Falling DVD sales lowers media earnings

Execs debate whether drop-off is temporary or permanent

By Danny King -- Video Business, 2/6/2009

FEB. 6 | Last year’s DVD sales slippage is showing up on studios’ bottom lines.

Although the spending decrease was indisputable, media executives this week offered differing opinions on whether it was a result of a stalling U.S. economy that stifled most retail categories, or whether the medium was permanently shrinking because of the combination of more digital-delivery options and the growth of other packaged-media types such as videogames.

Walt Disney Co. said its studio entertainment unit’s fiscal first-quarter earnings plunged 64% as DVD titles such as WALL-E and The Chronicles of Narnia: Prince Caspian failed to keep pace with year-earlier releases including Pirates of the Caribbean: At World’s End, Ratatouille and High School Musical 2. With a majority of U.S. households owning DVD players, Disney CEO Robert Iger said on a conference call with analysts this week that the company would look at ways to cut costs related to its DVD marketing, production and distribution while possibly raising prices on some of its Blu-ray Disc titles.

“Going forward, people will potentially be more selective of what they buy because they already have a decent selection,” said Iger. “We need to be mindful of these changes.”

News Corp. fared worse than Disney, reporting that the profit for its filmed entertainment unit’s fiscal second quarter dropped 72% as DVD titles such as Dr. Seuss’ Horton Hears a Who! lagged such year-earlier releases as The Simpsons Movie, Live Free or Die Hard and Fantastic Four: Rise of the Silver Surfer.

And although Time Warner Inc. reported this week that its filmed entertainment unit’s fourth-quarter profit rose 7.1%, late-year revenue from its DVD operations, the largest in the U.S., was largely salvaged by the Dec. 8 release of The Dark Knight, last year’s best-selling DVD in the U.S.

Viacom’s Paramount reports earnings next week.

News Corp. CEO Rupert Murdoch, speaking on a conference call this week, appeared to believe the decline was more cyclical, blaming falling sales in his DVD and book publishing operations on what he called “the worst global economic crisis we’ve witnessed since News Corp. was established more than 50 years ago.”

Still, many industry analysts say that the relative maturation of the DVD market, compared to other forms of packaged media such as videogames, also is a major factor. U.S. DVD spending last year fell 5.7% from 2007, to $21.7 billion, despite Blu-ray sales tripling to about $750 million, according to data compiled by Video Business and Rentrak. 

“DVD sales have been a huge boost to the movie business,” wrote Jason Bazinet, Citigroup’s media analyst, in a note to clients this week. “However, current DVD player penetration is around 65% in the U.S., and recent adopters may buy fewer DVD titles than early adopters.”

Regardless of the cause of the spending decline, companies are forecasting a further pullback for the early part of the year. News Corp. president Peter Chernin said on the company’s conference call this week that sell-through improved from the fourth quarter, but he estimated that January spending was down about 9%.

Meanwhile, with Warner Bros. slated to release about 60% fewer new DVDs this quarter compared to a year ago, the division’s first-quarter DVD sales should drop “significantly,” Time Warner Inc. chief financial officer John Martin said on this week’s call.

And News Corp. lowered its earnings forecast for the fiscal year ending June 30, attributing a quarter of the estimated earnings decline to lower home entertainment and book publishing sales.

Still, Chernin stopped short of saying the DVD spending decline was permanent.

“It’s important to be mindful to look at that business closely,” he said. “But it’s too early to say it’s a secular decline.”