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What's Driving The Box Office Batty


On July 26 the DVD of xXx: State of the Union will arrive on store shelves just 88 days after the movie starring Ice Cube first appeared in theaters. That turnaround is about half the average time for Hollywood fare, but there's good reason for that: The flick was a stinker, costing more than $100 million to make and market but pulling in just $26 million during a bleak run in cinemas. Sony Pictures, which released xXx, is hoping to breathe some new life into the action flick by getting it to DVD ASAP, flouting the industry's traditional timetable and hoping to cash in on what has been a red-hot market for disks.

xXx: State of the Union has more company than Spago has pizzas as Hollywood posts the worst box-office performance in two decades. Moguls blame everything from bad scripts to folks surfing the Internet more. But one key question facing the industry has less to do with what and more to do with when: How quickly should Hollywood studios rush their films to DVD? The answer goes to the core of the complex Hollywood ecosystem and could shake up the long-standing relationships among studios, theaters, and DVD retailers. "With the disappointing box-office results of Cinderella Man and Batman Begins, we may be seeing seismic changes in the film business," says former Artisan Entertainment CEO Amir Malin, who runs the Qualia Capital entertainment fund. "Consumers are being a lot more selective about which movies they see [in theaters]."

A shift is clearly under way as movie fans exercise new clout. With the price of cinema tickets skyrocketing -- a night at the movies for a family of four can easily cost $50 or more -- 73% of Americans would just as soon catch the latest flick on the tube, according to a June 13-15 poll of 1,000 adults by Associated Press and AOL (TWX) News. That makes sense, since, in essence, the living room has become the theater. About 80% of homes now have DVD players, and consumers are buying large-screen sets by the crateful.

What's more, profits from DVDs can be huge: Studios get $12 a disk, even if it is sold at rock-bottom prices at Wal-Mart Stores Inc. (WMT) or Best Buy Co. (BBY) In all, retailers will sell $18 billion in DVDs this year, figures PricewaterhouseCoopers, compared with about $10 billion in box-office revenues.

To capture that DVD gold, Hollywood has for years made its flicks available to TV viewers only through a carefully structured system of "windows." DVD retailers waited six months after the theater premiere; cable's and satellite's video-on-demand (VOD) got the film 90 days after that, and HBO (TWX) and other pay-TV services six months following VOD. But the windows have been slowly closing, and studios now ship DVDs to market sooner than ever before -- on average, in 137 days (vs. 200 days in 1998), according to DVD Release Report, a newsletter covering the disk market. Even a blockbuster like Walt Disney Co.'s (DIS) The Pacifier was released on DVD three months after its March theatrical release.

The issue of when to put a movie onto a DVD is a delicate one. True, getting films out quickly lets studios capitalize on whatever buzz they've generated for the theater opening. But it can also boomerang: If folks stay home, the theater release loses its long-standing place as the marketing engine that stokes so-called ancillary sales when stars hit the late-night talk shows. DVD sales may already be denting the box office. Even before this miserable summer, attendance had fallen in five of the past seven years -- not coincidentally, as DVD growth has taken off.

Fissures in the film world are appearing as pressure on the system builds. "As an industry, we may simply have gone too far with moving up DVD releases," worries Universal Studios Inc. President Rick Finkelstein. Needless to say, the Old Guard is being cautious. "Windows preservation needs to be disciplined," says former Paramount Entertainment (VIA) Chairman Jonathan L. Dolgen. "The value of the big screen is what starts everything." But clearly new voices are getting louder. Billionaire entrepreneur Mark Cuban is going so far as to advocate releasing movies to theaters, DVDs, and VOD all on the same day -- heresy in Tinseltown. Still, Cuban is betting that the big studios will eventually "follow the money." New models will emerge "and they won't cannibalize the studio's existing business," agrees long-time Hollywood exec Blair Westlake, Microsoft Corp.'s corporate vice-president for media and television.

Few dispute that the DVD boom has also conferred tremendous power on a new set of Hollywood players -- the big retailers. Warner Bros. (TWX) Chairman Barry M. Meyer recently joked to an industry audience that someday soon "premieres will be [held] in a Wal-Mart." Not everybody laughed. With DVD sales growth projected to flatten in a few years, retailers want disks sooner. Other companies along the chain are beginning to clamor, too. Big distributors, such as cable operators Comcast (CMCSK) and Time Warner and satellite services like DirecTV (DTV), have promised their investors big returns from VOD services. So they are pushing Hollywood to speed up the system. "When one studio sees the sky isn't falling, they will all fall into line," predicts Stephen Burke, president of Comcast Corp.

SOUL-SEARCHING

Talk from bold thinkers like Cuban, who owns both the 2929 Entertainment studio and the Landmark Theater chain, has triggered some soul-searching in Hollywood. Steve Beeks, president of independent producer Lions Gate Entertainment Corp. (LGF), worries that the box office malaise is long term. "We're looking at everything," he says. A group that includes Warner Bros., Fox (NWS), and Universal is discussing plans to test earlier releases of movies offered on VOD. Movielink, an Internet movie provider owned by five studios, is looking to tighten up schedules, as well as allowing consumers to burn downloaded movies when DVDs first become available. Eventually the studios will cut out an even earlier window -- two weeks after theatrical release -- speculates Warren N. Lieberfarb, former head of Warner Bros. Home Entertainment, and sell 24-hour passes for $30 or more, much like a pay-per-view boxing event. That price will allow folks to download movies under protections limiting viewing to just a few hours and preventing them from shipping films elsewhere. Clearly, some big script changes are in store for Hollywood.

By Ronald Grover in Los Angeles


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