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THE BIG PICTURE

DVD downturn panics film industry

Big box-office returns no longer guarantee big DVD sales.

May 19, 2009|PATRICK GOLDSTEIN

If box office is booming, why are so many top studio executives brooding about the future of the movie business? Let's just say that in today's increasingly complex film world, the cinema gods giveth at almost exactly the same time as they taketh away.

The studio bosses who should be celebrating the unprecedented upswing in moviegoing at theaters -- with theater box office up roughly 15% this year -- have been getting a big dose of bad news from the other end of the food chain. DVD revenues have cratered in the past six or so months, dropping off (depending upon whose figures you trust) as much as 15% to 18% overall.

What's really scary for studio executives is that DVD sales, which have traditionally represented the biggest chunk of pure profits in the business, were the real safety net when it came to greenlighting movies. In the past, if you had an action film that made $150 million in domestic theatrical box office, you could relatively accurately predict what that movie would make in DVD sales. But in recent months, studios have been alarmed to discover that there is often a dramatic fluctuation between box-office revenues and DVD performance, with the highest erosion often coming from the highest-grossing films.

Even more alarming, especially for studios that have thrived on seducing moviegoers into seeing mediocre product, is the realization that audiences are becoming more quality conscious. In the past, if a forgettable action film hit pay dirt at the box office, it would perform correspondingly well in DVD, allowing studios in greenlight meetings to provide a conversion rate -- i.e. that if a movie of a certain genre made $100 million in the theaters, that would equal X millions of units in DVD. But judging from recent DVD sales figures, films that had poor word-of-mouth were underperforming in DVD, even if they had enjoyed lofty box-office numbers.

The example that made the biggest impact in studio circles involved "Iron Man" and "Indiana Jones and the Kingdom of the Crystal Skull." The films, released within weeks of each other last summer, did almost the same amount of business in their U.S. theatrical runs, roughly $318 million. But when they arrived on DVD, "Iron Man," the film that performed far better in exit polls (not to mention with critics), easily outperformed "Indiana Jones," whose DVD numbers were far lower than expected. Among the big-grossing summer films, "Hancock" was also a poor performer (in terms of box office versus DVD numbers), while the DVD numbers for such well-liked family films as "Wall-E" and "Madagascar: Escape 2 Africa" held up far better.

Needless to say, this volatility in the high-rent district has inspired something of a mild panic in studio executive suites. For years, DVD profitability basically mopped up the industry's sins and clinkers. If studios lose their DVD margins, they essentially lose their margin for error.

"This has become a major issue for the movie business," says Sony Pictures Entertainment Chairman and CEO Michael Lynton. "Over the past decade, the DVD business has been perhaps the most important profit center for the industry. But now it isn't just contracting, it's become more volatile and unpredictable than it used to be. And that very volatility is what makes your decision-making more difficult, because when you don't really know why a lot of titles aren't performing, the only rational response is to become more cautious when you're deciding what movies to make."

Lynton isn't pushing the panic button. He cautions that the DVD business isn't going away tomorrow, especially with Sony having made a big bet on the Blu-ray format. He adds that "not taking risks can itself be risky behavior. It's just that our inability to have confidence in how a particular movie might perform is a whole new ingredient that everyone in the industry is struggling with."

Although studios are extremely secretive with DVD numbers, especially the figures involving conversion rates, I was able to study one studio list of the films that performed the worst, in terms of conversion from box office to DVD. It was a long list. Films that fared poorly included a host of year-end releases whose DVDs arrived this spring. They included such box-office hits as "Quantum of Solace," "Yes Man," "Seven Pounds" and "Saw V." The list also included a huge number of adult-oriented award-season films, from "The Reader" and "Milk" to the Oscar winner itself, "Slumdog Millionaire."

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