Just before Thanksgiving I highlighted my concerns that holiday spending on DVDs could be weaker than expected. At the time, I identified two potential problems. First, the studios have to deal with a generally weak holiday spending environment. Second, the amazing success of the box office this summer put a glut of high profile DVDs on retailer shelves. So assuming consumers were inclined to spend on DVDs, any single title could get squeezed or all the titles might lag sales goals. Now, another problem has emerged which is great success for video game titles. Halo, Guitar Hero 3, and others appear to be selling very well this holiday season.
Early returns on DVD sales were mixed. Transformers was first out of the box and did very well selling 8 million units at its launch. Spiderman 3 was next and underwhelmed with 3 million units. Ratatouille got off to a good start with 3.8 million units but Shrek The Third, which had domestic box office more than 50% above Ratatouille, sold just 3.3 million units in its first week. Things looked a little better when Live Free or Die Hard sold a better than expected 2.1 million units.
While the jury remains out, the latest sales data is much more promising. Last week saw the release of Pirates of the Caribbean: At World’s End and The Bourne Ultimatum and both performed very strongly. Pirates sold 8 million units and Bourne sold 3 million.
I suspect the final outcome will be a moderately weaker than expected DVD sales season with more titles than usual underperforming…..

….But the breadth of titles across the industry and within individual studios should mean that weakness in individual titles won’t have a meaningful impact on 4Q results for the studio owners. The one exception could be Dreamworks Animation, which is relying completely on Shrek The Third. However, DWA shares already have been killed mitigating risk relative to expectations. Disney is most highly reliant on DVD sales among the majors but as long as shortfalls for Ratatouille or Pirates are not severe, the breadth of the company’s offerings, including Meet The Robinsons, High School Musical 2, and Hannah Montana, should prevent DVDs from causing an earnings shortfall.
A moderately weak DVD season does have longer term implications as it will reinforce the thesis that this critical driver of movie and TV studio economics is in a gradual state of decline. Resolution of the format war between next generation DVD players would be the best tonic for the DVD flu but that is not happening this holiday season which means the industry likely has to wait another year.