DVD Rentals to Drop 50% in Five Years

DVD sales are already in the toilet. By 2017, DVD rentals might be as well.

Earlier this week, Coinstar (NASDAQ: CSTR) and Verizon (NYSE: VZ) sent shockwaves through the video rental community when the two corporations announced an unprecedented deal to launch a new streaming video service while continuing to push DVD rentals via more than 30,000 Redbox kiosks.

Inevitably, it has made us wonder if Coinstar could be the future of video rentals. But even if it is, the company might not want to over value its DVD business. In fact, Coinstar might need to prepare for a massive drop in DVD revenue.

“I think the fact that Coinstar has signed a streaming deal tells you how they feel about the long-term on DVDs,” Sterne Agee analyst Arvind Bhatia told Benzinga this morning. “I agree that DVDs have a long future. But I think if you're looking at five years from now, is it possible that the DVD [market] is half of what it is today? I think it's possible.”

Regardless, Bhatia believes that DVDs are still an important part of the industry. “But I think in the next five years, studios will find that more and more households and the bandwidth availability are moving toward streaming,” he said. “Coinstar will find itself in a good position given that it is starting out [in streaming] now. Coinstar is going to continue to get a lot of cash flow from the DVD business, and so will Netflix. But Coinstar is a growing business; Netflix is not. Both are going to be investing in the streaming business more and more.”

However, the world of streaming is “quite a bit different” from DVD rentals, Bhatia said, “with content guys controlling a lot more of how the market is going to evolve.”

“So I think it's going to be a very interesting market,” he said. “It will depend on who wants to spend the billion dollars that Netflix is spending.”

For the time being, however, Bhatia thinks that Coinstar is in a good position because it is the only company that is dedicated to the DVD business. “Nobody else is that focused,” he said, adding that he is not sure what will come of the streaming deal with Verizon. “I am not sure how big it's gonna be, but it's a start. It looks like it's going to have some potential.”

Netflix, on the other hand, is feeling the pain of new competition. “You saw the Amazon (NASDAQ: AMZN) deal this morning – the deal with Viacom (NYSE: VIA),” said Bhatia. “I think Netflix is feeling a lot of the pressure on this.”

Unfortunately, there is no going back from the mistakes that were made in 2011. “I think Netflix will be the first one to admit that maybe it moved on this too fast,” said Bhatia. “In hindsight, they should have waited a little bit before doing all of the things they did last year. But their focus has shifted, which I think is giving opportunities to other players. Coinstar is the biggest in the history of all this, clearly.”

Still, we shouldn't be too hard on Netflix. Or should we? “I think that they're trying to position themselves for the next 10 to 20 years,” said Bhatia. “And I think if you look at it in that light, their strategy makes more sense. But in the next one to two years, they're going to have to go through some pain. And I think that their pain is self-inflicted. They chose to go through this. We all know that.”

However, Bhatia believes that the only thing that changed is how quickly Netflix acted. “I think they would have moved in this direction inevitably,” he said. “So that's the only change.”

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