Moguls will need a stiff drink nearby when they read Morgan Stanley analyst Benjamin Swinburne’s bracing report today about the state of the home video business — and Hollywood studios. He says that film operations at Universal, Disney, Paramount, Fox, and Warner Bros are worth about $19.3B, down from $40.2B in 2007. And a big reason for the 52% drop is that studios’ annual home video profits from each TV household fell to $100 last year from $127 in 2007 — and will continue to slide to $93 in 2015. Sales and high-priced rentals of DVDs and Blu-ray discs from retailers such as Blockbuster are simply falling too fast as consumers discover that they can do just fine paying $1.20 a night to rent a disc at a kiosk — or less to watch a movie from Netflix. The analyst says it’s possible that studios will boost sales of discs with the UltraViolet initiative, which gives buyers opportunities to stream the movies to mobile and other digital devices. But probably not: Swinburne figures that Netflix users, who pay about $8 a month for a subscription, in effect pay just 48 cents for each movie that they stream. As a result, “the incentive to rent a film at $4-$5 or buy a digital copy at $10-$15 goes down considerably,” he says. “It suggests Netflix film deals are potentially an impediment to the success of UltraViolet.” Meanwhile, DVD sales are falling much faster than Blu-ray disc sales are growing. And overseas opportunities aren’t sufficient to change the story given “lower studio settlement rates for international box office, a minor international home video market and rising film costs.”

The net result: The studios’ overall cash flow from movies fell about 40% from 2007 to 2011. Swinburne says that “only through significant realignment of (movie) cost levels, particularly in the area of marketing and distribution but also overall production costs, can values be maximized.” The picture isn’t entirely bleak, though. Big Media companies have protected themselves by diversifying more into television, a much healthier business, the analyst says.

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