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Analyst: Netflix, Kiosks Continue to Undermine Sellthrough

11 Nov, 2010 By: Erik Gruenwedel

Despite industry attempts to bolster faltering sellthrough through 28-day rental delays, Netflix and kiosk vendors such as Redbox and Blockbuster Express contributed to an 11% drop in third-quarter disc sales, an analyst said.

Richard Greenfield, with BTIG Research in New York, said sales through the first nine months of the year dropped 7% — a decline softened he said by the strong retail performance of Avatar.

“In fact, we believe Avatar meaningfully skews the overall consumer spending on home entertainment for the nine-months, which is quite concerning when thinking about [the fourth quarter] and 2011,” Greenfield wrote in a post.

Netflix's burgeoning subscriber growth continues to drive ardent home entertainment consumers away from sellthrough (notably TV DVD and family-friendly content), while Redbox’s ubiquitous presence in front of big=box disc retailers such as Walmart negatively impacts the casual consumer, according to Greenfield.

Indeed, nine-month sales of DVD movies dropped 16.4% to $5.5 billion from $6.6 billion during the same period last year, offset by an 80% increase in Blu-ray Disc sales to $1 billion (from $556 million), and 37% increase in electronic sales to $432 million from $315 million.

By comparison, by-mail disc rentals (Netflix) increased 27.8% to $1.6 billion from $1.2 billion, and kiosks increased 55% to $927 million from $598 million. Brick-and-mortar disc rentals dropped 31.4% to $1.9 billion from $2.8 billion.

Transactional video-on-demand (VOD), which studios and multiservice operators have aggressively marketed as a virtual alternative to the video store, increased 20% to $1.2 billion from $1 billion last year.

Greenfield said 28-day embargoes imposed upon new releases by Warner Home Video, 20th Century Fox Home Entertainment and Universal Studios Home Entertainment have done little more than temporarily staunch the bleeding and confuse the consumer.

“The movie industry has fragmented to the point that the consumer does not understand it, meaning while Avatar may not [have been] available day-and-date at Netflix and Redbox, but Toy Story 3 and Alice and Wonderland were,” Greenfield wrote.

The analyst said rumblings about lengthening the retail window could be undermined by a disappointing theatrical third quarter (down 5%), which he said portends “an ominous” sign entering the “heart” of the home entertainment holiday selling season.

That sign was perhaps underscored by Foothill Ranch, Calif. resident Don Barnes, who exited a busy Blockbuster store last weekend with four previously-viewed DVD movies purchased for $20.

"I don't go to the movie theater," he said.

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