Blockbuster, Netflix and the end of movies as a product

Something funny happened this week when I read the news about Blockbuster (S DISH) shutting down all of its stores. For a split second, I thought: Wow, this means I can buy lots of DVDs at discount prices. Then I remembered that I don’t own a DVD player anymore.

Okay, that’s not entirely true. I do still have one, but it’s tucked away in the basement, and hasn’t been used in years. Instead, I stream everything. Netflix, (S NFLX) Hulu and the occasional VOD rental from services like Vudu (S VUDU) or Google (S GOOG) Play have kept me busy enough to also make me forget about those few hundred DVDs that I still own. And if I really ever wanted to watch something from a disk, I could always use my Macbook. (S AAPL) But honestly, I don’t remember the last time I did that.

I know what you’re thinking. How does one guy’s habits make a trend? It’s true, my setup and my TV and movie viewing habits may not be representative of mainstream America, but a closer look at the numbers shows that I may not be that far ahead of everyone else:

  • First, there’s Blockbuster. The chain used to have 9000 stores at its peak, with a total revenue of $5.9 billion in 2004. This week DISH said it was closing Blockbuster’s remaining 300 stores. In Q2 of 2013, Blockbuster’s revenue was down to $120 million.
  • Sales of physical media peaked a decade ago, with U.S. consumers spending $24.9 billion on DVDs, Blu-ray discs and VHS tapes in 2004. In 2012, that number was down to $8.46 billion, according to numbers from the Digital Entertainment Group. Hopes that Blu-ray would pick up as DVD declined largely haven’t materialized.
  • Netflix’s DVD subscriptions also continue to decline, from close to 14 million subscribers in 2011 to just 7.15 million in Q3 of this year.

But the end of Blockbuster isn’t just about the decline of physical media. It’s about the end of movies as a product, as consumers quickly adapt to a world of digital access. And that’s a trend that should really scare Hollywood, much more than those going-out-of-business signs that are popping up at remaining Blockbuster stores all over the country.

Studio executives would like to believe that they can get consumers to purchase and collect movies again if they add some bells and whistles, like cloud access and exclusive online content. It’s the premise of UltraViolet, the more-or-less industry-wide cloud storage locker. Ultraviolet provides streaming access to both digitally purchased movies as well as digital copies of plain-old DVDs, and it’s being heavily promoted by both studios and retailers like Walmart, BestBuy (S BBUY) and Target. (S TGT) But two years after launch, still only 15 percent of consumers even know about UltraViolet.

That’s why Hollywood is also pushing to make digital purchases more attractive, even if that means sabotaging other business models. Prices for so-called VOD rentals (movies that you can access for 24 to 48 hours) are going up while digital sales (digital files that are yours to keep) are becoming cheaper. Revenues from digital sales are increasing as a result, reaching $274 million in Q3 of 2013, and  up from $178 million in Q3 of 2012.

More than 80 percent of digital movie revenue comes from rentals, not sales

That’s impressive, until you compare it to the $25 billion consumers spent on physical media ten years ago. And it becomes even less significant when you consider that TV show episodes are only available as digital sales. I regularly “buy” episodes of shows like the Walking Dead, only to never watch them again, simply because there is no option to rent.

The Digital Entertainment Group, a trade association that tracks revenue in this space, doesn’t differentiate between movie and TV shows when talking about digital sales, but an industry insider told me that between 80 and 90 percent of all digital movie revenue comes from rentals, not sales.

That is, of course, until you also factor in subscriptions, which dwarf the entire sector. Netflix alone clocked $700 million of digital revenue in Q3 alone. Amazon’s (s AMZN) contribution is a little harder to calculate, but the company said that it added “millions” of paying prime subscribers last quarter, thanks in large parts to its video service.

All of this goes to show that the way in which people consume their movies is rapidly changing. Studios would like consumers to go back to a pre-Blockbuster era in which movies are bought like physical products, at a price that came with a healthy profit margin. But Blockbuster’s demise is just one more reminder that physical products are disappearing, and with them, the concept of ownership.

Instead, consumers value convenience and access. The idea that you have to buy a movie in order to watch it may soon be as forgotten as that DVD player in my basement.

Image courtesy of Flickr user  yapsnaps.