Harry Potter has tackled some tough opponents in his short, but action-packed life. Dragons, ogres, a basilisk, the Dark Lord Voldermort, Uncle Vernon and Aunt Petunia. Next week he will be at it again, casting his spell over cinema audiences with the London premiere of Harry Potter and the Half-Blood Prince. But while box office success looks all but guaranteed, Potter’s magic faces a bigger test come Christmas: the decline of the DVD.

DVD sales have become the mainstay of Hollywood and the financing arm for many independent movies. Barclays Capital analyst Anthony DiClemente calculates that last year the box office returns from major studios were about $10 billion in the US. By contrast, the home video market was worth $24 billion.

At the box office, the recession has been good to Hollywood. Cinema sales have boomed with movies including Transformers 2, Star Trek, Up and now Harry Potter expected to deliver a record year for the industry. According to Box Office Mojo, the cinema industry site, theatrical receipts are tallying close to 12% ahead of 2008. But at the same time, DVD sales, while still huge, are slumping at an alarming rate.

The previous five Potter movies have generated billions in worldwide box-office and DVD sales, but each film has sold fewer discs than its predecessor. This Christmas, when the next film is expected to be released for home sale, it will enter a market that has already been hit hard. DiClemente said that DVD sales had been dropping at between 12-14% for the past few quarters, half of that was probably due to the recession and the rest down to structural changes in home entertainment.

This year, Bob Iger, the Disney chief, became the first studio boss to acknowledge publicly that the slump might be about more than consumers tightening their belts in the recession. “We have been taking a hard look at this business for a while with the belief that as choice grows, consumers will simply be more selective about what they buy,” Iger said.

In the UK, sales of DVDs have been hit by the downturn and by the collapse of retailers Woolworths and Zavvi, said Lavinia Carey, director general of the British Video Association. Last year was a record year for DVD sales in the UK, but this year they fell 10% in the first five months — the first decline since DVD was introduced in 1998.

It is a worrying trend that is likely to have a profound impact on the shape of the movie business. Paramount Pictures, riding high with the Transformers franchise, is reportedly in talks about merging some, or all, of its DVD operations with Sony and Fox, owned by News Corp, parent company of The Sunday Times. A merger could save costs on production and distribution as the market quickly moves toward digital distribution of film and television content.

Edward Jay Epstein, author of The Big Picture: Money and Power in Hollywood, said independent film makers, who rely on DVD sales to finance their films, were likely to be the worst hit. Loans backed by international and DVD rights have become the mainstay of independent film financing.

Sales of Blu-ray, the high-definition disc format, are growing fast. In the UK Blu-ray sales are up 231% on last year, according to Carey. However, they are starting from a low base and many consumers appear wary of committing to a new format as films increasingly move online.

Epstein said that until the picture became clear the major studios are likely to play it safe and the independents will struggle to raise cash.

“We are going to see fewer dramas, fewer comedies, more franchise movies, more Harry Potter, more Spider-Man. Films that will sell overseas,” he said.

The figures suggest that the DVD has been on the decline for some time. In the US, per capita spending on DVDs has been falling since 2005 and 2006, when Americans spent $60 a head on them. Last year, the figure was $43, according to Hollywood researchers The-Numbers.com. But the fall has been gradual and masked by a rising population that has driven up total sales. Bruce Nash of The-Numbers said there was no disguising the direction of sales now. “Towards the end of last year sales started to fall dramatically, well below what the industry was expecting,” he said.

Unlike the fall in CD sales, the DVD slump has not been caused by rampant pirating, although it is increasingly an issue. DiClemente said the economic downturn has encouraged more people to rent movies from services such as Lovefilm in the UK and Netflix in the US and to watch films either on the internet or via pay-per-view services on TV. But the big factor is that people are simply buying fewer DVDs.

Until recently, Hollywood had a formula for estimating the number of DVDs it would sell of a given film in the all-important first week of its release, when marketing is at its height. In its first week, a film usually sold 10-15% of the total number of cinema tickets sold. Ten million tickets would translate to 1-1.5 million DVDs. Nash said that figure was now closer to 7-10% and films with fan appeal, such as Potter and Twilight, were holding up, but that the recession had hit other titles hard.

“People are no longer prepared to spend money on a film they will watch only once,” he said.

In the short term, the shift is likely to have a profound impact on the bottom lines of the studios. A DVD selling at $14.99 produces about $10 for the studio. Rental sales, by contrast, provide only $2-$2.50.

DiClemente said even after the economy picks up, the decline in DVD sales and the move towards digital sales, rentals and new forms of payment looks set to continue. “Over the long period the same thing is going to happen to the DVD as happened to the CD,” he said. “The industry has got to shift to digital.”

He said Blu-ray was growing fast, but two factors were likely to hamper the format’s growth: first, consumers were aware that movies are soon to be delivered digitally, and second, in the current environment, upgrading their DVD players was an expensive proposition.

“This is what the music industry is going through,” said DiClemente. “Content providers have to fund new, innovative ways to monetise their assets. Over the long period, Hollywood has done that before and I’m confident that they can do it again.

“In the meantime, there’s the recession and the consumer is confused. There are going to be some bumps in the road.”

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