Viacom’s Paramount Pictures studio is seeking to merge its home entertainment division with a rival and is in advanced talks with Sony Pictures and News Corporation’s Fox studio, signalling that Hollywood could soon see a wave of consolidation.

The negotiations follow an industry-wide slump in DVD sales, the entertainment sector’s most profitable revenue stream. Sales have fallen by as much as 20 per cent in the past year, forcing studios to cut costs in order to maintain profit margins.