Recession-fueled penny-pinching is driving consumers to rent more movies and buy fewer.
New data released Thursday by the Digital Entertainment Group, an industry trade organization, showed that movie rental revenue rose 8% in the first half of the year -- a remarkable uptick for a business that many in Hollywood had thought peaked.
At the same time, sales of DVDs have taken a shellacking, falling 13.5% for the period.
The trade group, unlike in previous reports, did not disclose industry-wide revenue generated by DVD rentals and sales.
DVDs have been a cash cow for Hollywood in the last decade, providing the biggest chunk of movie revenue. Sales started slipping last year, however, proving a serious threat to studios' bottom lines. New forms of home entertainment such as high-definition Blu-ray discs and digital distribution over the Internet have grown but not enough to make up for the DVD slump.
Blu-ray sales rose a dramatic 91% to $408 million in the first half of the year, while Internet downloads and streaming combined with cable and satellite video-on-demand, which the trade group lumps together, grew 22% to $968 million.
The overall picture, however, was a negative one, as total home entertainment revenue fell 3.9% to $9.73 billion. That's a slight improvement over 2008, when home entertainment revenue declined 4.7%.
"This is exactly the same kind of transition that we saw when people went from VHS tapes to DVD," said Gerry Kaufhold, principal analyst for market researcher In-Stat. "People knew they were going to get a DVD player, so they stopped buying VHS tapes. There's the same sort of discontinuity" now.
The bad news for Hollywood is that the recession hit right in the middle of that transition, making it less likely that consumers will shell out $200 or more for a new Blu-ray player. Even when the economy improves, it remains to be seen how eagerly consumers will adopt the new format.
Studios will face a big challenge this coming holiday season in the fourth quarter, typically the biggest time of the year for DVDs sales. Blockbuster pictures such as "The Dark Knight" and "Twilight" have continued to sell well, meaning this summer's hits such as "Transformers: Revenge of the Fallen" might do the same.
But sales of movies that aren't big hits at the box office, as well as catalog titles, have been soft. In addition, available shelf space at Wal-Mart, Best Buy and other stores has been shrinking as stores focus on other categories such as video games.
Consumers are becoming more receptive to renting DVDs, particularly from Netflix, which saw its subscriber base increase 25% over the last year to 10.3 million, as well as the fast-growing DVD kiosk company Redbox, which rents movies for $1 per night.
That's a troubling trend for studios, because rentals generate smaller profits than purchases.
One way Hollywood is coping is by trying to take the focus off just how badly the DVD sales market is performing.
Although the group has regularly disclosed the value of the DVD sales in the past, DEG declined to do so this time.