Warner Bros. just became the latest studio to announce cut backs, unveiling plans to eliminate 800 jobs, about 10% of its global workforce, through layoffs, attrition and outsourcing. The move follows similar cut backs at Paramount Pictures and NBC Universal, as well as earlier downsizing moves by Warner Bros. parent Time Warner. In a memo to staffers announcing the cuts, Warner Bros. toppers Barry Meyer and Alan Horn called the decision painful but necessary.

“Despite the fact that the company performed solidly in 2008, this decision reflects changes necessary for stability and growth going forward,” the memo said. “The changing entertainment business landscape, shifting consumer demand and the overall state of the economy have affected companies around the world, and Warner Bros. is not immune to these factors.”

One of the biggest changes in the entertainment business landscape—and the one that has hit the studios hardest--has been the decline in consumer spending on DVDs, their biggest revenue stream, which fell 8.5% last year according to Video Business. That was partially made up by an increase in sales of Blu-ray Discs, but overall consumer spending on the category was still down 5.7%, according to the VB data, to $21.7 billion. Other researchers have reported even steeper drops.

Studios are now citing the drop in DVD sales to try to rein in the enormous salaries lavished on A-list talent over the past decade.

While all industries are cutting back these days as companies hunker down for what everyone expects will be a miserable 2009, the studios have a bigger problem than just their high cost structure, however: They are losing their audience, and no amount of cut backs is likely to fix that problem.

While box-office revenues were up slightly last year, to $9.6 billion, actual ticket sales fell by 5% (higher ticket prices account for the difference). That decline comes after a flat 2007 in ticket sales.

The DVD numbers are particularly alarming, especially since the decline in consumer spending is not being made up in other distribution channels. Digital delivery of movies remains a paltry business, racking up a mere $488 million last year, according to Adams Media Research, far less than the fall off in DVD revenue.

Where is the audience going? It’s playing video games.

Despite a weak December due to the economic downturn, videogame sales increased 19% in the U.S. last year, according to the NPD Group, to $21.33 billion. The game business now virtually equals the DVD business in terms of consumer spending: $21.7 billion to $21.3 billion.

The situation is even more pronounced in some markets outside the U.S. In Australia, for instance, the videogame business is now twice as large as the theatrical box office and more than 40% larger than the DVD business, according to the Interactive Entertainment Association of Australia.

Worldwide, games now account for 53% of total consumer spending on home entertainment software, according to Media Control GFK International, surpassing combined sales of DVD and Blu-ray.

It’s no accident that sales of The Dark Night on Blu-ray far outstripped any other title to date, both in absolute terms and as a percentage of total unit sales. It appeals to the gamer demographic and was the one Blu-ray title every PlayStation 3 owner actually bought (which just goes to show that PS3 is driven by the dynamics of the games industry, not the DVD business, despite Sony’s most fervent wishes, but that’s a story for another time).

While the studios certainly need to get their fiscals houses in order, I’m not sure the long term trend is really reversible. For better or worse, interactive entertainment is becoming the dominant form of entertainment in the U.S. and abroad, apart from live events and television, and commands an ever-growing slice of the (shrinking) consumer leisure dollar.

That’s not something the studios can cut their way out of.

Paul Sweeting

Paul Sweeting is the Editor of Content Agenda, a business-to-business brand dedicated to the nexus of content, technology and business. This piece was originally published on Paul's blog "Media Wonk" on Content Agenda and is posted on DMW with the author's permission.

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