Prices, sales both down in home vid sector


NEW YORK -- Home video market sluggishness is the latest concern gripping media and entertainment investors, adding to already high levels of wariness.

Big sector stocks have been under pressure and trading close to 52-week lows.

"The biggest problem is slowly eroding (performance) expectations," Gamco Investors portfolio manager Lawrence Haverty says.

The deal market has dried up amid the global credit crunch, and the ad market is showing signs of weakness amid a housing slump and increasing chatter about a U.S. recession.

Home video also has really started to weaken. "That is a big profit driver," Haverty said.

Natixis Bleichroeder analyst Alan Gould picked up on that theme in a report this week.

Blockbusters are generating fewer DVD unit sales than in the past, he argued. "Where a big picture used to sell 20 million units, top movies now struggle to reach 10 million units," Gould explained.

He called home video "the biggest profit center for the studios" before moving on to examine what the sluggish trends mean.

Marvel Entertainment's films "have underperformed this holiday season, with both 'Spider-Man 3' and 'Fantastic Four: Rise of the Silver Surfer' missing home video projections, generating an estimated 20% and 33% of box-office revenue," the Natixis analyst said. "We now highly question whether video revenue from the upcoming film slate will be able to generate 70% of domestic boxoffice as we have projected."

If video makes up only 35% of boxoffice, this would mean a $19 million, or 29%, reduction to his average profit per film estimate for Marvel, Gould calculated.

The analyst also reported signs that DreamWorks Animation's "Shrek the Third" is "pacing at a disappointing level." The early estimate of 6 million units sold would mean "much less than the industry average DVD revenue to domestic boxoffice revenue," he said.

He also noted that video industry leader Time Warner Inc. has seen its average unit price drop 15% during the first nine months of the year.

And while TV-DVDs have been the big growth driver of the video sector in recent years, "even that business seems to have topped out," according to Gould.

However, he lauded Lionsgate for avoiding blockbuster DVD releases this holiday season, with "War," "3:10 to Yuma" and "Good Luck Chuck" coming out in January.