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DVD Decline Cuts Disney Studio Q1 Income

5 Feb, 2008 By: Erik Gruenwedel

Strong DVD sales of Pirates of the Caribbean: At World's End, Ratatouille and The Jungle Book Platinum Edition couldn't halt a 15% decline in The Walt Disney Co.'s studio entertainment first quarter (which ended Dec. 29) operating income.

Studio income, which includes Walt Disney Studios Home Entertainment, fell to $514 million, compared to $603 million last year. Segment revenue was flat at $2 billion.

In an investor call, Tom Staggs, senior EVP and CFO, said the decline in studio entertainment was due to tough comparisons with last year, when the quarter included DVD sales of Disney/Pixar's Cars, Pirates of the Caribbean: Dead Man's Chest and The Little Mermaid Platinum Edition, among others.

Pirates of the Caribbean: At World's End and Ratatouille performed well, but DVD unit sales came in roughly 9% behind last year's remarkable results,” Staggs said.

He said first-quarter DVD revenue for Ratatouille included just domestic and limited international sales, compared to Cars, which included worldwide sales.

While Ratatouille is Pixar's third-highest theatrical revenue generator, Disney president and CEO Bob Iger said the film would not be franchised across multiple distribution channels as compared to “Pirates” and “Toy Story.”

The CEO also said there will be a theatrical sequel to Cars in addition to the release of Toy Story 3 in 2010. The studio is planning 3D releases of the first two “Toy Story” films in 2009.

Separately, Disney's board signed Iger to a new five-year contract through Jan. 31, 2013.

Iger said DVD sales of High School Musical 2 had exceeded expectations. He projected the final tally to rival the 15 million unit sales of the original.

He was especially pleased with the strong theatrical box office results from the 3D theatrical release of Hannah Montana & Miley Cyrus: Best of Both Worlds, which topped last weekend's box office with more than $31 million in revenue.

The executive said the Hannah Montana concert tour had sold more than 8 million music CDs.

Staggs said studio margins declined in the quarter due to greater emphasis on theatrical versus home entertainment releases.

“When you put films out in the theatrical window, the margin is dramatically lower,” he said. “When home video is driving your results, your margins are going to come up.”

When asked if future TV DVDs and TV syndication could be threatened by the lack of new product in production due to the writers strike, Staggs said timing could be impacted by the delayed shows.

“We still have a very strong [TV] pipeline,” Staggs said.

Iger said it was “guaranteed” the ABC Television Network would make fewer pilots this year even if the writers strike was settled this week.

“The strike did not have a significant impact on first quarter results,” he said.

For the quarter, Disney posted a 36% drop in overall profit to $1.2 billion despite a 9% revenue increase to $10.4 billion, compared to profit of $1.7 billion and revenue of $9.5 billion during the same period last year.

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