The Causal Effect of Subscription Video Streaming on DVD Sales: Evidence from a Natural Experiment
37 Pages Posted: 13 Jan 2017 Last revised: 16 Jul 2018
Date Written: July 1, 2018
Subscription-based video streaming has recently become the main revenue driver in the home entertainment industry. Whether and how it affects the sales of physical media, which was previously the industry’s largest revenue source for decades, is still not well understood. We answer this question using a natural experiment that occurred on October 1, 2015 when the content owner Epix switched its streaming partner from Netflix to Hulu. This event created an exogenous shock that significantly reduced the streaming availability of Epix’s content because of the difference in the market shares of the two streaming service providers at the time. This occurrence allows us to investigate the causal effect of subscription streaming on physical DVD sales. Our difference-in-differences analysis shows that the decline in the streaming availability of Epix’s content caused an increase of 34.31% in their monthly DVD sales during the 15 months after the event. We also find that the cannibalization between subscription streaming and physical sales is much stronger for more recent titles. Finally, we introduce a simple method for pricing streaming content licenses based on the idea that the revenue generated from streaming content licenses should at least compensate for the loss in physical sales.
Keywords: subscription streaming, DVD sales, natural experiment, difference-in-differences, motion picture industry
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