DISK AVERSE.(The Talk of the Town; movie and DVD industry trends)

In 1918, the movie business found itself in crisis. Moviegoers, who, increasingly, were more educated and more middle-class, had been growing bored with the crude, melodramatic shorts of the day. "Neither the producers nor the theatres are making money, and the critics are justly condemning most of the current films," Photoplay commented. "The producer . . . is not producing good enough pictures. Unless he does so, and does so promptly, the movie business cannot hope long to endure." But in the following years, thanks to directors like Chaplin, Griffith, and DeMille, increasingly sophisticated films propelled audiences back into theatres. What had looked like the death of Hollywood was what we now think of as its birth.

Nearly ninety years later, theatre attendance is tumbling again, audiences and critics are disgruntled, and each new week brings a lament about the feeble box-office and a postmortem for some surefire hit that no one came to see. Last week, the total box-office take was down seven per cent from the previous year, and the one would-be blockbuster, Michael Bay's "The Island," bombed, bringing in a pathetic twelve million dollars. In other words, there couldn't be a better time for Hollywood to once more reinvent itself.

In some ways, that reinvention is already under way. As Edward Jay Epstein explains in his new book about the economics of Hollywood, "The Big Picture," in 1947 box-office receipts accounted for ninety-five per cent of the studios' revenue; today, they account for less than a fifth. The key to this transformation is the DVD, one of the most lucrative innovations in Hollywood since the introduction of sound. Unlike videotapes, their predecessors, DVDs have remarkably high profit margins--they're cheap to make, and people buy them rather than just renting them. The DVD, then, has changed the way the studios make money. But it has only started to change the movies they make.

Hollywood's basic strategy is a familiar one: invest a huge amount of money in films that have the potential to be blockbusters, target teen-agers as a core audience, and spend enormous amounts of energy and money trying to get people to the theatre on the first weekend. This is a high-risk, high-reward strategy, and it can work, but it makes less sense in a world in which DVDs are the main source of revenue. While many blockbusters do very well on DVD, they generally make less that way than at the box office. Instead, the weekly lists of DVDs are full of movies that Hollywood has traditionally considered mediocre performers--small-to-mid-budget comedies, horror films, and dramas, like "Friday Night Lights," "The Notebook," and "Hide and Seek." Unlike blockbusters, these movies often earn more from DVD sales than at the box office. The bio-pic "Ray," for instance, earned seventy-five million in the theatre but a hundred and twenty million in DVD sales.

In recent weeks, ...