Are you planning to give a DVD or Blu-ray disk to someone this holiday season? If not, you will be in good company. Looking at DEG numbers for Q3 home entertainment spending, gifting electronic movies is far less common than disks.
DEG home entertainment spending numbers for Q3 2016 show the move away from physical, toward digital is accelerating.
Disk rental market plummets
Disk sales continued to contract, falling 8.7% year-over-year (yoy) to just over $1B. However, disk rentals had one of the biggest yoy declines ever. Store rentals fell 22%, to $133M, and are on target to deliver just $500M in revenue this year. Ten years ago DVD rentals yield 40X more revenue, or $20B. In the past, kiosk rentals have held up well against the contrary trends in the business. Not so in the third quarter. Kiosk rental revenue fell 17%, to $325M. Disk subscription plans also continued to contract sharply, falling 16% to $135M.
Overall, the entire disk rental market looks likely to barely deliver $1B in 2016.
Digital market picks up the slack
Despite the sharp fall in physical disk revenue, home entertainment spending grew 3.8% yoy in the third quarter, to reach $4.2B. That means digital revenue is growing faster than physical revenue is declining.
Much of that growth is coming from the continued expansion of SVOD services. DEG reports a 24% increase in SVOD revenue in Q3, to reach $1.6B. Netflix is still responsible for much of this growth. Though the company only increased streaming subscribers in the US by just 10% yoy, US streaming revenue increased 22%. Much of that revenue increase was due to the end of grandfathering, as Netflix increased the subscription rates on existing subscribers.
As well, electronic movie sales and VOD rentals enjoyed meaningful growth. The former increased 9.8% and the latter 4.8%.
Do people give digital movies as gifts?
The holiday season has been a boon for physical media sales. Giving someone the latest episode in the Marvel or James Bond franchises has been a mainstay of the industry for years. Typically, spending on physical disks in Q4 is nearly double Q3 spending.
Digital movies just don’t seem to have the same cachet with consumers. There certainly is a small bump in sales in the fourth quarter, but nothing like the boost in disk sales. Q4 2015 electronic sell thru revenue was only 16% higher than Q3 2015. And it appears virtually no one is giving the gift of Netflix for the holidays. There is typically no seasonal bump at all in SVOD revenue in the fourth quarter.
Digital now dominates
61% of home entertainment spending came from digital products in the third quarter, and 39% from physical. This is a big change from last quarter, when digital revenue was 57% of spending. Two years ago, digital represented 47% of home entertainment spending.
And 2016 looks like it will be the first year ever that digital spending will be higher than physical spending in every quarter. Even in the lucrative fourth quarter, nScreenMedia is forecasting physical spending will be $2.6B and digital $2.8B.
Why it matters
The transition to the use of digital media in the home is accelerating.
While disk sales continue to decline at a brisk clip, the disk rental market is collapsing. It is one-twentieth the size it was 10 years ago.
Home entertainment spending grew modestly in Q3, thanks mostly to continued strong growth in SVOD spending.