Netflix is ‘Killing’ DVD Sales, Research Finds

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Netflix has rapidly become the go-to destination for many movie and TV fans. The service is bringing in billions for copyright holders, but it also has a downside. New research shows that the availability of content on Netflix can severely hurt physical disc sales, which traditionally have been the industry's largest revenue source.

netflix-logoWe’re all familiar with the claims that piracy is “killing” the movie industry, but legal alternatives are in constant competition as well.

Over the past decade, TV and movie companies have taken part in a massive ‘experiment’ in which they’ve had to reinvent their business models, adapting to rapidly changing demands from consumers.

In part responding to piracy, the movie industry started offering their own online video download options, and with bandwidth becoming cheaper and more readily available, streaming services such as Netflix soon followed.

However, having more legal options available doesn’t automatically mean that more money is rolling in. The next challenge is to set them up in a way that doesn’t cannibalize existing products while optimizing long-term revenue.

For many years disc sales have been the prime revenue source for the movie industry, bringing in billions of dollars a year in the U.S. alone. Netflix’s streaming service is a direct competitor to these sales, but to what effect?

A new study published by researchers from Hong Kong universities provides some empirical evidence on this issue. Through a natural experiment, they looked at the interplay between Netflix availability and DVD sales in the United States.

The experiment took place when the Epix entertainment network, which distributes movies and TV-shows from major studios including Paramount and Lionsgate, left Netflix for Hulu in 2015.

Since Hulu has a much smaller market share, these videos no longer reached a large part of the audience. At least not by default. The researchers used difference to examine the effect on DVD sales, while controlling for various other variables.

The results, published in a paper this week, show that DVD sales increased significantly after the content was taken off Netflix, almost by a quarter.

“Our difference-in-difference analyses show that the decline in the streaming availability of Epix’s content leads to a 24.7% increase in their DVD sales in the three months after the event,” the paper reads.

“Our results validate the industry’s concern that video streaming services displace physical DVD sales.”

Of course, this doesn’t mean that all studios should pull their content from Netflix. It does show, however, that there are a lot of variables in play that require careful assessment from a business point of view.

For example, it appears that percentage-wise the bump in DVD sales is the largest for new movies and movies that did better in theatres.

“In addition, we find that the cannibalization between two media is stronger for DVDs released more recently and for movies with better box office performances,” the researchers note.

This may also be one of the prime reasons why most recent releases are not on Netflix, and why the most popular movies of the past decade are unavailable as well. It’s not to annoy consumers, but to maximize profits.

The research above has its limitations. It only focused on DVD sales and not on other physical and digital revenue sources, for example. That said, the present data clearly suggests that content owners might be wise to keep titles off Netflix for a while, especially the blockbusters. Similarly, it affirms that there’s little harm in putting their older back catalogs on the streaming service.

Of course, this strategy will also keep piracy intact, which plays a role as well. However, that doesn’t necessarily have to be an oversight. It might also be a calculated risk, as lowering piracy might also lower legal revenues through other sales channels.

It might take a few extra years and many more experiments before we truly know what works and what doesn’t. And by then the rules of the game will have probably changed again.

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