had 25 percent, Blockbuster had 22 percent and other retailers, mostly independents, had 17 percent.

The studios’ attitude toward Netflix and Redbox changed from outright hostility to grudging acceptance. Indeed, as 2010 began, much of Hollywood was embroiled in litigation with Redbox on the grounds that the proliferation of dollar-a-day rental kiosks was cannibalizing the sell-through business. By the end of the year, however, most major studios had deals in place with both rental services that called for a 28-day delay in new-release rentals in return for vastly discounted prices. Netflix also launched a streaming service, giving consumers the choice of getting movies on DVD, Blu-ray Disc or over the Internet.

Marmaduke takes a cynical view of Hollywood’s dealings with the nontraditional rental dealers. “2010,” he said, “is the year the studios’ favorable prices to Netflix and Redbox came back to bite them.”