Studios reel as DVDs show wear

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Already battered by months of weak box-office receipts, Hollywood studios face the sucker punch-a drop in their cash-cow DVD sales.

For the past eight years, the studios have been able to bank on revenue from sales and rentals of DVDs, which have accounted for 60% of entertainment companies' bottom lines, compared to just 20% taken in ticket sales. Now, however, there are signs that DVD sales are starting to mirror the recent box-office slump.

Despite having a couple of the biggest box-office behemoths in recent memory, DreamWorks Animation and Pixar Animation Studios had to adjust their earnings estimates when "Shrek 2" and "The Incredibles" sold fewer DVDs than the companies had predicted. Their stock prices plunged on the news.

"Shrek 2" sold 35 million DVDs instead of the 55 million that DreamWorks executives had estimated. (The original "Shrek" sold 49 million DVDs.) "The Incredibles" is expected to sell 30 million DVDs instead of the 34 million projected.

Movie Gallery, the second-biggest video-rental chain in the country, blamed this year's "flow-though of an unimpressive slate of titles" for a drop in its own current business. And, as technology continues to advance, companies like Morgan Freeman's newly formed, Intel-backed ClickStar are promising to deliver movies to consumers over the Internet.

Given that a movie's theater run acts as a promotion for the DVD release, the current box-office slump-the worst in decades, with 19 straight weekends of decreased attendance-doesn't bode well, either. "There's a ripple effect, and studios need the movie to do well in theatrical release," said Paul Dergarabedian, president of box-office-tracking firm Exhibitor Relations Co. "It's the engine that drives everything else."

Compared to last year when "Spider-Man 2" was red hot, this July 4th holiday weekend saw a 16% decrease in box office for the top dozen movies. Year to date, box office is down 9%. Critically lauded movies like "Cinderella Man" and "Lords of Dogtown" did not pull in mass audiences, nor did TV-inspired remakes such as "Bewitched" and "The Honeymooners."

`TOTAL SHOCK'

For the fourth quarter, an all-important DVD selling time, industry watchers are wondering whether consumers' once-voracious appetite for the format will fall off altogether. "This year so far has been a total shock to people in the film and DVD businesses," said Scott Hettrick, editor of trade magazine DVD Exclusive. "None of these signs portend a very happy future."

Nevertheless, the DVD market is still growing-about 13% this year, largely on the strength of TV releases and kid movies-but that's expected to fall into the single digits within the next few years, according to Adams Media Research.

"It's too soon to be playing `Taps' for any part of this business," said Steve Feldstein, senior VP at Fox Home Entertainment. "Fourth quarter will be driven by the year's big event movies like `Star Wars' and `Mr. and Mrs. Smith,' new TV and library product. There will be a plethora of offerings ... that will sell."

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