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Accelerating rentals prop up shrinking home entertainment biz in third quarter

October 19, 2009 | 12:25 pm

RedboxKioskIn what passes for good news these days, Hollywood's biggest and most profitable business shrank a little slower in the third quarter than in the first half of the year, thanks entirely to rentals.

Overall home-entertainment revenue, including DVD and Blu-ray sales, rentals, video-on-demand and digital downloads and streaming, fell 3.2% in the third quarter to $4 billion, reflecting an ongoing decline driven by the economic downturn and plummeting consumer interest in buying movies and TV shows on shiny discs.

The Digital Entertainment Group, an industry trade association, reported that rental revenue rose 9.9% in the three-month period ending Sept. 30, even faster than the 8.3% growth it experienced in the first half of the year.

Every other sector of the home entertainment business, including DVD sales, high definition Blu-ray disc sales and digital transactions, grew slower or shrank faster than during the first half of 2009.

In its news release with the data, DEG attempted to highlight sales of Blu-ray disc sales, which rose an impressive 66.3% in the quarter. That's a substantial slowdown, however, from the category's 91% growth in the first half of the year.

Studios love Blu-ray disc sales more than any other type of transaction because profit margins are the highest. Although they're growing fast, Blu-ray sales in the quarter were $161 million, just 4% of the home-entertainment industry's $4 billion total. Industry hopes that Blu-ray could make up for plummeting sales of standard-definition DVDs have not been realized.

Total disc sales, including standard DVDs and Blu-ray, plunged 13.9%, a slightly bigger drop than the 13.5% decline in the first six months of 2009. In an effort to downplay just how dismal revenue from DVD sales has become, DEG didn't disclose total revenue for the category.

[Update (5:45 PM): According to Rentrak Corp., which tracks industry sales and provides data to DEG, total DVD and Blu-ray sales were $1.98 billion last quarter, while rental revenue was $1.57 billion.]

Digital distribution, which includes online downloads and streaming as well as cable video-on-demand, rose 18%, down slightly from 21% in the first six months. It remains about 10% of the total industry with $420 million worth of revenue.

The accelerating growth of rentals appears to be driven almost entirely by fast-growing mail subscription service Netflix and $1 per night kiosk rental company Redbox. Blockbuster, the nation's biggest physical DVD rental company, saw its revenue plunge by 22% in the quarter ended June 30.

However, the profit margins on rentals are substantially lower than for sales. That's why three studios -- Twentieth Century Fox, Universal Pictures and Warner Bros. -- are attempting to block Redbox from offering their movies until several weeks after they go on sale. Warner Bros. is also trying to do the same to Netflix.

The fourth quarter is always the biggest by far for home-entertainment revenue, as that's when most summer tentpole films, such as "Harry Potter and the Half-Blood Prince" and "Transformers: Revenge of the Fallen," are released on DVD. Many studios this year are taking aggressive steps this year to push consumers toward buying discs, particularly Blu-ray, instead of renting them.

Update (5:35 PM): Fox, Warner Bros. and Universal have all instructed their distributors not to provide DVDs to Redbox until several weeks after they go on sale at retail outlets. However, a Fox spokesman noted that that his studio did offer potential terms to Redbox for it to rent movies the same day they go on sale, but the two companies were unable to reach a deal.

--Ben Fritz

Photo: A Redbox kiosk in San Rafael, Calif. Credit: Justin Sullivan, Getty Images.

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