SIGNALS

Suppose you had a perfectly fine bucket. As you poured water into your bucket, you marveled at the way it perfectly held the water. Then one day a miscreant drilled a hole in your bucket, and put his own bucket under yours. No matter how fast you pour water into your bucket, it inevitably streams out the bottom. To make it even more frustrating, the hole just keeps getting bigger and bigger. All of which brings us to sales of DVD and Blu-ray.

Once upon a time, there was no hole in the DVD/Blu-ray bucket. The water level of the sales just kept rising. Then streaming appeared as a tiny hole in the bucket. The water level in the DVD/Blu-ray bucket still rose, but not as fast. Then the hole started getting seriously big. The water level started dropping. Sales of DVD/Blu-ray have been steadily falling for several years and in 2016, for the first time, streaming revenue surpassed (by almost $1 billion) disc revenue.

Unsurprisingly, streaming directly and negatively impacts disc sales. For example, when Epix (a TV and movie distributor) switched its streams from Netflix to Hulu, which is much smaller than Netflix, their disc sales immediately jumped by 25%. Clearly, streaming is the reason why disc sales are dropping.

Sony recently wrote down almost a billion dollars of its movie business value, blaming the loss in part on slowing movie disc sales.

That's not all bad news for content owners because they get paid either way. But balancing the two revenues from disc sales and stream licensing can be tricky. Sony recently wrote down almost a billion dollars of its movie business value, blaming the loss in part on slowing movie disc sales, and projecting its further future decline. At least in the case of Sony, the revenue from streaming is certainly increasing, but apparently not nearly enough to replace lost disc revenue.

Of course, the principle that underlies the whole bucket thing is bandwidth. When bandwidth was expensive and thus small, the water level was pretty safe because the hole was small. It was when streaming bandwidth increased that the bucket really started leaking. But discs are also using bandwidth to their advantage. Hence there is at least one bright spot for Blu-ray.

In particular, sales of Ultra HD Blu-ray are increasing; 110 Ultra HD titles were available at the end of 2106, and 20 million discs were sold; another 250 titles are scheduled for release in 2017. Unit sales of Ultra HD players was a modest 300,000 in 2016, but this is three times the number of Blu-ray players at the same time as the original Blu-ray launch. In contrast, streaming has a tough time meeting the Ultra HD bandwidth requirement. Realistically, you might need 25 Mbps to stream Ultra HD quality, but the average U.S. home reliably has about 15 Mbps available, barely adequate for plain old HD. For as long as that bandwidth advantage exists, Blu-ray will be able to push back, albeit futilely, against the stream.

As sales of 4K televisions increase, consumers may be encouraged to buy Ultra HD Blu-ray players and discs to take advantage of their high-quality screens. Ultra HD gives hope, at least temporarily, to discs. But of course, in the long run, the trend line is down, and one day DVD and Blu-ray will kick the bucket.