Marginal Revolution has a nice analysis of what is wrong in Hollywood. They state the following 6 reasons (and yes I know 5 is listed twice, but a quote is a quote):

1. Hollywood cannot control its marketing costs or star salaries. The growing importance of DVDs increases the “needle in the haystack” problem for any single film and thus locks studios into more marketing, creating a vicious spiral.
2. TV is now so much better, and offers artists greater creative freedom. Why watch movies?
3. The Internet is outcompeting cinema, whether at the multiplex or on DVD.
4. Big TV screens are keeping people at home, which lowers box office receipts. This also hurts the long-term prospects of many DVDs.
5. The demand for DVDs has fallen because movie lovers have completed their core collections, just as the demands for classical CDs have fallen.
5. The demand for DVDs was due to fall in any case. Forget the collectors, you buy DVDs to have a stock on hand so you don’t have to run out to the video store on short notice. Now everyone has a stock. Stocks must be replenished every now and then, but there is no longer a large new cohort simultaneously building up a stock from scratch.

Link.