How movies got smaller and bigger

They united studios -- and divided them. They not only rescued old TV shows from late-night obscurity but also became the engine driving show business profits. And they are changing the way movies are made, both for better and worse. Altogether, it was a year when DVDs ate Hollywood.

A bigger phenomenon than even Hollywood’s obsession with franchise films like “The Lord of the Rings,” DVDs enjoyed staggering domestic sales growth, up 46% to a projected $12.3 billion in 2003, according to Adams Media Research. About 55% of all U.S. homes are expected to have a DVD player atop the TV by the time every last holiday present is unwrapped, up from 39% in 2002. Movies now generate more money from the department store video aisle than from the movie theater ticket window.

Thanks to steep holiday discounting, you can buy a decent DVD player for about $40 -- or less than the DVD retail price of “The Simpsons: The Complete Third Season.” “When people first get a DVD player, they are like sharks in a feeding frenzy. They just buy and buy and buy” new discs, says Peter Staddon, senior vice president of marketing for Fox Home Entertainment.

The economics are as irresistible as a “Spider-Man” sequel: It can cost about $6 per copy to manufacture, distribute and promote a mass-market DVD. Some of these discs carry a wholesale price of $18, meaning a studio’s profit margin can reach $12 per DVD.

At the current sales rate, Disney and Pixar Animation Studios could sell more than 30 million “Finding Nemo” DVDs in North America, potentially eclipsing the industry record of 31.5 million set by the studio’s “The Lion King.” So Disney and Pixar could end up sharing more than $300 million in profits from the computer-animated film’s DVD alone, more income than the movie produced in U.S. theaters. During that theatrical run, “Finding Nemo” grossed more than $339 million, but Disney and Pixar share only half of that revenue, because the rest is kept by theater owners.

Such hefty margins are sparking equally hefty marketing efforts, highlighted by pricey TV ads. Some studios can spend $10 million or more promoting a new DVD title, a greater sum than can be lavished on some movies. DVD launch parties now rival the pageantry of movie premieres. At last month’s Manhattan release party for “X2,” stars Hugh Jackman, Patrick Stewart and Rebecca Romijn-Stamos walked down a silver carpet lined by 14 electronic news crews and an equal number of paparazzi.

All the same, the full DVD chronicle is not entirely cheery. Pirated DVDs are turning up on street corners mere minutes after movies debut in theaters. Thievery like this costs Hollywood an estimated $3.5 billion annually, and DVD income usually spells the difference between a film’s making money and losing it. But an industry antipiracy campaign focusing on awards-season DVDs sparked a civil war between the seven major studios and their art film units and ultimately collapsed.

The skirmish was launched when the studios’ trade organization, the Motion Picture Assn. of America, announced Sept. 30 that it was banning the year-end distribution of free DVDs to awards voters. The MPAA argues these discs are often illegally copied and sold. Yet its edict was immediately denounced by the studios’ own boutique film divisions, who complained the ban unfairly punished their smaller, more artistically ambitious films, which now dominate the Oscars. The infighting grew so contentious that MGM insisted its art film label, United Artists, not criticize the MPAA’s ruling.

Disney’s Miramax Films, the leading maker of award-winning movies, was not so muzzled and led the fight against both the ban and a compromise permitting only Academy Award voters to receive free videocassettes but not DVDs. On Dec. 5, a federal judge overturned the MPAA’s prohibition, and awards voters looked to their mailboxes for a cavalcade of complimentary discs.

It’s hardly just the people who pick the Golden Globes who have become infatuated with DVDs. Die-hard fans of old television shows drove one of the year’s most remarkable DVD trends. DVDs of dusty dramas such as “Battlestar Galactica” and even a quickly canceled series like “Firefly” proved immensely popular, helping generate $1.5 billion in domestic sales of repackaged TV shows (programming that failed entirely in the videocassette’s heyday).

Says Craig Kornblau, president of Universal Studios Home Video: “If you’re not happy this time of year, you’re never happy.”

Value-added video

As DVDs craft so many silk purses from sows’ ears, they also are changing the way movies and television shows are made. Rather than just slap on a director’s unrehearsed audio commentary and call a DVD a “special edition,” studios now endeavor to create wholly separate and elaborately produced DVD features.

“When we started preproduction on our movie, we also started preproduction on our DVD,” says Guillermo del Toro, the writer-director of next April’s “Hellboy.”

Phenomenal growth can’t last forever. “The working-class people now buying DVD players are not buying stacks of DVDs,” says former Artisan Entertainment chief executive Amir Malin. More worrisome is that DVD sales projections can help dictate what kinds of movies are made, emphasizing commercial compost over cutting-edge creativity. So you may be able to pick from lots of TV shows in the DVD section but only a handful of edgier film titles at the multiplex.