Shifting Consumer Behavior Changes the Game for Hollywood

by Tony D'Altorio

Shifting Consumer Behavior Changes the Game for Hollywood

by Tony D'Altorio, Investment U Research

Tuesday, February 15, 2011

Hollywood's traditional business model is in a state of flux.

That much is evident in the closed, and closing, stores of bankrupt Blockbuster (PINK: BLOAQ). The DVD rental chain used to pay movie studios hundreds of millions of dollars a year for their films. But that source of revenue is now gone with the wind thanks to Blockbuster's inability to adapt.

Other companies have stepped in to do what it refused to though. And they're doing rather well for themselves these days.

These companies offer different ways to rent or buy movies that Blockbuster couldn't or wouldn't. And now it's open season to see which company will go the distance.

The Netflix Model

Several different models have emerged over the last few years.

One such method involves DVD kiosk operators, such as the ones Redbox operates. That model allows consumers to rent from a limited group of DVDs and BluRay discs for a low fee.

Subscription services like Netflix (Nasdaq: NFLX) offer another choice. The company signed up over 20 million subscribers to its DVD-by-mail service

It also invested heavily in a digital streaming service. Last year, Netflix struck a 5-year deal worth $900 million for the right to stream movies from Paramount Pictures, Metro-Goldwyn-Mayer and Lions Gate Entertainment.

So at the click of a mouse, its customers can watch thousands of new and old movies, as well as TV programs. That service has grown rapidly enough to fuel a fourfold increase in its stock price in 2010.

That success has certainly attracted competitors.

Amazon (Nasdaq: AMZN), for one, now plans to offer its own digital film subscription service. It will bundle it with Amazon Prime, which gives customers unlimited free shipping on items for an initial fee.

Apple and Walmart Offer Digital Copies of Films to Buy or Rent

Still other companies from both the technology and retail sectors are offering digital copies of films to buy or rent. These businesses charge consumers for each individual transaction.

According to media research firm IHS Screen Digest, this was a $400 million business in 2010. And by 2015, it should double.

Naturally, both Apple (Nasdaq: AAPL) and Walmart (NYSE: WMT) want pieces of that pie.

So far, Apple gets an easy A when it comes to individual digital film transactions. IHS says it already controls 64.5% of them.

The company generates more money for Hollywood studios than many traditional cable television operators, including Time Warner Cable (NYSE: TWC). And it could easily eclipse Comcast (Nasdaq: CMCSA) as the largest provider of video-on-demand by 2014.

But Walmart is aggressively discounting its own digital films in an attempt to erode Apple's lead.

New on the scene, it only last year bought up the U.S. online film service Vudu. But it has quickly gained traction alongside Amazon, Sony ADR (NYSE: SNE) and Microsoft (Nasdaq: MSFT).

According to IHS, Microsoft is currently second to Apple in such transactions. It has a near 18% share, thanks in part to strong sales of its Xbox Kinect device.

But as 2010 drew to a close, Walmart moved up to compete for third place with Sony and Amazon.

That's quite impressive considering how its movie service didn't even register a blip when it bought Vudu last March. But it has used its influence and retail power to get Vudu installed on a range of new devices, including Sony's PlayStation 3.

And the Winner Is.....

Who will emerge from this clash of the titans? Whatever you do, don't bet against Apple.

It has maintained its dominance by creating new devices more suited to digital movie rentals than sales. For example, the new Apple TV has no hard disc for storing movie downloads.

That coincided with a shift in consumer behavior that might not make Hollywood very happy. Because the studios have traditionally generated higher profit margins selling DVDs than through rentals.

IHS data suggests digital rentals are fast becoming more popular than online purchases. In the U.S., transactions in the former rose over 50% in 2010 to 38 million, compared to 25 million in 2009.

This shifting consumer behavior has changed the game for Hollywood movie studios.

Long gone is the easy money that came from Blockbuster. And Apple has a good shot of coming out on top when all is said and done.

After all, it once again spotted a trend in its infancy and jumped in front to ride the wave all the way in.

Good investing,

Tony D'Altorio

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