Netflix offers videos through the mail or streamed over the Web, a service… (Paul Sakuma, Associated…)
To paraphrase Apollo 13 astronaut Jack Swigert, "Hollywood, we have a problem."
The industry that was supposed to be immune to economic downturns looks like it's going to have some re-entry problems as the economy begins to recover.
Broad swaths of the entertainment business declined in 2010. DVD sales were off 13%. Music CD purchases plummeted 19%. Video game sales as well as concert and theater attendance also fell. Even the turnout for America's favorite pastimes — baseball and NASCAR — was down. And swift changes in technology will make it difficult for Hollywood to capture pre-recession levels of revenue.
So much for the value of escapism.
But perhaps most ominously, last summer the pay-television industry suffered an unprecedented net loss — for the first time — of customers, a yellow warning light that consumers may no longer regard cable TV as a must-have utility on par with electricity and phone service.
Cable and satellite subscriptions, DVD sales and video rentals long have been the profit pillars that supported Hollywood. Although media executives continue to boast "content is king," recently released year-end data suggest entertainment companies are vulnerable to the same disruptive forces that imperiled the music and newspaper industries.
"The studios and the content companies have become increasingly aware of the problem, but they seem collectively paralyzed about what to do about it," said Craig Moffett, an analyst with Sanford C. Bernstein & Co.
2010 now looks to be a watershed year in the confluence of two powerful trends.
The first of those forces, technology, is enabling people to get entertainment in cheaper and easier ways.
And the second, the anemic economy, is widening the gulf between the haves and the have-nots, making it tougher for some consumers to justify paying for cable or tossing a new DVD into the shopping cart.
"Right now it is a tale of two cities," Moffett said. "On the high end, people can't go up-market fast enough," he said, referring to affluent consumers who are buying the latest in mobile phones, portable tablets, or Internet-connected TV sets. "Then you have this other half of the country that is being largely ignored in this discussion."
The "other half" encompasses the lower 40% of American earners, who, after paying for food, housing and transportation, are left with just $100 a month to pay for healthcare, clothing, phone service — and entertainment, Moffett said.
One of them, Rebekah Atkinson, a Biola University graduate, found herself making necessary sacrifices after losing her job two years ago. She disconnected her mobile phone and sliced her food budget to make ends meet. The 30-year-old La Jolla resident ultimately found a job that paid 60% of her previous paycheck. A year later, her husband lost his job, precipitating another round of household cuts.
"The cable bills were starting to come up higher and higher. Before we knew it, we were paying $200 a month on the cable package," Atkinson said. "That's a car payment for some people. It had to go."
The most profound shift among consumers has been toward renting movies and away from buying them, which has enormous financial consequences for Hollywood.
Thanks to the proliferation of Redbox kiosks, which offer $1-a-night movie rentals, cost-conscious consumers have an inexpensive alternative to buying the DVD for $19.99 — representing a significant blow in revenue to the studios. Blu-ray high-definition discs were expected to pick up the slack, but consumers have been slow to embrace the more expensive format.
High-speed broadband access, now available to two-thirds of all homes, is also helping to cap the onetime home video gusher.
Services such as Netflix Inc. are able to pump a carousel of movies instantly into the home via the Internet for only $8 a month. The popularity of the company's streaming service has skyrocketed: 66% of Netflix's 17 million subscribers use it, eliminating the need to receive DVDs in the mail through Netflix's trademark red envelopes or to run out to the corner video store.
Studio revenue from home video rentals amounted to less than $1.7 billion in each of the last two years, compared with $2.97 billion in 2001 — more than a billion-dollar drop in less than a decade, according to market researcher Screen Digest.
"Studios get a double negative whammy from rental's strength," said Tom Adams, principal media analyst for Screen Digest. "Transactions are growing, but consumer spending is not, because they're getting 'em cheaper."
Meanwhile, theater attendance last year was off nearly 5% compared with 2009, as exhibitors charged more for movies in 3-D.
It's not difficult to see why movie viewers are staying home.
"There's no popcorn, no babysitter, no expensive soda. You just sit on the couch," said Michael Nathanson, media analyst with Nomura Securities International Inc.