Dreamworks blames falling DVD sales for profits drag

DreamWorks Animation joined the growing number of Hollywood studios to paint a gloomy picture about their businesses yesterday, saying a slump in demand for DVDs meant annual profits would be below expectations.

A slowing in DVD sales is particularly unwelcome for Hollywood, which is this summer also suffering the biggest drop-off in cinema attendance in 20 years.

Shares in DreamWorks Animation fell 14 per cent to $23 (£13) in morning trading, compared with their flotation price of $28 when the company was spun off from the DreamWorks studio started by Steven Spielberg, Jeffrey Katzenberg and David Geffen.

DreamWorks Animation, whose cartoon epics include Shrek, Shark Tale and Antz, also said the Securities and Exchange Commission is carrying out an informal investigation into the circumstances surrounding its first quarter earnings in May. It added that it would not go ahead with a planned secondary $500m offering of its stock after the IPO.

After initial popularity on Wall Street, DreamWorks Animation has hit problems. It warned in May that DVD sales of Shrek 2 were below expectations, while its Madagascar, a tale of animals who escape from New York's zoo, has disappointed at the US box office.

Other studios are also struggling. Pixar Animation Studios, which made Toy Story, cut its earnings forecast last month after stores selling DVDs of its latest story, The Incredibles, returned higher than expected numbers of unsold copies. Its shares slumped 14 per cent in one day.

Kris Leslie, DreamWorks Animation's chief financial officer, said: "We have observed changes in the marketplace that appear to have impacted our titles." She said it was too early "to determine if these changes are temporary or permanent".

Generally, DVD sales are on track to be 10 per cent higher this year, but that is down from the recent annual rates of growth of about 40 per cent when consumers bought DVD players at a dramatic pace.

Movie studios churned out a large number of DVDs as they tried to fend off competition from rival sources of entertainment, including the internet and pay-per-view cable and satellite television channels.

However, the move may have been counter-productive. "Studios are flooding retailers with DVDs, which means each title is not on the shelves for as long," said Anthony DiClemente at Lehman Brothers.

At the same time, the heads of Hollywood's largest entertainment businesses are also struggling with the conundrum of fewer people going to the cinema this summer. Box office sales of films that were expected to be certain hits, such as Russell Crowe's Cinderella Man, have so far been disappointing.