Matthew Garrahan is the Los Angeles Correspondent for the Financial Times
Hollywood studios are facing a cash crunch amid a cooling of consumer interest in buying films online, hitting the industry's hopes that digital sales could eventually replace tumbling DVD revenues.
DVDs were Hollywood's most important revenue stream for most of the past decade, generating more than $20-billion a year. But sales of DVDs have collapsed, falling more than 25 per cent since 2006, leaving the studios desperate for new sources of revenue.
The industry had high expectations for digital film downloads but, after a promising start by the market leader, Apple's iTunes store, and the launch of a flurry of rival services, sales growth has slowed, according to a new report by IHS Screen Digest, a media research firm.
"The retail model that has been so successful with DVD is not going to replicate itself digitally," said Dan Cryan, the author of the report. "What we're seeing in the US and internationally is a huge surge in digital retail to start off with but then it flattens out quite quickly."
"If the studios are still expecting digital retail to save their bacon, they are in for a rude surprise."
The report is likely to make grim reading for studio executives pondering the future of an industry that had also pinned its hopes on 3D films, because cinema chains were able to charge a higher ticket price for films that used the format.
The proportion of audiences paying for 3D movies has slipped from its peak 18 months ago and general admissions are down year on year, despite a record $415-million international opening weekend this month from Transformers 3: Dark of the Moon.
Still, Hollywood is generally optimistic about digital film distribution, with many executives pinning their hopes on cloud-based services that would allow consumers to store digital copies of films remotely. Apple is working on such a service: it continues to be the world's largest digital film retailer, representing 55 per cent of all global online movie transactions, and in 2010 began selling films online in Japan, Spain, France and Italy. Sales of its iPad device have also helped online film consumption, according to IHS Screen Digest.
But more than 30 smaller services have stopped selling digital copies of films in countries including Canada, Germany, France, Italy. In the UK, LoveFilm and BT Vision Download store have stopped selling digital movies, although LoveFilm continues to rent titles.
The report finds more sustainable growth in digital movie rentals, which is a lower margin business for the studios than an outright digital sale. "Rental is much more solid and doesn't slow down nearly as quickly as retail," said Mr. Cryan.
In western Europe, digital rental transactions, also known as internet video on demand, rose from 3.2 million in 2009 to 8 million in 2010, representing more than 70 per cent of all online movie transactions and close to 50 per cent of digital film-related revenues in the region. But while digital rental is rapidly growing, total revenues are still tiny when compared with the hole left by falling DVD sales.
The studios are fighting battles on multiple fronts: they hoped Blu-ray discs, the successor to DVD, would eventually pick up the slack but, while sales of the new format are growing, they have not been enough to replace lost DVD income.