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DVD Industry Woes: The Other Shoe Drops 14%

Amid continued sluggish sales, now the rental business has dropped badly in the first quarter

The other shoe seems to have dropped for the moribund home-entertainment industry.

The previously buoyant rental side of the business fell 14 percent in the first quarter, according to trade organization the Digital Entertainment Group. Overall, revenues were down 8 percent, to $4.8 billion,

The retreat comes after a 5 percent overall drop in 2009 for the industry, which managed to reach the $20 billion mark for the year based largely on rentals.

DEG attributed the rental decline to retrenchment of brick-and-mortar outlets. Blockbuster is in the middle of a plan to trim nearly 30 percent of what was 4,350 outlets. Number-two operator Movie Gallery, meanwhile, cut 450 stores last year.

Adding to the poor first-quarter year-to-year comparison was Circuit City’s liquidation sale in early 2009, which resulted in significant sales for DVD and Blu-ray titles.

There were a few bright spots. Blu-ray sales spiked 74 percent in the first quarter. And digital distribution – which includes both downloads and video-on-demand transactions — grew 27 percent to $617 million.

“We are still facing a challenging environment but are very pleased to see positive indicators of stabilization in our overall business,” said Ron Sanders, president of Warner Home Video and the DEG.

Still, with high-definition Blu-ray still only accounting for a small portion of the overall revenue pie — percentage-wise, it’s in the low teens — the first-quarter data represents troubling signs for the studios.

Equally worrisome is the momentum of the less profitable portion of the rental market — low-cost vendors like Netflix and Redbox.

Last week, Fox became the latest studio to reach an agreement with Netflix, delaying supply of hot new-release titles to the leading online rental service until 28 days after their release in exchange for concessions on price and more catalog titles for streaming, including full seasons of Fox TV shows.

Warner Bros. and Universal also have agreements with Netflix, and Warner reached terms with kiosk renter Redbox in February that called for a 28-day delay, with other studios believed to be working on similar deals of their own.

Unfortunately, there is some risk to the studios’ efforts.

By coming down on Netflix and Redbox, they are hindering the two outlets responsible for the bulk of home-entertainment transactions.

Last year, even though overall revenues were down 5 percent, transactions – including DVD and Blu-ray sales and rentals, downloads, everything – increased nearly 3 percent to 3.5 billion.

With Redbox charging customers only $1 to rent discs out of its big red machines at the local quickie mart, the studios are hoping to redirect some of those transactions to the more profitable variety.

But of course, there are no guarantees.