Online Video Set to Surpass Physical Media

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The inevitable is about to happen, perhaps sooner than anyone thought. The DVD format, first introduced in 1996, and its 2003 successor Blu-ray, as well as legacy VHS, are about to be passed in viewing volume by online paid video downloads. The legal, paid consumption of movies online in the United States will reach 3.4 billion views or transactions in 2012, approximately 1 billion units higher than the 2.4 billion for physical video for this year, according to information and analytics provider IHS.

Online sales are defined as electronic sell-through (EST, with a one-time fee to download and store locally), Internet video on demand (iVOD, one-time streaming) and subscription video on demand (SVOD, repeat streaming by subscription). Just last year, physical video still had the leading share of the market, with 2.6 billion views or transactions, compared to 1.4 billion for online. Although it is declining, physical video this year will still command more viewing time from Americans, who will spend an estimated 4.3 billion hours on DVDs and Blu-ray discs, compared to 3.2 billion hours for movies online. But it’s amazing how close those numbers are, as well.

“The year 2012 will be the final nail to the coffin on the old idea that consumers won’t accept premium content distribution over the Internet,” says IHS senior principal analyst Dan Cryan. “In fact, the growth in online consumption is part of a broader trend that has seen the total number of movies consumed from services that are traditionally considered ‘home entertainment’ grow by 40 percent between 2007 and 2011, even as the number of movies viewed on physical formats has declined.”

Apparently, says IHS, the surge in consumption of online video is due to the rise of flat-rate subscription services such as Netflix, Amazon Prime and Hulu, which offer customers unlimited on-demand movies for a fixed monthly or annual fee. The result is that subscriptions in 2011 accounted for 94 percent of all paid online movie consumption in the United States, compared to just 1.3 percent of units consumed that were bought on an ownership basis via electronic sell-through.

But although online sales will account for the majority of transactions this year, it is set to attract a far lower share of revenue in 2012, at $1.7 billion, measured against $11.1 billion derived from physical formats.

This is because consumers will pay an average of 51 cents for every movie consumed online, compared to $4.72 for physical video. The pattern will likely remain unchanged even by 2016, predicts IHS, with online accounting for 17 percent of revenue compared to 75 percent for physical video and pay-TV video on demand taking the remaining 8 percent.

When the Internet and audio CDs were still in their infancy, techno-pundits decried the absurdity of selling bits to consumers on physical media. We’re now seeing the inevitable – the ubiquity of Internet connectivity will all but obsolete physical media as a means for distributing content. (In a related development, note the struggles that the U.S. Postal Service is going through.) How long until DVD and Blu-ray become completely irrelevant?

As IHS’ Cryan points out, “almost nine years after the launch of the iTunes Store, CDs are still a vital part of the music business.” Netflix started streaming video over the Internet in 2007, and applying the same CD-longevity measure to digital video on disc would suggest the formats are still around in 2016. Any bets?

Aldo Cugnini is an analyst for Insight Media. Reach him at  aldo@insightmedia.info