The Studio Strategy: Follow The Music Industry

October 2, 2009 by John Dugan

movie-studio-monkey According to Digital Entertainment Group, DVD sales fell 13.5% to $5.4 billion while DVD rentals rose by 8.3% to $3.4 billion in the first half of 2009. The movie rental kiosk is largely responsible for the growth of movie rentals and is also a primary factor in the decline of DVD sales. Over the past year, the kiosk market has grown from 2% of total movie rentals to 19% of the movie rental market. While 850% annual growth is clearly not sustainable, the movie kiosks’ affects on the studios are.

New channels of distribution continue to cannibalize DVD sales and squeeze margins. In addition to the kiosk market, online stores are booming. Both Amazon and iTunes have seen 21% year over year growth in digital sales and rentals, while retailers like Borders are experienced DVD sales declines of 48%. With the demand for DVDs falling, retailers like Borders and Best Buy will reallocate floor space away from physical media in order to maximize revenue per square foot. This poses a serious threat to the studios, who typically generate 30% profit margins from DVD sales.

It’s rather ironic that while the major studios don’t want to go the way of the music industry, they are making the same mistakes. Fox, Time Warner and NBC Universal have all become embattled in the lawsuit game. As analyst Michael Morris of UBS notes, “Investors are growing more concerned with how media companies can monetize their film libraries as DVDs are replaced by other delivery methods.” My piece of advice: it’s not through lawsuits.

Side Note: My thanks to the people at Shutterstock who threw some free images our way. They have quite a large selection of film related images… but for this post I figured a monkey was more appropriate.