Last Tuesday, the Digital Entertainment Group released its Q1 2011 Home Entertainment Report, and there were several clear trends to be examined in how Americans choose to purchase and watch movies.

For those readers aren’t familiar with DEG, it is basically the industry cheerleader for the DVD and Blu-ray formats, among other things. DEG publishes these reports and other press releases on a regular basis, and I often find their forecasts and analysis at odds with what I’m reading and hearing from other media sources and analyst firms.

In the past, I’ve often found DEG’s outlook to be overly rosy, particularly when it comes to the Blu-ray format. For example, a release from DEG made the claim that Blu-ray player penetration into American households was at an all-time high. But how many of those players are PlayStation III game consoles, and are used exclusively or largely for playing games? And how many Blu-ray players were bought solely for (or are being used largely for) streaming Netflix movies, as opposed to watching rented or purchased Blu-ray discs?

The truth is that packaged media is facing tough times. Walk into any Target, Best Buy, or Wal-Mart, and you can see for yourself how much these stores are de-emphasizing the sales of DVD and BDs. For now, the general public is in a head-over-heels love affair with Netflix, which recently passed Comcast to become the largest pay TV service in the United States (23M subscribers and still climbing!)

This time around, I’m inclined to agree with DEG’s findings, which reflect that clear trend towards streaming and away from optical discs. Q1 ‘11 sell-through of packaged media dropped by almost 19% Y-Y to $2.2B, a precipitous decline that DEG blames on the lack of so-called ‘tentpole’ movies (think Avatar and Toy Story) that traditionally fuel sales of packaged media.

Things weren’t looking so great in the packaged media rental arena, either. Brick-and-mortar rentals were off by a whopping 36% to $440M, which should be no surprise given Blockbuster’s struggles to reach profitability and its eventual fall into Chapter 11 bankruptcy last fall.

On the positive side, Q1 ‘11 kiosk rentals (Redbox, Blockbuster Express, et al) were up 33% over the same quarter in 2010, while video-on-demand, pay-per-view, and streaming revenue jumped 33% in the same time period. Those are impressive numbers, but they were barely enough to offset losses in the highly-profitable brick-and-mortar business.

DEG also itemized electronic sell-through (up 10.4% Y-Y) and video-on-demand purchases (up 8.7%). When you add up all the numbers, total home entertainment spending in the USA was down almost 10% Y-Y, and that’s not good news.

True to form, DEG characterizes the home entertainment industry as ‘resilient’ and even states that sell-through is up 20% for April of 2011. They also cite an April 18 report from The NPD Group that states 75% of U.S. consumers continue to view movies on DVD and Blu-ray disc.

If you read the NPD press release, you’ll see that it does state 77% of respondents reported watching a movie on optical disc during Q1 ‘11, unchanged from 2010. And respondents also stated that 78% of their home entertainment budgets went to the purchase and rental of DVDs and Blu-ray discs, while 15% was spent on video subscription services (read: Netflix) that offer a mix of optical disc and streaming rentals. Digital video downloads, VOD, PPV, and paid streaming made up the rest (about 8%), with per capita spending dropping 2% Y-Y.

What the NPD release doesn’t tell you (at least, not in the press release) is what percentage of DVD and BD rentals were through $1-per-night kiosks. That’s definitely not a high-margin business for Hollywood. But then again, we don’t need NPD to tell us; DEG already has. As I mentioned earlier, kiosk rentals are up 33% Y-Y, while brick-and-mortar transactions are down 36%.

So what’s really going on here? Is the continuing decline in packaged media sales and rentals due to a tough economy? Is it due to a lack of blockbuster movies? Or, is it clear evidence of a growing trend away from physical media in favor of streaming and digital downloads, as I’ve said for several years?

More questions to ponder. How does this trend define what a television is? Does it become a connected hub for all media devices in the home, as several manufacturers at this year’s CES would have you believe? Or, are all of those connections to be made outside of the TV from multi-format playback devices, such as combination DVD/BD players with wireless Ethernet ports and USB connections for flash memory and external hard drives?

The devil is indeed in the details.