Death of DVD retail greatly exaggerated

DSN Retailing Today, July 19, 2004 by Doug Desjardins

Whenever a new technology comes along, there is always a tendency to exaggerate the impact it will have on the status quo. The best example was the Internet boom of the late 1990s in which online retailers were going to wipe out Wal-Mart and every other bricks-and-mortar retailer overnight.

We all know how that one turned out, but at the time retailers were worried because the doomsday scenario had the blessing of nearly every wizard on Wall Street. And for a brief period of time, they all got a taste of the gloom and doom talk video retailers have been hearing for nearly 20 years. It's hard to think of any industry that's prospered for so long in the face of imminent extinction.

It began in the 1980s when cable providers wired the last few miles into the distant suburbs. That's when the buzz began about video-on-demand and new technology zealots predicted that home delivery was going to wipe out video retail in a few short years.

Video-on-demand never lived up to its hype, but then the Internet boom arrived to lay waste to the industry. A startup company called DIVX came along in 1998 with a complex system that allowed people to download movies onto a disc using a dial-up connection. Needless to say, that idea never caught on and the industry enjoyed a much-needed revival on the strength of DVD.

Through it all, video stores have thrived as their high-tech rivals have come and gone. Last year, the industry generated a record $24 billion, with more than $10 billion in rentals and $14 billion in sales. Not bad for a business that's been on its last legs for two decades.

But now, even the biggest optimists acknowledge the best days of the video business are behind them. Major players like Blockbuster have watched rentals decline for two straight quarters due to an increase in DVD sales and competition from online subscription services like NetFlix, which now has about 2 million members.

DVD sales are expected to rise about 10% a year for the next few years and could soon top $20 billion, but even they're going to eventually take a hit as file sharing begins to infiltrate the business. It's something that has the major studios worried and for good reason. They saw the music business nearly get wiped out by Napster and other online services before they managed to regain some control.

That's why the studios are taking preemptive action by making movies available on the Internet for a reasonable price (a business model Apple's iTunes has validated).

A new company called Movielink--formed by MGM, Sony, Paramount, Warner Bros. and Universal--now allows people to download movies for $5 and watch for them for a 24-hour period. And other services are being tested that use set-top boxes and digital video recorders to receive and store movies through cable companies, satellite services and the Internet.

What we're finally seeing is the brave new world of video retailing the pundits predicted would arrive years ago. But even that's a stretch. That brave new world is a reality for only a select few early adopters and it will be many years before most homes are equipped with the technology required to download movies in a time-efficient way.

In the meantime, video retailers will have to survive the year on rental revenues of about $9.5 billion and DVD sales of more than $15 billion. Not much, but it will have to do.