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Digital Home Entertainment to Exceed Physical by 2016, Study Finds

Box office and digital revenue will climb steadily over the next five years, but rentals and sales of DVDs and other discs will fall sharply, according to a report released Wednesday by PwC.

In a sign that the future will be streamed and downloaded, the study projects that electronic home video revenue will exceed that of physical home video in 2016. Meanwhile DVDs are looking increasingly imperiled, with PwC estimating that physical home entertainment revenue will fall more than 28% from $12.2 billion last year to $8.7 billion in 2018.

By 2018, electronic home video, which includes subscription video-on-demand services and cable on-demand offerings, will be the main contributor to total filmed entertainment revenue, overtaking the box office by 2017, the study finds. In five years, revenues for the sector will double from $8.5 billion in 2014 to $17 billion by 2018.

Though the movie business is clearly an industry in flux, there are bright signs for one of its oldest distribution avenues, the theatrical exhibition industry. Ticket sales are projected to climb over the next five years, with domestic box office revenue climbing 15.9% from $10.8 billion to $12.5 billion. Meanwhile ticket prices will increase by less than a dollar from an average of $8.89 to $9.81 by 2018.

“The sector has been quite resilient,” said Cindy McKenzie, managing director of PwC’s entertainment, media and communications practice. “People still want to go to the movies, especially the big tentpole films.”

Even though DVD’s date with the dustbin is fast approaching, McKenzie said that the rise of Netflix, Hulu and other Internet video services are creating new revenue opportunities for movie companies. Further, the growth of electronic sales of movies, which topped $1 billion in revenue for the first time last year, also show some promise and signal consumers are willing to keep buying films as well as renting them.

The flush years of home entertainment may be gone, as revenues get carved up between studios and digital upstarts, but there are cost-savings opportunities.

“The amount of money that you’re making per transaction may not be the same, but it is cheaper to distribute things digitally,” McKenzie said.

The study’s methodology is opaque, with PwC reporting that it relied on historical data and proprietary data to come up with its models and forecasts.

PwC touches on two other silver bullets of interest — 3D and China — both of which were intended to restore the industry to health following DVD’s decline. China remains a tantalizing opportunity for studios looking to pump up international revenues. With a burgeoning population of moviegoers and extensive investment in theater construction, China is growing at a breakneck clip, with the box office climbing 15% last year to $3.13 billion. However, protectionist policies, rampant piracy and the growth of China’s own film industry could pose challenges for U.S. studios in their attempts to tap into the market, PwC concludes.

In the case of 3D, studios’ enthusiasm for the tinted specs appears to have diminished. Though total spending on 3D movies, video and video-on-demand hit $2.2 billion last year, studios scaled back the number of 3D films they released by 20% in 2012.

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