A new Forrester Research study released yesterday says the physical media of CDs and DVDs will drift away:

Hollywood will win the war against illegal downloading but the battlefield will be littered with casualties, including the DVD and CD formats as physical means of distributing video and audio, according to a Forrester Research study released Tuesday.

The study predicts that in five years, CDs and DVDs will start to go the way of the vinyl LP as 33% of music sales and 19% of home video revenue shifts to streaming and downloading.

....The Forrester report lists a number of winners and losers from the expected changes.

Among the beneficiaries are Internet portals that enable on-demand media services, broadband suppliers such as cable and telcos and the creative community, which would profit from the removal of manufacturing and distribution costs and constraints. AOL Time Warner's decision to sell off its disc manufacturing plants was said to be proof of this trend.

Media conglomerates could be among the losers if they do not have control of emerging means of distribution like VOD, Forrester said. Such retailers as Tower Records and Blockbuster will certainly feel the pain as sales and rentals shrink, though they may be able to sustain business by associating themselves with newer on-demand services. Major retailers including Wal-Mart and Best Buy are expected to survive by shifting CD and DVD floor space to sales of media devices.

The shift could also present several opportunities for companies if they move quickly.

Television companies have about three more years to release shows on DVD. By 2006, it is estimated that negotiations will start to focus on making content available on cable and Internet "basic VOD" tiers.

Movies studios are also urged to press the development of Internet-based alternatives to cable VOD for movies-on-demand.

"On-demand media services have the potential to turn pirate losses into gains even as they break the disc-based shackles that now hold back entertainment," the report concludes. [Hollywood Reporter]

This seems pretty obvious - in my 1993 book Networking In the Music Industry several forward-lookers predicted that physical media would be replaced (somehow) through the computer. I am a little surprised they see it happening as slowly as they do: only 1/3 of sales will be via digital downloads and streaming in five years. Interesting also that they mention streaming, which doesn't get nearly the attention that downloads get. Streaming comes in two flavors, self-selected like a jukebox, and preprogrammed, that is selected by someone else, who is in essence creating a playlist. The latter method is virtually indistinguishable from digital radio, Internet or satellite. How will this be funded? Advertising, monthly fee, built-in to a broader fee like cable television music channels? Is there ANY difference between webcasting and streaming?

Ultimately, the question of CD vs. digital file is one of storage.