Report: DVD sales no longer covering rising studio costs

Screen Digest launches Global Media Intelligent division

By Ned Randolph -- Video Business, 11/12/2007

NOV. 12 | DVD sales are no longer bolstering the movie industry, according to a report by Global Media Intelligent, a new division of international media analyst firm Screen Digest.

In the report "Do Movies Make Money?," GMI, which will serve media-focused institutional investors in the U.S, paints a bleak picture of the future of the movie industry, which is experiencing rising production costs and falling revenue.

The report says 132 medium-to-big-budget films released by the leading studios in 2006 will produce a loss of $1.9 billion pre-tax, compared to a profit of $2.2 billion for the new releases of 2004.

DVD sales, which accounted for 75% of growth and significant profits from 1999 to 2004, are declining domestically and internationally. In the first six months of 2007, DVD sales fell 12.5% from 2006, the report says.

"Some executives in the Hollywood studios are looking to the new technologies of video-on-demand and subscription-based TV to fill the gap left by DVD. However, GMI estimates that while vod will offer a superior share of the consumer dollar over traditional pay channels (60% versus 40%), it will not deliver at the lofty levels predicted in the early days of the industry and will not help the studios put old wine in new bottles," said Roger Smith, author of the report.

"Our analysis of the business of the Hollywood studios may come as a surprise to investors and even some people within the industry. We believe there is little chance of the negative revenue trend reversing in the coming years," Smith said. "New technology will not deliver anything like the revenue initially predicted, and as DVD sales continue to decline and the cost of making movies increases, the message is simple: the Hollywood studios must begin a serious attempt to reign in costs, like News Corp.'s Fox has done, if they are to survive."

One of the biggest sources of increasing costs is salary paid to top actors, directors and producers. These costs totaled $3 billion in 2006—nearly double that of five years ago, according to the report. Although the studios are in negotiations with writers, actors and directors over fees, salaries are not the main issue; the current cost of producing, casting and advertising movies in the present environment simply exceeds the likely returns, Smith said.

Financing films also has become a major concern. Until recently, the industry used to generate its own capital entirely from internal sources. However, since 2004 when revenue started to decline, the industry has been forced to seek outside financing, mostly from hedge funds and private equity. GMI believes that this source of capital will not be available on the attractive terms that until recently prevailed. Sophisticated investors are becoming aware of just how thin, or even non-existent, movie profit margins can be, GMI's report says.

The new GMI division will employ 40 analysts to cover TV, motion pictures, videogames, mobile media, home entertainment and broadband media by tracking dozens of markets and hundreds of companies all over the world.