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DVD Revenue Downturn Troubles Hollywood

The plateauing of the home video market is making a measurable dent in major studio finances. In 2005, the nearly $5.8 billion in cash flow from domestic home video studio rentals and $4.8 billion in domestic theatrical rentals covered 84 percent of studio film production and domestic marketing costs, according to Kagan Research. That's a cost coverage ratio (CCR) of 0.84 � and it's falling.

Cash flow is simple profit realized by subtracting direct expenses from the $10+ billion in distributor-level revenue generated by domestic home video VHS tapes and DVDs. Still, the domestic video revenue figure (also referred to as rentals) is more than twice as much as the revenues the majors generate from cinema-release rentals.

Domestic home video revenue at the consumer spend level fell 1 percent in 2005, ending a spectacular run since the 1997 U.S. introduction of the DVD. That's a key reason the film industry's torrid growth rate is decelerating, although it remains above average.

"Of course, the majors have other sources of internal cash flow including foreign video, theatrical release, global TV and merchandising," notes Kagan analyst Wade Holden. "Beyond internal sources, film companies can tap bank loans, private equity and other financial sources."

The top individual films based on CCR are hit independent (indie) releases, as they carry low expenses. For example, the Lionsgate release of "Diary of a Mad Black Woman" achieved a 4.24 CCR, which means theatrical rentals and video cash flow alone exceeded its production and domestic expense by more than three fold. In contrast, the top ranked big-budget film is Disney/Pixar's animated family film "The Incredibles", which ranked number 12 with a 3.23 CCR.

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