Fourth-quarter shipments fell 32 percent in the U.S. and Canada to 453.6 million DVDs, according to Los Angeles-based Digital Entertainment Group. The drop is the biggest since the industry-funded researcher started keeping track in 1997.

The decline is being fueled by viewer shifts toward rental services such as Netflix Inc., the U.S. recession and technology that makes it easier to stream Web videos to televisions.

“Making a movie just wont be as profitable as it once was,” Barclays Capital analyst Anthony DiClemente in New York said in an interview. “There will be a complete bottoms-up reconstruction of the economics of the film business.”

DVD sales may fall 11 percent this year and cause studios to write down new and recent titles that miss internal forecasts, Michael Nathanson, an analyst at Sanford C. Bernstein & Co. in New York, wrote in a report this month.

Home-video sales and rentals, mostly reflecting DVDs, accounted for 68 percent of the $88.9 billion global filmed- entertainment market in 2008, according to estimates by New York-based PricewaterhouseCoopers LLP. The figures include $3.89 billion in online rental fees and digital streaming revenue.

Future Cash Flows

Films are valued based on projected sales over 10 to 15 years, from theatrical release through DVD sales, cable television and TV broadcasts outside the U.S., said David A. Davis, managing partner of Arpeggio Partners LLC, a Santa Monica, California-based consultant to movie studios.

Studio estimates of these cash flows may prove optimistic if DVD sales continue to deteriorate, according to Nathanson.

In his Jan. 14 report, Nathanson lowered earnings estimates for Viacom, owner of Paramount Pictures; Burbank, California- based Disney; and Twentieth Century Fox owner News Corp. for this year and next. He left his 2009 projection for Time Warner, owner of Warner Bros. Pictures, unchanged while lowering the 2010 forecast.

“Dark Knight” producer Warner Bros. was the top Hollywood studio last year in U.S. box office sales, followed by Paramount and Sony Pictures Entertainment.

“Its too early to say” how the drop in DVD sales will affect Paramounts business, said spokeswoman Patti Rockenwagner.

ITunes, Netflix

DVD usage surpassed VHS cassettes in 2002 and peaked in 2006, when U.S. sales and rentals totaled $24.1 billion, according to Digital Entertainment Group. Now consumers are shifting toward digital services such as Apple Inc.s iTunes and online movie rentals from Netflix.

Netflixs revenue surged 19 percent in the fourth quarter, the Los Gatos, California-based company said on Jan. 26, citing “growing momentum with Internet streaming” and the impact of Microsoft Corp. and Tivo Inc. devices that make it easier to view Netflix rentals online.

Retailers are selling fewer DVDs. Richfield, Minnesota- based Best Buy Co., the largest U.S. electronics seller, reported a 12 percent decline in comparable-store movie, music and video-game sales in December.

Big-Screen TV

“The easier it becomes for consumers to purchase content directly and have it come to their big-screen TV, the more it takes away revenue from the physical retailer,” Michael Morris, an analyst at UBS Securities LLC in New York, said in an interview.

The lower cost may also boost the appeal of rentals to strapped consumers. Unlimited Netflix online or DVD rentals cost $8.99 a month. A DVD of Paramounts “Iron Man” costs $15 at Amazon.com.

Source