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Mid-Year Theatrical vs. Packaged Media

7 Jul, 2009 By: Erik Gruenwedel

Last weekend’s photo-finish win by Transformers: Revenge of the Fallen over Ice Age: Dawn of the Dinosaurs pushed year-to-date domestic box office revenue (through July 6) to a record $5.5 billion — up nearly 11% from the same period last year, according to BoxOfficeMojo.com.

By comparison Blu-ray and DVD sellthrough and rental revenue — which was down more than 9% to $3.35 billion in the first quarter, according to the Digital Entertainment Group (DEG) — should conceivably top $6 billion through the mid-year (doubling the first quarter number), say analysts.

The DEG has not yet officially released mid-year revenues.

At a glance, any hand wringing among the studios over declining home entertainment revenue would appear unwarranted in light of home entertainment revenue possibly being as much as $700 million higher than theatrical with the lucrative fourth quarter release slate pending.

But that would neglect complicated studio accounting practices that value margins as much, if not more, than revenue, analysts say. A studio typically hopes to break even on a movie based on the theatrical window, with actual profit occurring in the subsequent release windows, notably with DVD and Blu-ray Disc.

“It is about the rate of change, not the overall size of the market,” said Michael Nathanson with Sanford Bernstein in New York.

Indeed, with the exception of Blu-ray, which was up 105%, DVD sellthrough fell 14% in the first quarter.

“As packaged media revenue has declined, so has the ROI for the average film,” said Eric Handler, senior equity analyst media & entertainment research with MKM Partners LLC. “Digital has helped make up for some of the packaged media decline, but thus far it’s not an even swap.”

Edward Woo, research analyst with Wedbush Morgan Securities in Los Angeles, said it is difficult to value whether box office or home entertainment comparatively is winning or losing.

“You really need both in order for the film to be a financial success or not,” Woo said. “While packaged media is declining right now, it’s still a major source of revenue and expected to continue being so going forward.”

Handler said there is little doubt the strong box office numbers are making theater owners happy since any revenue growth over 4% suggests attendance is increasing in real numbers and not inflated ticket prices. He said increased attendance results in a $3 per cap incremental revenue gain generated by concessions.

“Theater owners use admissions revenue to cover overhead, which leaves concessions (with 85% gross margin) as excess profit,” he said.

Ralph Tribbey, editor of industry tip sheet The DVD Release Report, said declining home entertainment sales should be gauged on which niche is down. He said studios have cut back on theatrical catalog releases, which typically include little or no production costs. He said TV DVD releases are down due to a depletion of available content.

“People don’t walk into a video store and ask what’s good; they ask what is new,” Tribbey said. “I think [the studios] are going to do just fine in the third and fourth quarters with the films they have in the pipeline. They’re just not going to make as much as they made last year.”

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