Last Thursday night, a Bloomberg headline, "Online Film Viewing in U.S. to Top Discs in 2012, IHS Says," caught my eye. The article reported that media research firm IHS Screen Digest is forecasting that "legal online viewings of films will more than double to 3.4 billion this year from 1.4 billion in 2011." Meanwhile IHS is forecasting that DVD/Blu-ray viewing will decline from 2.6 billion viewings in 2011 to 2.4 billion in 2012.
Over the weekend, as I kept seeing other publications essentially reiterating the Bloomberg story, I started wondering how IHS arrived at its forecast, the details of which I haven't seen. Doing a little back of the envelope analysis, as I show below, it's awfully hard to see how streaming movies in the U.S. will more than double from last year, unless some very unexpected things happen with Netflix (IHS notes that 94% of streaming movie volume was subscription-based, and of course, Netflix massively dominates this segment). Rather, it seems likely DVD/Blu-ray will hold on for another year.
If you believe Netflix will continue to dominate in subscriptions in 2012, as I do, then to drive the doubling of streaming movie volume would require Netflix to dramatically add new users and to have their users skew their streaming usage to movies. I don't think either of those things will happen in 2012.
First the usage pattern. Netflix reported that in Q4, its members streamed 2 billion hours of content (note: though this is global, it's primarily U.S.). At the NATPE conference in January, Netflix content head Ted Sarandos told me that 60% of those hours were of TV shows, not movies, and that this percentage would be rising this year. That makes sense for a number of reasons: Netflix's Starz deal, which has been Netflix's primary source of recently-released movies, is now over, Netflix has aggressively built its catalog of TV shows available on streaming, and it's investing in original serialized (i.e. TV-like) content. Net it all out, and it's probably fair to assume Netflix usage in 2012 will increase to 70% TV shows and 30% movies.
And how about the growth of Netflix's U.S. subscriber base in 2012? This is still an open question. At $8/mo, Netflix still has a strong streaming value proposition. But for a lot of reasons, it's unlikely to see the kind of torrential subscriber growth it experienced from Q1 '10 to Q2 '11. Let's assume U.S. subscribers grow by 25% in 2012- virtually all of which will be streaming. And assume that time spent with Netflix grows a bit as well. So maybe by year end 2012, streaming hours/quarter is up to 3 billion hours. So using a straight-line method for 2012 would imply an average of 2.5 billion hours/quarter or 10 billion hours for all of 2012.
As such, the equation would be 10 billion hours for 2012 x 30% allocated for movies divided by 2 hours length per average movie = 1.5 billion movies watched via Netflix in 2012. And if Netflix accounts for say 85% of the legal movie streaming market in the U.S., then total movies streamed would be approximately 1.8 billion in 2012. That's still more than the 1.4 billion IHS estimates for 2011, but far less than the 3.4 billion it's forecasting for 2012. Again, maybe there's some major variable in their forecast that I don't understand that accounts for so much growth, but I'm not sure what that could be.
As I've said in the past, DVDs and Blu-ray are still very much a part of the current landscape. And it's possible they could even experience a bit of a resurgence in 2012 if the major Hollywood studios' efforts to drive UltraViolet from disc sales is successful. All of this is a reminder that despite consumers' interest in streaming, the shift away from discs is a very, very long-term proposition. Studios' business strategies will be a big influence on how the market evolves.