While the overall home video market in the U.S. fell in 2011, certain trends emerged that demonstrate that it is not just the form -- be it physical or electronic -- that matters, but the convenience and price points also play a very critical role in determining how the home video business grows.

Nevertheless, the fall in DVD sales is a concern for media companies like Time Warner (TWX), Viacom (VIA) and Disney (DIS). For this reason, these companies are striking more online content licensing deals. Time Warner has even decided to increase the DVD sell-through window to 56 days, double the earlier period. Let's take a quick look at 2011 home video market growth and what it means.

See our complete analysis for Netflix

Home video market falls in 2011

For full year 2011, spending on home video in the U.S. decreased by 2.1% compared to 2010, amounting to $18 billion. The primary reason behind this decrease was the fall in DVD sales and reduced sales from traditional rental stores. Growth in streaming and Blu-ray sales were not enough to offset this decline. Blue-ray sales are still small part of overall home video market in the U.S., amounting to $2 billion in 2011.

Although DVD sales dropped and traditional rental stores saw a sharp decline, subscription DVD services and kiosk rentals saw healthy growth, growing by 4.1% and 31% respectively. Streaming and video-on-demand, no doubt, also saw healthy growth.

What these results mean?

The above results indicate that DVDs are still not dead and given the right price point and enhanced customer convenience and satisfaction, they can still be sold.

Some of the names that have grown by adopting innovative delivery systems include Netflix (NFLX) and Redbox. Netflix not only took advantage of tapping into the growing streaming market, it also made DVDs available to its customers via mail, thereby increasing convenience and growing its base. While it has de-emphasized this going forward, it still accounts for around 15% of our Netflix valuation. Netflix's decline in DVD subscribers in the later half of 2011 also penalized this business more than it should have as a result of the company's own missteps.

Also, Redbox's DVD rental kiosks are cheap, fast and convenient for customers compared to renting DVDs from traditional rental stores.

The lesson to be learned here is that you can sell content, if you have the right content and know how to sell it. Movie rental companies will have to value customer convenience the most and be careful with the pricing. The number of players in this business are increasing and slight missteps can encourage customers to quickly switch the service or completely drop it as this is not as indispensable as pay-TV or broadband services. Netflix is a case in point!

Our price estimate for Netflix stands at $126, implying a premium of about 30% to the market price.