Slowing DVD sales could sink holidays

In a note to clients, Natixis Bleichroeder senior entertainment analyst Alan Gould said early results from the fourth quarter point to softer-than-expected sales of movie and TV shows on DVD.

“Given the strong summer at the box office, the industry was expecting very strong fourth quarter home video sales,” Gould said. “However, the initial read on fourth quarter video releases has been somewhat disappointing.”

Among the most disappointing releases: Sony Pictures’ release of Marvel’s Spider-Man 3, which Gould projects will sell fewer than 5 million units; NBC Universal’s I Now Pronounce You Chuck & Larry, and DreamWorks Animation’s Shrek the Third, which is coming in at about 6 million units, 2 million shy of what would be expected based on its box-office gross, and Fox’s Fantastic Four: The Rise of the Silver Surfer.

Other highlights:

• Blockbuster films that once racked up sales of 20 million DVDs now struggle to reach half that number. “This trend is likely due to industry maturation, the economy and new technologies. Home video, the biggest profit center for the studios, is being impacted.”
• Industry leader Time Warner has seen its average DVD unit price drop 15% during the first nine months of the year, resulting in a 5% decline in video revenue on a 12% increase in units.
• Falling prices and declining unit sales “implies a $19 million, or 29%, reduction in our model film’s average profit.”

Despite the bad DVD news, Gould has not changed his rating on any of the media stocks he follows, maintaining “hold” ratings on Disney and Time Warner, and a “buy” rating on News Corp., Viacom and Lionsgate.