End of the DVD Party?

First Dreamworks' Shrek 2, now Pixar's The Incredibles. Retailers are shipping back scads of unsold copies. A bad plot twist for Tinseltown

By Ronald Grover

For years, it has been the salvation of movie studios. Even if a flick bombed at the box office, film execs could always rely on putting it onto a DVD, promoting it in video stores, and making some or all of their money back. And with the price of DVD players steadily dropping to as little as $40, the market for those little shiny disks has become a gold mine for Hollywood, generating an estimated $18 billion in retail sales this year and growing at an annual clip of 66% since 2000.

Indeed, the market has become so lucrative that movie studios have been rushing their films from the theater into DVD sales quicker than ever. Some industry experts think that's a big reason for the recent box office doldrums, where ticket sales could end up at 20-year lows (see BW 7/11/05, "What's Driving the Box Office Batty").

Now small but troubling signs are emerging that the DVD market's growth could be trailing off faster than Hollywood expected. On June 30, Pixar Animation Studios (PIXR ) cut its earnings-per-share estimate for the second quarter to 10 cents from 15 cents, due to slower-than-expected DVD sales of its blockbuster The Incredibles. The stock of Dreamworks Animation (DWA ) dropped sharply in mid-May, after the studio reported that returns of its own blockbuster Shrek 2 left sales 5 million short of its forecasts.


  Major retailers have noticed that DVD sales have been softer than anticipated recently, too. During its first quarter, ending May 28, Best Buy (BBY ) said it saw revenue declines for DVD sales that were "comparable" to the double-digit sales hikes it reported for video-game sales. A Best Buy spokesman declined to comment further.

Circuit City (CC ) cited single-digit increases for its same-store sales of DVDs during the same period. And Trans-World Entertainment (TWMC ), which operates more than 800 stores nationwide including the Wherehouse and Strawberries Music chains, reported a 2% decline in same-store sales in its own first quarter. Trans-World CEO Robert J. Higgins attributed the results in part to "sluggish performance" since Easter of DVD sales.

That led Sanford C. Bernstein analyst Tom Wolzien to speculate in a recent research report that a long-anticipated slowing of DVD sales may be showing up sooner than expected. "These data points...suggest that U.S. consumer demand may be cooling faster than our models suggest," Bernstein wrote. For the moment, Bernstein is projecting that DVD sales will increase by 9% in 2005 and 4% in 2006. That compares to a 29% growth in 2004, according to PricewaterhouseCoopers.


  Why? That's sure to be a hotly contested topic at the usual Hollywood watering holes. But some things are certain. Studios are hustling their DVDs quicker to the Wal-Marts of the world. In 1998, moving a film from theater to DVD took an average of 200 days, nearly seven months. Today that's about 137 days -- or around 4.5 months, according to industry newsletter DVD Release Report. Looking for Sandra Bullock's flick Miss Congeniality 2: Armed and Fabulous? Warner Brothers put that less-than-stellar box-office performer onto DVD in a lightning-quick 88 days.

In addition to movies, studios have been pushing out DVDs of classic TV shows such as old Seinfeld episodes and the X-Files, further filling those aisles with content. That means folks may be staying home from the movie theater to watch DVDs, but it also makes DVD sales just another marquee business. Like at your neighborhood theater, a hot new release seems to be coming out every week.

Result: Retailers increasingly are shipping back unsold DVDs -- even those as hotly anticipated as Shrek 2 or The Incredibles -- because they don't have enough shelf space to keep all those titles, figure several analysts.


  Then there's all the additional competition for viewers. Folks are watching more TV, according to a recent report by Turner Broadcasting, as well as playing more video games and surfing the Net. On top of that, cable and satellite operators are pushing nearly free digital video recorders, giving TV viewers the opportunity to record their own shows instead of buying DVDs in the stores.

"We live in an environment where leisure time is fragmenting, and choices are proliferating," says former Artisan Entertainment CEO Amir Malin, who operates the $250 million entertainment Qualia Capital fund, which that invests in media and entertainment properties.

Malin says recent DVD releases like MGM's (MGM ) Be Cool and Sony's (SNE ) Hitch have underperformed as DVDs, causing him to contemplate whether the entire industry may be headed for a "seismic change."

Hollywood doesn't like "seismic" events, unless they're in their latest action flick. But then again, this year's crop of summer movie "blockbusters" haven't exactly been packing folks into air-conditioned moviehouses. And if current patterns persist, once these summer films hit the sale racks as DVDs later this year, they may not be bringing in the gold the way their predecessors have done in the past.

Grover is BusinessWeek's Los Angeles bureau chief

Edited by Douglas Harbrecht

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