For the past few years the home video industry has been undergoing some traumatic changes. Although there was an almost seamless transition from the VHS to the DVD format, the shift to a high definition disc format has been stifled as a result of the format battle between HD and Blue-Ray. It’s also possible that consumers haven’t been convinced by a high-definition format will bring significant new benefits. In any case, it seems that the overall market has several challenges ahead.

Also while DVD sales grew strongly between 1999 and 2006, they have been dropped since then. During the same period DVD rentals grew at a slower rate but have plateaued around $7.5 billion during the past three years. Consumers are simply buying less discs, resulting in a greater importance for the rental segment.

This shift towards rentals may be led by the greater convenience of innovative subscription services like Netflix, and by lower priced rental options, as in the case of kiosks like Redbox that charge only $1 per rental. Since a kiosk requires a lower overhead cost, Redbox can offer rentals at $3 less than a video store. With its low price point and well placed distribution network of 18,000 kiosks, many at Wallmarts, Redbox has raised its share of the DVD rental market from 2.3% to 9% during the past year. This would be approximately half of the kiosk DVD business, based on figures from an NPD study. NPD also estimates that kiosks will grow to a 30% market share during 2010.

Unsurprisingly Redbox is seen as a threat both by Blockbuster, whose second quarter same store sales fell 18% this year, and by many production studios (although not Dreamworks) who see their DVD revenues flattening. In response Blockbuster is planning to open 10,000 kiosks over the next year and several movie studios have blocked Redbox from offering new releases for 28 days. This story is far from over since it remains to be seen how other factors like online video and VOD services will come into play but it does demonstrate that the DVD rental market while seemingly mature is far from settled.

CrunchBase Information on Redbox

Sometime on Wednesday February 11, Netflix passed the 10 million subscriber mark. This milestone was exceeded by how quickly the company reached it. During the past two months Netflix has grown by 600,000 subscribers; roughly double the rate of its previous quarter. At 1.2 million subscribers a quarter, Netflix would reach 14.5 million subscribers by the end of 2009, easily passing its projection of 11.3 million subscribers.

Many attribute the company’s quickening pace to the popularity of its video streaming service. Launched in 2007, it allows customers to watch video instantaneously on their PCs with broadband connections. This services was later expanded in 2008 to work via the Roku Player, Macs, Xbox 360s and Samsung Blu-Ray Disc players. Partnerships have also been anounced for 2009 via Tivo DVRs and Vizio and LG HDTVs. Equally vital to the device connectivity being offered with the service is the fact that broadband is now reaching roughly 60% of U.S. households.

Just as Netflix’s inital success was launched by the  popularity of the DVD platform this second stage in the company’s growth is being fueled by another rising adoption- broadband. Netflix is thus beginning a new s-curve.

There are other ways that Netflix is transforming. Using terminology from Chris Anderson’s book The Long Tail, Netflix is transforming from a ‘hybrid retailer,’ that is half digital and half bricks and mortar, to a ‘pure digital retailer,’ that has no physical inventory. Although the current streaming library is only about 10% of the total DVD library, this will surely expand in the future, thereby lowering operating costs as well as expanding customers options.

Personally, I believe this is just the beginning of a new trend in online video, which other companies like Google and Hulu are exploring, but which will come into light over the next two years as technologies further evolve and more deals get hashed out.