DVD woes send studio revenue down 26%

We knew it would be ugly. Now we’re starting to see just how hard the economic meltdown is hitting showbiz.

Disney kicked off what’s likely to be a grim earnings season in the media sector by posting on Tuesday a 32% drop in net income for the first quarter. Overall revenue slumped 8% to $9.6 billion, and net income was $845 million.

Red ink ran throughout the Mouse House, with operating income declining in each of its four operating units. The film studio fared worst, with revenue sliding 26% and operating income plummeting 64%. The broadcast side of the Mouse’s TV biz fell sharply, with revenue off 14% and operating income down 60%.

Disney was the first of several media companies whose financial results will quantify how the economy is affecting showbiz.

Sony and GE issued bleak results last month, but entertainment is just a small fraction of their total livelihood. Disney will be followed this week by Time Warner, News Corp. and several other media players; no one is expecting many rays of sunshine.

Disney execs blamed the economy, the faltering DVD biz and tough year-to-year comparisons for the weak perf of the studio. Homevid releases — “Wall-E” and “The Chronicles of Narnia: Price Caspian,” among others — were not as strong compared with 2007’s crop, which included “Pirates of the Caribbean: At World’s End” and “Ratatouille.”

“We are forcefully confronting current circumstance while investing in the great creativity, brands and assets” in the company fold, Disney prexy-CEO Robert Iger said. He said it was “unclear” when relief may come in what is “likely to be the weakest economy in our lifetime.”

The studio’s theatrical slate for the quarter included one solid hit, “Beverly Hills Chihuahua,” a lukewarm performer in “Bedtime Stories” and one misfire, “Miracle at St. Anna,” that opened just before the quarter but didn’t provide much revenue. That compares with a far stronger late-2007 roster that included “Enchanted” and “National Treasure: Book of Secrets.”

Most ominously, Iger said on the earnings call that traditional areas like broadcast TV are looking vulnerable even after a recovery.

“We don’t think the changes in consumption can all be attributed to the economy,” Iger said. The climate “has caused us to examine much of what we do.”

Theme parks struggled, as expected, but were not a big drag on results as some Wall Streeters had predicted. Domestic parks attendance declined 5% from record prior-year levels, helping to explain the 4% dip in revenue to $2.7 billion and a 24% drop in operating income to $382 million.

On the TV front, cable revenues managed a 2% gain but operating income declined 12%. The company cited several drags on earnings in the media networks division, including higher fees to carry NFL games on ESPN, lower ratings and correspondingly lower ad revenue at ABC.

Consumer products revenue spiked 18% due to the acquisition of Disney Stores North America. Revenue reached $773 million, while operating income fell 8% to $265 million. In terms of licensing, royalty revenue was flat with the prior-year quarter.

Within consumer products, the interactive segment posted a 13% rise in revenue to $313 million but saw operating net income swing to a loss of $45 million due to higher marketing costs and other factors.

Disney shares had gained 2% during an up session for the Dow, closing Tuesday at $20.62. The stock lost a lot of ground after hours as traders reacted to the results.

Two themes loomed large during a conference call with analysts to discuss the results: the urgent need to cut costs and the outlook for the battered homevid arena.

Iger repeatedly said the company is trying to improve the “price-to-value relationship” with extra features such as downloadable content on Blu-ray DVDs.

The topper also said the overall funk last fall as the economy cratered led to a consumer pullback on DVD spending. Competition for DVD dollars — coming from vidgames, digital cable and Web content — is already being closely watched by Disney, Iger said, citing stats suggesting a saturation point in the homevid space.

The average household owns 80 DVDs, he said, and avid consumers are in the 135-140 range, meaning the pace of acquiring new product had been likely to fall even without the economy’s decline.

From a cost standpoint, Iger said the film studio, which had already pared back to fewer films and a focus on tentpoles, is moving forward with an eye toward reining in spending wherever possible.

“The cost of the system needs to come down,” he said, alluding to businesses like the direct-to-DVD trade and feature films. “We need to be even more selective in terms of what we make and distribute.”

For the studio, as well as the rest of the company, costs are the focus during the downturn given the continued overall strength of the Mouse’s key brands, including Disney Channel, Pixar and ESPN. “We’d have a huge problem if there wasn’t the demand,” Iger said. “It would take a lot longer to fix that.”

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