The death of DVDs

Hollywood is going the same way as the music industry – only faster

a woman

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Are you waiting for digital movies to crush discs and tapes, once and for all? According to the analysts at IHS Screen Digest, that day is already here.

Much as when Apple (Nasdaq: AAPL) and its iTunes store passed the largest CD sellers back in 2008, a new breed of US movie services is passing physical-format sales and rentals for the first time ever, and there’s no going back:

That graph shows online films coming out of nowhere to totally obliterate the traditional distribution methods in just a few short years. Last year was a turning point where the new market matured, but 2012 will see the official changing of the guard. The S-curve then flattens out somewhat. By 2016, online movie purchases and rentals will outpace physical ones by about two-to-one.

We’re not talking about short-form YouTube videos here, or else the numbers would skew even further to the digital side. These are full-length theatrical features, the kind you’ll find at Netflix (Nasdaq: NFLX).

Trouble in paradise?

It’s not all wine and roses for the up-and-comers, though. IHS also notes that physical media still collects the lion’s share of the dollars spent on filmed entertainment. In 2012, IHS predicts a $1.7 billion market for digital movies but $11.1 billion in DVD and Blu-ray sales.

That’s because the average digital view costs just $0.51, versus $4.72 for your average purchased or rented disc.

Of course, pure digital delivery comes with just about zero overhead costs while discs cost a lot to press, pack and ship. That’s why Netflix and Amazon.com (Nasdaq: AMZN) can afford to give you unlimited viewing for a low monthly fee. Don’t expect your local video store (if you still have one) to let you fill a shopping basket with DVDs for a few bucks. The two halves of the home-entertainment industry work under very different business models.

Furthermore, IHS predicts that rental plans will wipe out the market for buying digital media online in short order. That’s good news for Netflix, bad for Apple — which likes to sell videos in its iTunes store — and a mixed bag for Amazon, which dabbles on both sides of the buy-or-rent fence.

Yes, but…

These findings seem reasonable enough, though I expect the physical sales to dip further and digital to rise higher in the long term than what IHS believes. And let me just point out that digital-music sales passed CD sales in 2011, as measured in dollars collected, for the first time ever. Commenting on the music industry, Brian Zisk of the SF MusicTechSummit says that digital “is a much healthier ecosystem for folks to be selling digital formats instead of physical formats”. He continued: “That’s the future, and the way it’s going.” And I’d argue that the movie industry is walking down the same path.

If anything, I’m pretty sure that the conversion to digital will be even faster this time around. Have you noticed how many smartphones and tablets you see these days? Movies in digital format are perfect for mobile consumption, and in the US, Netflix integration in particular has been a major selling point of pretty much everything Apple makes these days. That trend goes hand-in-hand with the Wi-Fi broadband access points that are springing up across the map like the weeds in my lawn.

Australia

In Australia, this is more bad news for DVD retailers, such as Big W & Dick Smith Electronics, both owned by Woolworths Limited (ASX: WOW), Kmart & Target, both owned by Wesfarmers Limited (ASX: WES), Harvey Norman Holdings Limited (ASX: HVN), JB HiFi Limited (ASX: JBH), Sanity and a whole host of online DVD retailers.

It’s not just DVD sales that will be affected. Sales of Blu-ray and DVD players will also likely be affected. In fact, it appears that we’ll no longer need any type of device to store or play music and movies. If movies and music are wholly digital, and if we rent rather than buy, there’s no real need to store anything.

How long will it be before the local video store disappears? It’s likely they won’t be around much longer.

On the up side, this should be good news for Telecommunications companies such as Telstra Limited (ASX: TLS), Optus, Vocus Communications Limited (ASX: VOC), Amcomm Telecommunications Limited (ASX: AMM), TPG Telecom Limited (ASX: TPM), iiNet Limited (ASX: IIN) and Macquarie Telecom Group Ltd (ASX: MAQ), and should be a fillip to online streaming services such as Quickflix Ltd (ASX: QFX). Increased demand for internet & mobile data & services is good news for these companies.

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Motley Fool contributor Mike King owns shares in Vocus and JB HiFi. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy

A version of this article originally appeared on our US site, Fool.com.

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