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Chicken Little Meets DVD

21 Jul, 2005 By: Erik Gruenwedel

Following the recent disclosure by DreamWorks Animation SKG that DVD sales of Shrek 2 wouldn't meet expectations — news that prompted several shareholder lawsuits — one could reasonably assume, considering these litigious times, that similar legal recourse might befall Pixar Animation Studios.

That's because Pixar last month announced that DVD sales of The Incredibles fell 7 percent below projections, dropping quarterly net income $6 million. The news sparked a company warning to investors that forced Pixar to increase financial reserves for the anticipated “run of the unit returns” occurring at a major retailer near you.

It also spawned a minor trend among some ambitious analysts to release statements questioning the state of the industry — tantamount to yelling “Fire!” in a movie theater.

Lions Gate Entertainment Corp. shares fell slightly thereafter, prompting one analyst to speculate that stocks tied to media companies “heavily reliant” on DVD would suffer accordingly. That same analyst admitted, however, that Lions Gate traditionally underships product, thereby rendering concerns mute.

Arvind Bhatia, media analyst with Southwest Securities, Dallas, said current weak theatrical and DVD release schedules was a short-term issue, likely to be reversed in the fourth quarter.

This is not the kind of rollercoaster scuttlebutt shareholders want to see on a Securities and Exchange Commission filing — or, for that matter, in a civil suit.

Not that Pixar's The Incredibles is without guilt.

The storyline seemed formulaic, lacking the originality and punch found in predecessors Toy Story, Monsters, Inc. and Finding Nemo. The pivotal chase scene played like a big-screen promo for a future theme park thrill ride.

That said, The Incredibles has sold more than 40 million units, while Shrek 2 sold 35 million units, results studios and shareholders should embrace.

If anything, Pixar and DreamWorks are victims of previous successes and the economic laws of supply and demand, including a saturated market, commodity pricing and lackluster product.

Instead of excessive product returns, Pixar is guilty of being too conservative in its release schedule and sitting on almost $1 billion in free cash, the latter of which analysts consider foolish and shareholders could argue entitles them to a healthy dividend.

Now, that's worth a civil fight.

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