If Web movie views double, Netflix -- not content -- is king

IHS Screen Digest predicts more movies will be viewed online than via DVD. That's due in large part to the popularity of Netflix, which owns a significant percentage of that growing market, the research firm says.

Greg Sandoval Former Staff writer
Greg Sandoval covers media and digital entertainment for CNET News. Based in New York, Sandoval is a former reporter for The Washington Post and the Los Angeles Times. E-mail Greg, or follow him on Twitter at @sandoCNET.
Greg Sandoval
3 min read
Greg Sandoval/CNET

Netflix executives should be whooping it up.

IHS Screen Digest predicts more movie viewing will occur online rather than with DVDs or Blu-ray discs this year. Not only did the research firm say that Netflix's popularity helped fuel Internet film consumption, but it added that the company owns a significant percentage of that growing market.

If the prediction proves true, Netflix should see its share of growth this year. Also, a world where Internet-delivery is king means the company -- the Web's top video-rental service -- should be in a stronger position to negotiate content licenses.

IHS forecasts online viewings will more than double to 3.4 billion this year, up from 1.4 billion in 2011. The number of viewings from DVD and Blu-ray will fall from 2.6 billion to 2.4 billion. According to IHS, while digital purchases only accounted for 1.3 percent of all movie consumption in 2011, Netflix, Hulu, and Amazon Prime accounted for a combined 94 percent.

Since Hulu and Amazon Prime are much smaller, Netflix owns most of that market. If Netflix can hold on to market share -- with a streaming-video library filled with little known or dated titles -- what would that say about the strength of the service?

IHS' report is unlikely to be welcomed news in Hollywood.

The six major studios don't want any distributor to become too powerful. For a year now, the studios have tried to rein in Netflix's growth by choking off the company's supply of movies. In the past, Hollywood tried to prevent CEO Reed Hastings from getting his hands on discs, but that failed because of the First Sale doctrine. That's the limitation on copyright law that enabled the company to legally purchase discs from other retailers or wholesalers and lawfully rent them to subscribers without limitation.

Few, if any, legal end-runs exist when it comes to streaming video. To stream movies over the Web, Netflix in most cases needs to obtain licenses from the studios. For a while now, it seemed the only hand Hasting had was to get control of the audience. The company now has more than 24 million subscribers, and as that number increases, the harder it gets for the studios to lock the service out.

Let's face facts: the Blockbuster era is long dead. Netflix is now the company synonymous with home video.

For the studios, however, the prospects of a video landscape dominated by Netflix is dark and gloomy. In terms of studio profits, subscription services aren't as lucrative as DVD sales. Web stores and services will account for 57 percent of movie consumption but only 12 percent of revenue, IHS reported.

Netflix CEO Reed Hastings

Don't expect the studios to go quietly. Executives from three different film studios have told me in recent weeks there is still too much money in DVDs to abandon the market in favor of Web distribution. The strategy for some now is to sex up discs as much as possible, "stuff" all kinds of extras and special offers into that DVD package, one source told me.

UltraViolet, the cloud platform created with the help of five of the major studios, has become an attempt to boost the value of owning DVDs and Blu-ray discs. Wal-Mart stores recently signed on with UV, a platform that enables film fans to access their movies from the Web. To do that, customers of the big-box retailer must bring their qualifying discs into a Wal-Mart store and pay a fee for access to an online locker where their movies are stored.

The film-industry sources I spoke with told me these are necessary baby steps. Plenty of people around the country have never heard of the cloud or streaming video. A large number of consumers still want discs. One studio executive said that some industry leaders believe tying discs to digital lockers helps the studios keep a still-lucrative revenue stream flowing while also preparing the way for a possible replacement.

He told me it was just sound business.

That may be true but there's risk. What happens if Netflix continues to grow and the strategy of starving the service of content isn't effective? By shackling online film services to DVD purchases or exchanges, the studios risk hobbling them.

This could mean these services stand even less of a chance of competing against Netflix.