How many DVDs do you need?

At breakfast this morning with Nabeel Hyatt, a sharp young entrepreneur from Boston, we wound up talking about a little research study we'd like to conduct: at what point does consumer DVD purchasing slow down?

I'd love it if you'd post a comment on some of these questions: is your DVD library growing at the same pace it was when you first got your DVD player? Did it start slowing after you'd bought 10 DVDs, or 50, or 100? I wonder if there isn't some point where the average consumer feels like she owns enough DVDs, and there has to be a pretty compelling reason to buy more.

I don't know that anyone has done a legitimate study of DVD purchasing habits, in terms of how they change the longer someone has owned a DVD player and the larger their collection of DVDs has grown; instead, we can look at overall sales growth, which is enlightening, but in a different way.

Some recent clips about the slow-down in DVD sales:

- BusinessWeek cites research from Wall Street analyst Tom Wolzien:

"`...U.S. consumer demand may be cooling faster than our models suggest," Bernstein wrote. For the moment, Bernstein is projecting that DVD sales will increase by 9% in 2005 and 4% in 2006. That compares to a 29% growth in 2004, according to PricewaterhouseCoopers." (Since 2000, DVD sales have been on a tear, growing at an annual rate of 66 percent, to $18 billion this year.)

Other analysts seem to think retailers are shipping back DVDs to the studios because they simply don't have enough shelf space.

- James Surowiecki suggests in the New Yorker that smaller films are more responsible for the continuing growth in DVD sales than big blockbusters, implying that people might gravitate towards niche-y interests when they're confronted with the vast choices (relative to the neighborhood multiplex) of a Wal-Mart or Best Buy:

"...[W]hile there’s some evidence that the performance of the biggest hits appears to be slumping (though only slightly), smaller movies are picking up the slack: over-all sales are still rising briskly. This year, they are on a pace to top twenty billion dollars."

"In the U.S., a big-budget epic like `Troy' may have earned nearly twice as much money at the box office as `Ray' did, but, once DVD sales are included, that ratio drops to just 1.2 to 1. And, once you take into account the difference in production and marketing costs, `Ray,' a far cheaper film to make, starts to look like a truly excellent investment."

If studios wind up relying more on DVD sales than box office, does that mean we'll get more 'Rays' and fewer 'Troys'? Here's hoping.

Surowiecki cites New Line Cinema as a good model for the studio of the future, releasing only a few "tent pole" pics like the "Lord of the Rings" trilogy, and focusing instead of small and medium-budget movies like "The Notebook" and "Harold and Kumar go to White Castle," which perform well as DVDs.

Surowiecki writes: "The rise of the DVD, then, should allow Hollywood to spend less and make more. The last couple of weeks have provided a perfect case in point. The Owen Wilson and Vince Vaughn vehicle `Wedding Crashers' did not seek out a mainstream audience (it’s rated `R') and was made relatively cheaply. It did very well at the box office and will do even better on DVD, to go by the performance of similar comedies, like `Old School' and `Dodgeball.` `The Island,' by contrast, cost about a hundred and twenty million to make, flopped at the box office, and, if it’s like most big-budget flops—`Hulk,' say—will struggle to do well on DVD."

People hear about loud, expensive flops fast. Smaller movies, on the other hand, have a chance to build positive word-of-mouth more slowly, both in theaters and following their DVD release.

- Edward Jay Epstein observes in Slate that television is even more profitable for studios than DVDs, since it costs money to manufacture, distribute, and market DVDs. Selling TV rights costs the studios very little, and the TV and cable networks that air the movies bear the burden of marketing.

Epstein writes: "Last year, the six major studios—Disney, Fox, Warner Bros., Paramount, Universal, Sony, and their subsidiaries—had total revenues of $7.4 billion from world box-office sales, $20.9 billion from world video sales, and $17.7 billion from world television licensing. Revenues, however, are what companies record, not what they earn. And, in the case of Hollywood, the revenues from movies, DVDs, and TV yield very different earnings."

Last year, Epstein says, studios actually lost money on box office: $2.2 billion on the $7.4 billion they took in. Video sales are profitable (in 2004, gross profit of $13.95 billion), but the real El Dorado, he says, is television:

"The studios only have to pay the residuals to the guilds and unions, which varies between movies and TV and average roughly 10 percent. The studios get to keep the other 90 percent. In 2004, this amounted to slightly more than $15.9 billion, making it the studios' single-richest source of profits."

"The 2004 MPA Consolidated Sales Report—another confidential document—shows that the six studios' revenues from television licensing went from $6.8 billion in 1994 to $17.7 billion in 2004—a nearly $11 billion increase."

Epstein is the author of The Big Picture: The New Logic of Money and Power in Hollywood.

I wonder, with TV proving so profitable, whether it will lead studios into other "virtual" distribution businesses, where there's no physical product, like Internet downloads, video-on-demand, and digital cinema?