Are Netflix's Best Days Behind It?
Are Netflix's Best Days Behind It?

Google can tell consumer interest in DVDs is waning because of how people use its search engine. DVD-related search terms have been on the decline at Google since late 2008 while Netflix has constantly grown. And that decline in search terms mirrors declines in physical media revenues. And while decline does not equal death, the study should provide further impetus to develop streaming media businesses models that will eventually replace DVDs and CDs.

BTIG analyst Richard Greenfield describes the report in a blog post:

"The Google report (which includes the chart shown above-right) clearly illustrates that searches for DVD terms (DVDs, Movies on DVD, New DVD Releases and Top DVD Rentals) has fallen dramatically over the past couple of years, while searches for Netflix have shown dramatic growth (with Redbox growing as well, particularly over the past year). While the Hollywood studios continue to hope that they can create a robust electronic sell-through business, we believe consumers simply are not interested in owning content anymore. Content is so easy to access on-demand, why buy it, especially given the dramatic price differential between buying and renting?"

Greenfield adds that on-demand movies go well beyond Netflix and include Internet video-on-demand services from iTunes, Amazon, Blockbuster, Vudu and others. And he mentioned the iPad app for Sony's Crackel, an ad-supported, on-demand service with a very limited selection of movies.

So why anybody would buy a DVD? For the same reasons people still buy CDs: distribution (you can buy DVDs in all sorts of retail environments), permanence (you can watch what you buy and don't need to worry about licensing battles between owner and service provider), price (they have come down over the years), image and sound quality (to take advantage of ubiquitous home theater systems), familiarity and habit (some people are used to and prefer buying physical items) and portability (unlike a DVD, a video stream cannot be moved from the living room to the family minivan for a long road trip with the kids).

And it's worth nothing that Greenfield's post came the day before a massive service outage at Amazon Web Services. Neither Netflix nor Amazon's video on-demand services were affected, but it served as a reminder that accessing content from the cloud comes with a small degree of uncertainty.

So don't read Google's report as an obituary of physical product. The DVD is not yet dead - just as the CD is not yet dead - but the patient has definitely been admitted to the hospital. As Greenfield points out, U.S. DVD sales were $11 billion while the rental business was $7.8 billion - and most of that is from DVDs. Recall that Netflix ships DVDs to subscribers in addition to streaming on-demand video content. Movies to Go, a new DVD kiosk operation in the vein of Redbox, just launched in Central and Southern California.

But Google's report is further writing on the wall for physical product. The DVD has declined enough that content owners should give far greater attention to digital alternatives. As Union Square Ventures' Fred Wilson wrote at his blog the other day, "it is high time to invest to build the streaming market."