Movie Industry slouches toward Digital Future.

The past few years have been bruising for the movie industry. After more than a decade of growth, the DVD began stalling in 2007. For the first time in its history, the industry saw its primary revenue source shrink without a new format coming along to take its place in the driver’s seat.

Logically, Blu-ray and digital formats should have stepped in to fill the revenue gap, but this has not happened. And at least two forecasts suggest it will be at least five years before these formats can lift Hollywood out of its doldrums.

A Strategy Analytics study forecasts that the expected drop in DVD revenues will be larger than any increases in the Blu-ray and download businesses. Worldwide revenue from sales and rentals of DVDs will plummet to $24.1 billion in 2013—less than half the 2009 figure of $50 billion, according to the study. Even a fivefold increase in Blu-ray revenue during that period won’t be enough to offset the DVD losses. The net result? Global DVD and Blu-ray revenues decreasing to $48.1 billion in 2013, from $55 billion in 2009.

A US forecast from Capgemini is hardly more optimistic. It predicts that US DVD sales volume will shrink to $3 billion in 2013, from $13.2 billion in 2008. During the same time span, Blu-ray sales will climb to $8.4 billion from $750 million, but even with this increase, net sales of packaged-goods titles (that is, DVD and Blu-ray) will drop to $16 billion from $20.6 billion.

Physical disk rentals will also decline, while video-on-demand (VOD) rentals and online rentals/downloads will each increase substantially. When all these revenue lines are factored in, the net result will be a business with no growth in five years.

Box office statistics are only slightly more favorable. US and Canada box office revenues reached $10.6 billion in 2009, climbing steadily from $7.5 billion in 2000, according to the Motion Picture Association of America (MPAA). That translates to a 41% increase from 2000 to 2009. However, on an inflation-adjusted basis, the increase was about 23%.

Further, box office increases were driven by higher ticket prices as opposed to genuine growth in movie attendance. Total US/Canada movie admissions have been flat for the past decade. In 2009, a total of 1.42 billion tickets were sold, compared with 1.39 billion in 2000, according to the MPAA. This means that, factoring in population growth, annual movie attendance actually declined on a per capita basis, from 4.7 admissions in 2000 to 4.3 in 2009.

So the movie industry is facing this bleak set of circumstances:

* A precipitous drop in the DVD business, which until recently was the top revenue driver for the industry

* Steady growth in the Blu-ray business, but not enough to offset the DVD losses

* Modest box-office revenue growth driven not by real increases in movie attendance but by price inflation

* Revenue growth from emerging technologies such as VOD and movie streaming and downloading, but a marginal contribution to the overall business from these media

Realizing that the best way to face these headwinds is to grow the digital side of their businesses, studios seem to be stepping up their licensing activity. Epix, a VOD provider that is owned by a joint venture between Paramount Pictures, MGM and Lions Gate, recently reached a licensing agreement with Netflix to stream movies from those studios on Netflix’s popular Watch Instantly service. The New York Times estimated the value of the deal at $900 million over five years.

Hulu, a joint venture between NBC/Universal, Disney, and Fox parent News Corp., is also exploring new revenue streams to supplement its core business, which is ad-supported online streaming of TV shows and movies. Hulu launched a paid-content service earlier this year and is rumored to be considering an initial public offering—no doubt a tactical play to raise the enormous amounts of cash that it needs to license premium content for its online service.

One factor working in the studios’ favor is consumer behavior. Online video viewership is growing steadily, and most of the growth is coming from full-length content such as episodic TV and movies. As more electronics companies launch internet-enabled TVs into the market, consumers will continue to integrate their online and home-viewing experiences, further enabling streaming and downloading services to flourish.

This may be the most promising trend for an industry whose growth depends on emerging technologies growing into the core of the business and generating the kind of revenue that DVDs produced in their heyday.

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