Time Warner Will Revisit DVD Deals with Netflix and Redbox


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Time Warner ( TWX ) competes with other media conglomerates like Disney ( DIS ), News Corp. ( NWS ), CBS ( CBS ) and Viacom ( VIA ) in the media and entertainment business. We maintain a $35.51 price estimate for Viacom stock.

In its recent earnings report, Time Warner stated that it will be reviewing the economics of the home entertainment business. The following excerpt is taken from the company's latest earnings transcript.

Time Warner entered into an agreement with rental companies like Netflix (NFLX) and Redbox last year to delay the rental of new releases by 28 days and in turn agreed to make DVDs available at lower prices (along with access to digital content). It seems that Time Warner is realizing that it might've made a mistake in this agreement, as these rental companies take advantage of low cost and easy access to DVDs. In other words, Time Warner might be looking to redirect some of these revenues from rental companies to itself.

See our full analysis and $35.51 price estimate for Time Warner

What Time Warner might do here is extend the release window and charge higher prices for DVDs from these rental companies. So how do DVD prices influence Time Warner's equity value? We estimate that Time Warner generates roughly 16.6% of its value from DVDs. Since this is an important business for the company, it will emphasize profit maximization here. Drag the trend line in the modifiable chart above to see how DVD prices affect Time Warner's stock value.

One risk that could cause concern for Time Warner going forward is the rapid decline in DVDs sold per household as more video moves online. Time Warner will likely look to mitigate some of this through price increases and additional digital distribution deals.

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

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: CBS , DIS , NWS , TWX , VIA

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