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The anticipated growth of internet-enabled TVs in the next four years would likely increase the popularity of digitally downloaded movies, TV shows and video games while dampening sales related to DVDs, blu-ray discs, video game discs, and other physical content formats, according to Retailer Daily.

While internet-enabled TVs are only expected to account for about 3% of TV sales this year, research firm Parks Associates estimates that they will represent 24% of TV sales by 2013. Companies including LG, Panasonic, Samsung, Sony and Toshiba now or reportedly plan to offer internet-enabled TVs, at a starting price point of around $1,500 USD.

The growth of internet-enabled TVs would particularly threaten retailers such as Blockbuster (BBI) and GameStop (NYSE:GME), which base most of their profits on sales of products related to physically-formatted digital entertainment content. Blockbuster makes movies available for download through its OnDemand service and has partnered with TiVo (NASDAQ:TIVO) and Samsung (OTC:SSNLF) to make OnDemand available through their playback devices. The retailer is also considering offering digital content downloads through its Blockbuster Express kiosks in the future.

GameStop has publicly stated it does not see downloaded video games as a threat to in-store sales until 2014, and even then GameStop research suggests the cost of downloading games may be too high for most consumers. The retailer currently offers online downloads of video games.

Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN), which do not rely on physical stores for their sales of digital entertainment content, have taken more active steps in the digital download market and should benefit from an expanded internet-enabled TV market. In March 2009, Netflix publicly announced it would increase focus on its digital content streaming service. The retailer does not break out streaming growth statistics but said the category was “gaining momentum.” Netflix has been expanding its library of online titles and enabling an increasing number of playback devices to accept its streaming content.

Amazon launched an online casual gaming portal in February 2009. In April 2009, Amazon added HD shows and movies through its Amazon Video On Demand service. Netflix and Blockbuster both offer digitally streamed HD content, as well.

A possible wild card in the impact internet-enabled TVs could have on retail is the explosive growth of free content streaming services, such as Hulu and YouTube. As reported by Marketing Vox, Nielsen Online data [pdf] indicates that Hulu has increased total year-over-year streams by 490%. In April 2008, Hulu had 63.2 million streams, compared to 373.3 million streams in April 2009. This places Hulu at number two among U.S. video web brands, and the fastest-growing brand in the top 10. YouTube comfortably maintained the top spot in April 2009 with 5.5 billion streams.

Hulu, which offers full-length, ad-supported streaming video of TV episodes and movies, is a more direct competitive threat to content streaming retailers than YouTube, which offers video snippets of up to 10 minutes in length and restricts the posting of copyrighted material. Hulu provides video in flash format and also offers some content in HD format. In addition to viewing Hulu online, users can view it on standard TV with MediaMall PlayOn software and playing device such as Playstation 3 or Xbox 360 console. However, unlike paid streaming content from retailers, Hulu’s content is only available for viewing, rather than download. In addition, Hulu’s movie catalog is relatively small, with about 500 films, and free Hulu content includes ads, unlike paid content.

The apparent reluctance of U.S. consumers to purchase blu-ray players may signal they are waiting to see what happens with direct download of entertainment content before committing to a new physical format. Growth of blu-ray sales during the first five years of the format’s availability significantly lag the growth of DVD sales during the first five years of the DVD format.

DVD players were introduced to the U.S. market in 1997 and blu-ray players were introduced to the U.S. market in 2003. Using 2008, the last year with complete blu-ray sales figures, as a comparison point, the year 2002 corresponds to the point DVD players had been on the market for the same amount of time, five years.

Blu-Ray vs. DVD

According to the Consumer Electronics Association, in 2002, 43 million DVD players had been sold in the U.S. In 2008, Adams Media Research estimates that 3.1 million blu-ray players had been sold in the U.S. Even adding in sales of blu-ray-compatible Sony (NYSE:SNE) Playstation 3 consoles, which Adams Media Research estimates totaled 6.1 million units by the end of 2008, and there is clearly a huge discrepancy in adoption rates. Factor in sales of the DVD-compatible Playstation 2 console, which the BBC estimates totaled 50 million units worldwide by the end of 2002, with most sales in North America, and the discrepancy becomes far more severe.

According to USA Weekend, several major TV manufacturers already have or will soon have internet-enabled TVs on the market.

Source: Internet-Enabled TVs Threaten DVDs, Physical Formats