DVD slump scares industry


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.”


To understand what this all means is to first understand how complicated it is to interpret the numbers from the DVD end of the business. For example, did “Slumdog Millionaire” have a disappointing showing on DVD because everyone who really wanted to see the film had gone to a theater? Or did it perform poorly because Wal-Mart, by far the biggest single outlet for DVD sales, especially with the demise of more upscale retail outlets like Circuit City, is not a hospitable home for an exotic specialty film? Even top-ranking studio executives admit that much of the DVD business is a mystery to them. I was on the phone with one high-level executive who insisted that the DVD business was down only 10% to 12% until he grabbed hold of a new study on his desk, skimmed the cover sheet, and said, “Hmmm, I take that back -- this study says it’s down 18%.”

The problem is that studios have invested years in obfuscating their DVD profits, fearful that A-list actors and filmmakers would get wind of how much money was pouring in and want a bigger piece of the action. By Sunday, everyone knows what movies made in theaters -- it’s a carefully monitored cash business.

DVD has little of that transparency, especially with some DVDs being rentals while others are sell-through purchases, making the numbers more difficult to quantify. When studios announce their opening-day DVD numbers, they aren’t actual sales figures -- the numbers represent the amount of DVDs shipped to stores. The DVDs that don’t sell get shipped back to the studio. The industry abounds with stories of studios who have warehouses full to the ceiling with DVDs that went unsold and were shipped back, left to rot in storage.

No one has any real answers about the DVD downturn either. Obviously the country’s economic woes have played a role. The DVD business has long ago lost its novelty, so many consumers don’t feel the need to stock up on as many new releases. Many consumers have turned to downloading and rentals, with Netflix in particular enjoying a burst of popularity -- a good thing for filmmakers but not such a good thing for studios, who make a lower profit margin on rentals than on sales.

You could also argue that we now live in a cultural moment where people don’t want to own things as much as they want to experience them. That would explain why event-oriented entertainment -- be it in the movie multiplexes and Imax theaters, the concert business or big arena sporting events -- is enjoying considerable success while stay-at-home entertainment (DVD and TV) has seen considerable drop-off.

No one knows the answer, but in the movie business, executives are unsettled, unsure of what movies to greenlight if they can no longer be sure of which of their old economic models still apply. It’s why studios are no longer making deals where talent gets first-dollar gross -- unless the talent is willing to wait until the studio breaks even first.

In Hollywood, executives are a lot like great athletes: If they lose their confidence, they can’t do their job well. It takes a lot of built-in swagger to roll the dice on a slate of $100 million-plus movies. But as the DVD numbers continue to slide, studio chiefs are finding it hard to take those big wads of cash out of their pockets. Right now, they’re spending a lot of time looking for safe bets.