Paramount, rivals said to be in talks

An industrywide slump in DVD sales and the weak economy have prompted Paramount Pictures to enter into talks with at least two competitors to merge some aspects of its home video operations, people briefed on the negotiations said.

Although discussions are still preliminary, the Viacom Inc.-owned studio initiated talks a few months ago with Sony Pictures and 20th Century Fox to handle the production, packaging, distribution and administrative elements of their DVD businesses, these people said. Any potential combination would be about saving costs, not about sharing revenue.

Paramount would maintain its own marketing and promotion of home entertainment.

The recession and eroding sales of DVDs, which have long supported the movie business, set the stage for these discussions, people close to the talks said.

First-quarter DVD sales fell 14% compared with the same period a year earlier, according to DEG: The Digital Entertainment Group, a trade association.

Sales of new releases have been off by double digits since September, when the economy showed signs of faltering. Major retailers, including Wal-Mart and Best Buy, are reducing the amount of space they dedicate to DVDs as shoppers cut back spending on such discretionary purchases.

Margins are being squeezed further as consumers gravitate to lower-cost rental services, such as Netflix’s movies by mail offering and Redbox, which dispenses $1 rentals from supermarket kiosks. And new sources of revenue, including Blu-ray movie discs and digital distribution, aren’t enough to offset the loss in DVD sales.

“The business is being cannibalized by . . . Netflix and Redbox, which offer both cost and convenience,” said Warren N. Lieberfarb, an industry consultant credited with advocating development of the DVD.

Combining back-office operations to trim expenses has precedents. For example, Universal Studios and Paramount’s joint venture Cinema International Corp. distributed their films outside of the United States for about 20 years.

Also, Fox handles DVD distribution for Lionsgate and Metro-Goldwyn-Mayer through a facility in Huntsville, Ala., that does all the manufacturing, packaging and distribution and provides information to manage inventory.

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