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DVD slump might weaken 'Half-Blood Prince' sales

COMPANY TOWN

Though the 'Harry Potter' films have been huge DVD sellers, each sequel has sold fewer units than its predecessor -- and raised the bar of profitability that much higher for Warner Bros.

June 22, 2009|Claudia Eller

Harry Potter, the teen wizard whose films have generated billions of dollars and become one of Hollywood's biggest franchises, is known for battling the evil Lord Voldemort. Now he's about to confront an even darker foe: A soft DVD market.

"Harry Potter and the Half-Blood Prince," the sixth installment in the Warner Bros. film series, will be released July 15, and expectations are that it will be one of the year's biggest blockbusters. The previous five "Potter" movies have generated $7.2 billion in worldwide box-office and DVD sales, reaping huge profits for the studio and Potter's creator, author J.K. Rowling.

But the movie world that "Half-Blood Prince" will enter is markedly different from the one that its predecessor, "Harry Potter and the Order of the Phoenix," faced when it was released in 2007. Over the last two years, DVD sales, which have long propped up the movie business, have sharply declined. The slump in the DVD market has undermined Hollywood's business model and cast a shadow over what used to be the industry's bright spot.

"There's been a fairly substantial shrinkage in the overall DVD market since the last 'Harry Potter' film came out," said Tom Adams, a home video industry analyst. According to Adams, DVD sales were down 9% in 2008 and he's projecting that they will fall an additional 8% in 2009.

"That puts much more performance pressure on these big franchise titles to succeed," he said.

Though the "Potter" movies have historically been huge DVD sellers, each successive sequel has sold far fewer units than its predecessor. Sales of the last release were off 15% in the first eight weeks compared with sales of the first film during the same time span. Even a small decline in DVD sales is a challenge for expensive movies because it raises the bar to profitability that much higher.

And the bar for Harry Potter is higher than ever. Warner Bros. spent $250 million to produce "Half-Blood Prince" and will invest $155 million to market and distribute the movie, according to people familiar with the situation.

Compared with other big-budget sequels, the incremental costs for each "Potter" film have been moderate, mostly because of salary increases for cast members and unfavorable foreign exchange rates. For example, when Warner Bros. began shooting "Half-Blood Prince" outside London in September 2007, the dollar was so weak against the British pound that it added roughly $15 million to the production cost.

Warner Bros. President Alan Horn said that the sixth "Potter" was worth taking a gamble on given all the money the franchise has generated for the studio and its corporate parent, Time Warner Inc.

"I think it's as comfortable a risk as we can have," Horn said.

Aside from box-office and DVD revenue, Warner Bros. reaps hundreds of millions of dollars from merchandise, video games and other sales including digital downloads on iTunes.

Kevin Tsujihara, president of Warner Bros. Home Entertainment Group, said profit margins were higher on distribution platforms such as video on demand and electronic sell-through because there were no manufacturing and shipping costs and the studio retained more revenue than it did from DVD rentals and sales.

"Even in a declining market, our profitability can go up," said Tsujihara, who declined to discuss "Potter" specifics.

Horn said he didn't expect the soft DVD market to hamper sales of "Half-Blood Prince" because it was a "unique property." He believes that although budget-conscious consumers have become more selective about the DVDs they purchase, they have been demonstrating a desire to own big films like "Potter," "Transformers," "Twilight" and Warner Bros.' "The Dark Knight," which according to The-Numbers.com was 2008's top DVD with more than 12.7 million units sold domestically.

Although Horn took a lot of flak from "Potter" fans when the studio pushed back the release of "Half-Blood Prince" to July from last November, the move may help boost DVD sales because the DVD will be released during the heavy gift-buying holiday season.

Because DVD and ancillary sales are driven by how well a film performs at the box office, Warner Bros. is focused on making sure that theaters will be filled with moviegoers.

As the "Potter" franchise ages, Horn says the biggest marketing challenge is assuring moviegoers that they'll be seeing something new.

"When you're doing the sixth version of a movie, how do you have fans not get tired of that?" the Warner Bros. president said.

Each of the "Potter" films follows a similar theme -- Harry uses his magical powers to seek the truth about the death of his parents and to fend off his evil nemesis Lord Voldemort -- but has a distinct look and story line.

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