The DVD business once ruled Hollywood, financing a delightful surge in restored versions of classic films, making Blockbuster and then Netflix
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And then the business crashed. By 2013, a $20 billion home entertainment business driven mostly by DVD rentals and sales had slipped to about $13 billion in DVD/Blu-ray rentals and sales, according to Digital Entertainment Group, the industry trade organization.
Fast-forward a decade, and “sell-thru” of physical media, as the industry likes to call it, had fallen off the cliff, to about $1.5 billion in 2022, according to the DEG.
Netflix thinks DVDs are dead. This summer, it attracted a lot of attention when it killed off its DVD-by-mail service, the very thing that built the company. Netflix’s lingering customers even got to keep the discs they still had laying around, mementos of a different age and the source of a lot of free coverage for Netflix.
As a further kick in the pants, after the holidays, Best Buy
Not yet, says Bill Rouhana, who maintains there’s still a business in DVDs, at least for nimble companies trying to serve a substantial, if shrinking, audience.
Rouhana should know. He is chairman and CEO of Chicken Soup for the Soul Entertainment, which includes among its many assets 29,000 Redbox kiosks sprinkled across the United States, renting out actual DVDs to actual paying customers, including about 10 million active users in its customer loyalty program.
“Like everything else of this sort, the stories of (DVDs’) death have been greatly exaggerated,” Rouhana told me this week. “That’s the point really. These (media transitions) take a long time before they work their way through the system. There are still millions of DVD(-capable) players being sold. It still remains a great way for people to get first-run entertainment using the Redboxes. None of that changes just because somebody decided to stop selling or renting them.”
It’s not just harried moms renting a couple of kids movies for the weekend while leaving a Wal-Mart in a small Missouri town, though that’s part of the business. Broadband access, which makes streaming a reasonably enjoyable experience, is still so spottily distributed across the country that Congress set aside $50 billion to make it better. But Rouhana said it’s difficult to draw a demographic for typical users.
“What overperforms (demographically) is people who are looking to save money,” Rouhana said. “It turns out maybe the elite don’t know this, but there are value-conscious people at all ages.”
Many can’t afford the fast-rising cost of streaming, as Disney+, Netflix, Apple TV+ and most of their competitors have been aggressively hiking subscription prices. To get all the services, and thus access to most first-run movies, would cost north of $100 a month. That’s a lot of $2 Redbox rentals.
“It’s really the value-conscious consumer who uses us,” Rouhana said. “The key word is ‘alternative,’ not complete replacements. For some it’s better to do DVD. The consumers make their choices, so long as you give them the alternatives.”
A key difference between what Redbox offers and what Netflix and Best Buy have provided is depth of catalog. The latter two both had to stock hundreds or even thousands of titles to appeal to all tastes. A Redbox kiosk will offer just 200 titles, with first-run films making up around 80 percent of the business, Rouhana said. There’s still a business there.
To be fair, a lot of investors don’t agree with Rouhana. When Redbox revenues underperformed, Chicken Soup shares caught a bad cold, plummeting to less than $1 apiece, where they remain. Rouhana said earlier this fall the company is examining strategic alternatives for its assets.
Redbox was further dogged by bad luck, thanks to the impacts on feature film production and distribution caused by the pandemic and then this year’s two strikes by the actor and writer unions.
That’s hammered the release schedules for Hollywood movies over the past four years, though 10 months into 2023, this year’s theater business has already topped 2022’s full-year total gross with $7.6 billion, according to BoxOfficeMojo. But the number of releases so far, 469, still lags far behind the 910 released in 2019, or the 993 in 2018.
That slowing of supply hasn’t helped Redbox’s reliance on first-run titles, an approach that makes since when Hollywood issues a steady stream of attractive options, typically bolstered massive theatrical marketing campaigns that hype consumer recognition for months after.
Now, Rouhana said, people are getting out of the habit of watching. That likely will improve when the studios get back to something like a “normal” pipeline of notable movies, whenever that may be.
“Every time we get a new movie, there’s an immediate bump,” Rouhana said.
All of which is to say that DVD isn’t dead yet, but it’s now in the part of the media cycle where smart companies must manage decline, like what’s happened to the newspaper business over the past three decades.
Walmart, for instance, is still selling plenty of DVDs, but it has shrunk the floor space devoted to physical media. Chicken Soup has to think about ways to manage its kiosk business amid the decline too.
“You have to be focused and thoughtful,” Rouhana said. “There are still rational ways to make a lot of money, harvesting a cash flow that continues. Okay, (that revenue source) gets smaller. Find other ways to use those kiosks.”
For now, that means expanding the network of screens atop the kiosks that can be used for high-margin out-of-home advertising. About 4,000 of the company’s kiosks already have those screens, Rouhana said, with the rest expected to get them in coming months.
The company also makes money with its service and maintenance team, which provides similar services to other companies with kiosk networks. It’s all part of bigger adjustments Rouhana and Chicken Soup are trying to make during a difficult period in the entertainment business.
“It’s hard to make money in the media business right now,” Rouhana said. “You need to have multiple places where you engage the consumer but not at cost structures that are out of control. The reality is the business is still going to struggle. There’s still too many programming costs.”
A “dramatic reduction” in film and TV production, somewhat masked by the strikes, will become readily apparent once actors join the writers in getting back to work. There will be fewer, more high-profile shows. Even FAST (linear, free, ad-supported) channels, which ballooned to more than 4,000 across various streaming platforms, are due for a serious cull because of overpopulation.
And there will likely be a lot fewer subscription streaming services, through acquisitions or possibly just partnerships that are less likely to invite regulatory roadblocks and tax consequences.
“There’s going to be a rollup of these services,” Rouhana said. “Companies are going to have to share the costs. They need a little more time for Wall Street to get used to the idea, but you can’t argue with the economics.”
The consolidation may even hit the four ad-supported streaming services that Chicken Soup runs along with its many FAST linear channels, transactional video-on-demand, original programming, and other offerings.
“What this means for our company is less money going into content,” Rouhana said. “We’ve already cut content costs. We need to spend less on (existing) content. We need to supplement it occasionally. And we have to combine our costs in our tech area. That might mean we combine Crackle, Chicken Soup for the Soul, PopcornFlix, and Redbox. Maybe we just need two networks.”
Meanwhile, the company will continue managing the DVD business for the era it faces now, one of decline, but not extinction. As Monty Python & The Holy Grail put it in a famous bit, it’s not dead yet.
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