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Fox Studio Operating Income Plummets 72%


By Erik Gruenwedel | Posted: 05 Feb 2009

Citing unfavorable year-over-year DVD releases, News Corp. Feb. 5 said its filmed-entertainment segment reported second-quarter (ended Dec. 31, 2008) operating income of $112 million, down nearly 73% from $403 million during the prior-year period.

Filmed entertainment includes 20th Century Fox Home Entertainment.

Revenue fell 25% to nearly $1.5 billion, from $1.9 billion during the previous year.

The results mirrored a disappointing trend among major studios that has seen the economic turmoil wreak havoc on consumer confidence and spending on packaged media.

The studio said quarterly DVD releases of Horton Hears a Who! and The Happening combined with the pay-per-view TV broadcast of Juno performed unfavorably compared to the prior-year releases of The Simpsons Movie, Live Free or Die Hard and Fantastic Four: Rise of the Silver Surfer, as well as the cable VOD availability of Night at the Museum and Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan.

News Corp. president and COO Peter Chernin, in a call with analysts, attributed the DVD slowdown more to the recession than a general souring on packaged media. He said DVD revenue increased in the first half of 2008 and declined 11% in the second half due to escalating consumer pressure from the economy.

Referencing comments made earlier this week by Disney CEO Bob Iger about changing consumer habits toward the DVD market, Chernin said it was too soon to draw conclusions given the depths of the consumer recession.

“We’ve seen some pretty rough numbers,” he said. “I think it is too early to say it is a secular decline.”

The COO said he was encouraged that DVD sellthrough in January only declined 9%, which represented an improvement over the 15% decline last October.

“I clearly think it is important to keep a close eye on the business,” he said. “And I think it is sort of the cornerstone of where the company looks at things.”

He said VOD and digital revenue grew 25% and 50%, respectively, but paled in comparison to DVD. He said the studio was focused on producing quality content and maximizing revenue through multiple distribution channels, including Hulu.com.

Chernin said he would not purposely shrink the release window between theatrical and DVD, especially following the record January U.S. box office. The studio is banking heavily on the theatrical and home video results of Marley & Me, Oscar-nominated Slumdog Millionaire, and three sequels: Ice Age: Dawn of the Dinosaurs, Night at the Museum: Battle of the Smithsonian, and X-Men Origins: Wolverine.

“We don’t in any ways [want to] compromise that,” he said.

The results included a $22 million write-down from an unidentified bankrupt retail customer in the United Kingdom. The company said theatrical results of Australia were disappointing in the United States.

Chernin said Fox had eliminated $400 million in operational costs in marketing, vendor deals and employee headcounts. The latter included 800 positions from the studio and freezing filling open positions.

News Corp. revised downward its projected fiscal year operating net income guidance by 30% from $5.1 billion. The media conglomerate said 60% of the decline would result from the deteriorating ad market and 25% due to weakened home entertainment and book sales.

“The economic recession is deeper than anyone predicted,” CEO Rupert Murdoch said. “It is impossible to be completely prepared for a downturn of this magnitude.”

He said the situation was the worst in News Corp.’s history.

“Will we return to the big profits of two years ago? I don't know,” Murdoch said.

Overall revenue topped $7.8 billion, down almost 8% from $8.5 billion the previous year. Due to an $8.4 billion pre-tax non-cash impairment charge related to goodwill and intangible assets, News Corp. reported a net loss of $6.4 billion.

"We are doing everything we possibly can to position ourselves to emerge stronger when the economy returns to some semblance of normalcy," Murdoch said.

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