Studio, Cable Net Stocks Climb On Content Demand

By
A A A

The television and film industry has its moments.

And anyone tracking the rise of engaging, quality content distributed via cable, Internet and satellite over a proliferation of venues -- theater, television, home computing and mobile devices -- knows this is one of them.

Start with the zombie-show "The Walking Dead" or "Breaking Bad" from cable TV content providerAMC Networks ( AMCX ). On the big screen, movie studioLions Gate Entertainment ( LGF ) struck box-office pay-dirt with "The Hunger Games" and "Twilight," films targeting teenagers.

In February, online video providerNetflix ( NFLX ) stepped into the fray with "House of Cards," its first try at producing its own content.

In spite of the many different delivery routes -- online streaming, pay-TV services or movie theaters -- the ultimate goal is the same.

"Everybody is looking for a break-out hit," said James Marsh, analyst at Piper Jaffray. The rising challenge is to maximize returns on a hit via a multitude of distribution channels, he says. Content producers are trying out new digital models, hoping not to undermine their existing cash cows, such as box-office receipts, advertising, or programming fees paid by cable TV companies.

Frenzied competition and rising consumer demand for that content have boosted earnings and share prices among Leisure-Movies & Related stocks, which have held a steady top-five ranking since early February among the 197 industry groups tracked by IBD .

Lions Gate shares are up more than 40% so far this year. Netflix has rocketed more than 100% as it fights its way back from a brutal, 19-month correction. In the adjacent, Media-Radio/TV industry group, AMC Networks is up 21%.

1. Business

Consumers watched silent movies accompanied by live piano a century ago. Today, movie theater chains are investing in 3D screens and cutting-edge sound systems so they can charge higher ticket prices.

At home, viewing has evolved from standard broadcast channels to cable, and videocassette to DVD options. Now consumers are turning to video-on-demand offerings via cable or satellite providers.

High-speed Internet service to homes is a fast-growing twist, enabling consumers to stream music and video to computers, web-connected TVs and mobile devices.

As new distribution technologies proliferate, content producers are struggling to decide what to make available where and find how much consumers will pay, says Michael Pachter, analyst at Wedbush Securities.

2. Market

For movie studios, box-office receipts and home video sales are still the biggest money-makers, says a Standard & Poor's report. Movies appear first in theaters. Studios then stagger release dates for the same films across a multitude of venues that include DVDs in stores, DVD-by-mail rentals; and video-on-demand services from cable and satellite providers. On-line streaming services provided by Netflix, Amazon Prime Instant Video, Wal-Mart Stores' Vudu and others are also high value options.

Once highly profitable, DVD sales are now in decline. U.S. consumer spending on "packaged" content such as DVDs fell 5.5% last year to $8.5 billion, says research firm Digital Entertainment Group.

At the same time, consumer spending on digital venues including online streaming, video-on-demand ( VOD ) and other electronic "sell-through" services jumped 28.5% to $5.1 billion, says DEG.

The rights to repackage older shows and films via streaming venues is becoming a key money maker, said Cowen & Co. analyst Doug Creutz in a January report.

"Content owners have gained hundreds of millions of dollars in high-margin revenue, largely for older programming that was providing minimal value, from content distributors such as Netflix, Amazon, and Hulu."

Another growing outlet: subscription-based VOD. Lions Gate, Viacom's Paramount and MGM formed cable movie channel Epix in 2009, building their own premium service, ala HBO, Starz and Showtime.

Lions Gate made "The Hunger Games" available first on Epix, then on Netflix under a licensing deal.

3. Climate

On the silver screen, blockbusters mean upside not just for the movie studio that makes the film, but more ticket sales at movie theaters owned by the likes of Cinemark, Carmike Cinemas and Regal Entertainment. Theater owners keep almost half of ticket revenue, says S&P.

Lions Gate's "The Hunger Games" was the third-biggest domestic revenue maker in 2012, behind "The Avengers" (Walt Disney Co. ( DIS ) and "The Dark Knight Rises" ( Time Warner (TWX) .

Studios raked in $10.8 billion in 2012, up 6.5% from the previous year, says Box Office Mojo. Ticket prices have jumped up to an average $8 in 2012, from $6 in 2003. The number of tickets sold increased 6.1% to 1.36 billion.

The business has been lucrative enough to lure China's Dalian Wanda Group to pay $2.6 billion to buy privately owned AMC Entertainment, the second biggest U.S. movie chain, in September.

Even so, TV production generates higher profit margins than feature films. So Lions Gate, Paramount, the Weinstein Company and other studios are producing more TV fare. At the same time, the rise of Internet distribution (such as Netflix and Roku) has cut into the growth in pay-TV subscribers.

That could eventually put at risk the hefty programming fees entertainment companies receive from cable TV firms like Comcast and satellite broadcasters. Pay-TV providers ponied up $40.3 billion in fees to content providers in 2012, up 7% from a year earlier, says SNL Kagan.

Piper Jaffray's Marsh says cable networks "don't want to cannibalize the pay-TV ecosystem." If consumer "cord-cutting" -- disconnecting pay-TV service and relying on Internet video -- becomes more frequent, cable networks could lose out too, he says.

Even so, cable networks are cautiously embracing online streaming. In 2011, both Discovery and AMC Networks signed licensing deals with Netflix. Discovery also has a deal with Amazon.

Content firms are also cautious. AMC Networks, for example, makes prior seasons of "The Walking Dead" available on Netflix. It's keeping the new shows on pay-TV.

Netflix, breaking the TV industry's weekly production model, offered the entire 13-episode season of its new political drama "House of Cards" at its Feb. 1 release. Netflix reports the show is now its most streamed piece of content in 40 countries.

Building on that success, Netflix plans seven new series in 2013, including "Turbo:F.A.S.T.", a kids show developed with Dreamworks.

Amazon.com, Microsoft and others also aim to produce their own programming for Internet consumption. Amazon studios in December said it's developing six original series pilots, including "Alpha House."

Wedbush's Pachter says an "arms race" in original content is under way as established and new players aim to develop exclusive shows that keep audiences loyal.

4. Technology

With DVD purchases down, movie studios aim to rekindle consumer interest in owning content. A consortium of movie studios developed Ultraviolet, a system that allows consumers to buy digital movies and store their library of titles in the "cloud."

Consumers can access their movies on mobile devices or at home. The Ultraviolet authentication system verifies film purchases and monitors downloads.

5. Outlook

Demand for content will continue rising as more distributors emerge, including Apple and Sony, says Cowen's Creutz. Coinstar's Redbox unit, which operates DVD rental kiosks, and phone company Verizon Communications plan to ramp up a new online video streaming service in 2013.

• Upside: International distribution has given a big lift to some cable networks, especially Discovery. Its international pay-TV subscribers rose to 1.4 billion in 2012 from 952 million in 2009, says Creutz.

S&P says movie studios are eyeing China's growing appetite for films. Dreamworks formed a joint venture with China Media Capital in early 2012, followed by that $2.6 billion puchase of AMC Entertainment by China's Dalian Wanda Group in September.

• Risks: New original content providers loom as trouble for cable networks, because they'll compete for viewers, especially the young adults that advertisers want.

Cable channels are fighting back. Starz also plans to develop more original content.

The stakes are rising for Netflix and cable networks, because flops could draw the ire of investors as programming costs escalate.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AMCX , DIS , LGF , NFLX , VOD

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Stocks

Referenced

Most Active by Volume

112,131,130
  • $74.98 ▲ 5.18%
57,963,905
  • $8.32 ▲ 8.33%
48,392,602
  • $3.45 ▼ 0.29%
45,276,527
  • $36.17 ▲ 4.21%
44,800,927
  • $17.84 ▲ 0.34%
44,539,649
  • $97.03 ▼ 0.16%
44,078,180
  • $15.62 ▲ 0.64%
43,461,551
  • $35.50 ▼ 1.06%
As of 7/24/2014, 04:04 PM