For the past few years the home video market has been undergoing some traumatic changes. Although the industry had a strong transition from the VHS to the DVD format, it was stifled with the move to a high definition format, perhaps as a result of the format battle between HD and Blue-Ray, or perhaps because most consumers simply haven’t been convinced by the new format’s benefits. In any case, the overall market is experiencing a revenue plateau.

Also while DVD sales grew strongly between 1999 and 2006, they have been been dipping since then. During the same period DVD rentals grew at a slower rate but have plateaued at $7.5 billion during the past three years. While they are staying within the DVD format, consumers are simply buying discs less often, resulting in greater importance for the rental segment.

This shift towards rentals may be due to greater convenience, exemplified by innovative subscription services like Netflix, and lower price options, as in the case of kiosks like Redbox that charge only $1 per rental. Since a kiosk requires a lower overhead cost, Redbox can offer rentals at $3 less than a video store. With its low price point and well placed distribution network of 18,000 kiosks, many at Wallmarts, Redbox has raised its share of the DVD rental market from 2.3% to 9% during the past year. This would be approximately half of the kiosk DVD business, based on figures from an NPD study. NPD also estimates that kiosks will grow to a 30% market share during 2010.

Unsurprisingly Redbox is seen as a threat both by Blockbuster, whose second quarter same store sales fell 18% this year, and by many production studios (although not Dreamworks) who are worried by the aforementioned plateauing DVD revenues. In response Blockbuster is planning to open 10,000 kiosks over the next year and several movie studios have blocked Redbox from offering new releases for 28 days. This story is far from over since it remains to be seen how other factors like online video and other VOD services will come into play but it does demonstrate that the DVD rental market while somewhat mature is far from settled.