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Hollywood Is Worried as DVD Sales Slow


Studio bosses are scrambling to shore up the DVD market even as they prepare for wider distribution of films online

It's official: The heyday of the DVD is over. Walt Disney (DIS) CEO Robert A. Iger recently implied as much in an analysts' call—the only studio boss to suggest publicly that Hollywood can no longer count on a cash cow that has yielded billions in profits.

DVD sales slid 6.3% last year. While the economy is likely a factor, it's also clear that audiences are bypassing DVDs because they have a range of other options, from watching movies and TV shows online to playing video games. As such, Hollywood executives face a conundrum familiar to many CEOs: They have to prop up a product that is losing momentum, buying time while they rethink their entire business model.

Next-generation Blu-ray discs will give the DVD a lift, but studio bosses still are scrambling to shore up sales. Iger may believe the DVD's best days are behind it, but he too is trying to goose disc sales. He has been pushing the studio to make more Disney-branded films. Not only are parents more likely to buy Disney DVDs than other movies, but Disney-branded films can be marketed through the company's theme parks, TV channels, and stores. "The Disney brand," Iger says, "gives us an advantage."

As DVD sales decline, studios are looking for ways to cut costs so they can make more money on each disc. A primary target: the so-called back-end deals that give stars and directors a piece of a film's revenues. Increasingly, executives are insisting that a film must break even before the studio will share proceeds. Sony Pictures Entertainment (SNE) is forging such deals. "We can no longer afford to give away money when we can't be sure what the DVD sales are going to be," says studio chief Michael Lynton.

Even as the studios take defensive steps, they're preparing for the day that films no longer come on silvery discs but are distributed mostly on the Web or through the cable and satellite companies' video-on-demand services. That market is already about $1.4 billion, according Adams Media Research, and last year grew a peppy 19%.

Right now, most studios are taking baby steps. Rather than waiting weeks between the release of the DVD and the online and cable versions of a movie, Warner Bros. (TWX) and others are releasing a select few simultaneously. The aim is to entice teens and others who aren't buying DVDs. There also are moves afoot to let TV viewers download movies after they have opened in theaters but before they go on sale as DVDs. The idea, says Fox Filmed Entertainment (NWS) Co-Chairman James Gianapulos, is to charge a premium—some in the industry have said as much as $40—for an early viewing of a high-definition flick.

Paramount arguably has gone the furthest: It's premiering movies on the Web. Last year it streamed the comedy Jackass 2.5 on Blockbuster's (BBI) site for free. The 64-minute film attracted 15 million viewers. It generated word of mouth, says Paramount, helping the studio sell the movie through a variety of sites. "You can use the Internet to launch a film like you use a movie theater," says the studio's digital czar, Thomas Lesinski, who plans to produce more low-budget flicks for the Web.

Selling or renting movies electronically is a good business. Studios collect about 70% of the $4.99 that cable companies charge viewers to rent a movie vs. 30% for selling a DVD. Of course, DVDs still generate 70% of film profits. The trick will be to ramp up electronic distribution without tanking the DVD business.

Grover is Los Angeles bureau chief for BusinessWeek.

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