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DVD: doom, gloom or boom?
First DreamWorks, now Pixar. Are DVDs sales losing their sizzle just when Hollywood needs them most?
July 1, 2005: 3:25 PM EDT
By Krysten Crawford, CNN/Money staff writer
Mr. Incredible may be a superhero, but he's not invincible. Pixar announced Thursday that sales of its
Mr. Incredible may be a superhero, but he's not invincible. Pixar announced Thursday that sales of its "The Incredibles" DVD will fall short of expectations.
DreamWorks dropped a bombshell in May when it told investors that DVD sales of
DreamWorks dropped a bombshell in May when it told investors that DVD sales of "Shrek 2" are softer than expected. DreamWorks shares have since tumbled 32 percent.

NEW YORK (CNN/Money) - Do two missteps make a trend?

That's what some Wall Street analysts were asking themselves Friday after Pixar Animation Studios, the seemingly invincible movie animation studio, lowered its second-quarter profit forecast on softer-than-expected The Incredibles DVD sales. Pixar (down $6.82 to $43.23, Research) shares, which hit a 52-week high in early June, tumbled on the news, released after markets closed Thursday.

In May, Pixar arch rival DreamWorks Animation (up $0.10 to $26.30, Research) jolted investors when it disclosed that 5 million unsold copies of "Shrek 2" on DVD caused the studio to miss first-quarter earnings forecasts by 25 percent. DreamWorks stock has since slid to $26.20, a 32 percent drop since the company's "Shrek 2" bombshell on May 10.

Analysts concluded at that time that the miss by DreamWorks was of its own making. Still new to the Wall Street game after going public in October 2004, DreamWorks executives had made a clumsy mistake not warning investors sooner that it had overestimated demand for the "Shrek 2" DVD.

It's a mistake that Pixar tried to avoid Thursday when it cut its profit outlook by one-third, to 10 cents a share for the quarter ending July 2. The Emeryville, Calif.-based company said sales of "The Incredibles" would be 7 percent below its estimates -- or between 2 to 3 million units, analysts estimated.

On Friday, Pixar shares were down more than 12 percent.

Now, some analysts are wondering if the shortfalls by Pixar and DreamWorks -- two studios with historically strong home video sales -- signal that something a lot more troubling is afoot in the DVD market.

"(W)e are more interested in whether a broader industry trend is developing," Richard Greenfield, an analyst with Fulcrum Global Partners, told investors in a research note Friday.

"The shortfall is clearly disappointing and will hurt (Pixar's) stock," said Greenfield, who has a neutral rating on the stock. However, he said the bigger worry now is the overall health of the DVD market. Consumer spending, he said, could be weakening as an oversupply of DVDs, including a flood of television shows on home video, has narrowed sales windows dramatically.

The DVD glut

While Greenfield cautioned that it's too soon to tell if the overall DVD market is showing early signs of distress, faltering DVD sales could hit Hollywood hard.

The domestic box office is in its longest slump in more than two decades, with total receipts down 7 percent year-to-date despite higher average ticket prices. Hollywood has to split ticket revenues with theater owners. And with star salaries and production costs soaring, movie studios often lose money off their theatrical releases.

Home video now makes up for those losses. DVD sales in the U.S. hit a record $15 billion in 2004, compared to $9.4 billion in domestic box office sales. Movie studios pocket the bulk of home video sales.

Studios, eager to capitalize on DVD sales, have shortened the time between a movie's theatrical release and its home video debut, potentially cutting even further into box office sales.

While Hollywood is becoming increasingly dependent on DVD sales, the home video market may not be the sure bet it once was. Once-torrid growth rates have cooled and retail prices have fallen. Two competing high-definition DVD formats are due to be released within the next year, which risks confusing consumers and further dampening sales.

What's more, DVDs are no longer about movies. Since 2000, sales of "Friends," "Sex and the City" and other television shows on DVD have gone from almost zero to $2.3 billion last year, according to Home Media Research. More TV DVDs are released now than movie DVDs. And with a higher price point, many more TV DVD releases are coming.

The end result: a glut of DVDs and retailers willing to yank DVDs off store shelves quickly either because sales are slow or newer releases are coming.

Analysts said Friday that these and other risks point to increasingly unpredictable DVD sales. But none of them concluded that the signs point to a crisis yet.

"We don't think this preannouncement suggests a dramatic slowdown in the overall DVD market," wrote J.P. Morgan analyst Spencer Wang in a research report. "Rather, we think a flood of new DVD product is reducing shelf space and the longevity of that shelf space for individual titles."

To deal with the space problem, studios are coming out with smaller packaging. They're also working with retailers on deals whereby the stores get exclusive rights to a title for a limited time in exchange for keeping it stocked, according to Gord Lacey, the founder of TVShowsonDVD.com.

Another possible solution to the space crunch: sales via the Internet.

Meanwhile, talks between rival industry groups over the next generation DVD continue in the hopes of reaching agreement on a single standard, thereby avoiding a potentially costly format war.

For more stories on iTunes, DVDs and other cool technology, click here.  Top of page

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