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Darth Vader: cash cow
The 'Star Wars' trilogy is just the latest sign of the studios' DVD binge. When will the party end?
September 23, 2004: 5:43 PM EDT
By Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - A deluge hit this week, and it had nothing to do with hurricanes or election ballot counts.

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On Tuesday, one of the most widely awaited DVDs in history -- the "Star Wars" trilogy -- arrived on store shelves. One of about 40 new DVDs due out this week in the United States alone, "Star Wars" demolished the competition with first-day sales of the four-disc set topping an estimated $100 million worldwide.

While the trilogy's long-awaited arrival didn't break any single-day records, the DVD debut "will probably end up ranking as one of the biggest titles of the year and probably one of the top 10 of all time," said Scott Hettrick, the editor-in-chief of DVD Exclusive.

That spells good news not just for diehard Chewbacca the Wookiee fans, but also for the two studios behind the "Star Wars" franchise--Twentieth Century Fox and LucasFilm.

Analysts estimate that DVD penetration in the U.S. has gone from just about zero to a little more than 50 percent in the last five years -- with penetration rates in Europe and other overseas markets lower but catching up.

The surge has turned DVD sales into mammoth moneymakers for movie studios. They pocket roughly 80 cents of every dollar on each DVD sold, a take well above the 50 cents for each dollar at the box office.

"Clearly (the DVD market) is a hit medium," said David Miller, a research analyst with Sanders Morris Harris. "Right now the studios are making a lot of coin on the DVD sell-through."

With $6.6 billion in sales in the first six months of the year, sales of home videos -- the vast majority of which are DVDs -- are on track to set a record in 2004, according to Video Store magazine. Overall revenues will have roughly quadrupled, from $3.4 billion in 2000, in the last five years.

007 helps seduce a buyer

The promise of huge DVD revenues was a key factor behind the recently announced $5 billion deal for Metro-Goldwyn-Mayer. James Bond and his suave sleuthing aside, the last definitive MGM hit was 2001's "Hannibal," which reaped nearly $352 million in worldwide ticket sales.

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But that didn't stop an investor group led by Sony from agreeing to shell out about $2.9 billion in cash and assume another $1.9 billion in debt for the 80 year-old studio, whose film library includes more than 4,000 titles. Best known among those are the Bond, Rocky, and Pink Panther franchises.

Miller at Sanders Morris, who called the MGM sale price "slightly high but not unreasonable," said MGM's film library will pull in $250 million in earnings before interest, tax, depreciation, and amortization -- a common measure of profits in the entertainment industry.

By combining MGM's library with its own inventory of roughly 3,500 films, Sony becomes the third-largest DVD supplier behind Warner Brothers and The Walt Disney Company, according to Video Store magazine.

Sony is exploiting not only pent-up demand for existing DVDs, but also the likelihood that it will profit from the rerelease of its entire combined library when a newer, advanced DVD format comes to market in a few years.

"That's a whole new revenue stream" waiting to be tapped, said Michael Savner, a research analyst with Banc of America Securities who covers MGM. Savner does not own MGM stock, although Banc of America has investment banking ties to the studio.

Studios are betting heavily on DVD sales to slake consumers' apparently unquenchable thirst for the sleek discs with high-resolution images.

Unlike the bulky, nearly obsolete VHS cassette, a DVD does not have to be rewound and has a longer shelf life. DVDs also boast special features, including commentary from directors and actors, and scenes cut from original theater releases.

DVD well drying up?

As far as movie buffs are concerned, this week's release of the "Star Wars" trilogy was long overdue. Dan Hassler-Forest, the editor-in-chief of the four-year-old DVD tracker DVDBreakdown.com said the early George Lucas sci-fi action films have been at the top of consumer lists ever since DVDs came on the market in the late 1990s.

But the "Star Wars" release leaves few films on consumers' most-wanted lists, added Hassler-Forest. Other long-awaited releases, notably the "Indiana Jones" and "Back to the Future" trilogies, are already sold in DVD format.

Even the handful of flicks that movie fans are clamoring for will likely be out on DVD sooner rather than later. The original 1933 version of "King Kong" starring Fay Wray, for instance, is expected on DVD, as soon as director Peter Jackson finishes a contemporary remake.

Depleted archives aren't likely to pose much of a threat to DVD sales, however. Hassler-Forest said market research shows that consumers snatch up new releases of existing DVDs, even though they're apt to carp about marketing gimmickry.

"A disc that has a gazillion extras will outsell the same disc without those extras, even though the people buying them (don't watch the added features)," said Hassler-Forest of DVDBreakdown.com. "It gives the impression that (the new DVD version) is a big thing."

DVD prices vary widely. The discounted price on Amazon.com for the "Star Wars" trilogy is $41.99, or 40 percent off the original price. According to Video Store magazine, the average price of a DVD runs about $15. That includes releases of new and old titles.

Studios have been especially adept at boosting demand by rereleasing DVDs of earlier films, with more bells and whistles, on the eve of their sequels' release. That's what happened this summer with "Spider-Man 2," "The Bourne Supremacy," and "Princess Diaries 2."

Fox, owned by News Corp. (NWS: Research, Estimates), and LucasFilm, are releasing the "Star Wars" trilogy about eight months before the May 2005 release date set for the sixth movie in the series.

DVDs are also cushioning studios during bad years at the box office. For the Walt Disney Co. (DIS: Research, Estimates), surging sales of 2003's "Finding Nemo" and "Pirates of the Caribbean," plus a longtime strategy of releasing animation hits for limited periods every few years are offsetting a string of box-office flops this year.

The Burbank, Calif. entertainment company released "Lion King 2" last month and plans to roll out for the first time the DVD version of "Aladdin" on Oct. 5.

"This helps save them from times when they have a drought at the box office," said Gitesh Pandya of BoxOfficeGuru.com.

The looming threat: piracy

But the mutual lovefest that studios and consumers are having with DVDs raises an important question: Can the passion last?

Analysts seem to think so. "The proliferation (of DVDs) has been phenomenal, and the consumer has not expressed any kind of unwillingness to purchase DVDs," said Miller at Sanders Morris.

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The biggest threat facing DVD sales, according to several analysts, isn't that studios oversaturate the marketplace, or that video-on-demand movie access will send DVDs the way of the Betamax.

Instead, the mega-danger studios face is the same one the recording industry has been battling for years: illegal copies obtained over the Internet.

"Piracy is still the number one threat as far as the studios are concerned right now," said Hassler-Forest. "Since it's in digital format, you can do stuff (to discourage illegal downloads), but you can't stop it."  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.