Millennials are ready for their close-up.
The generation now aged 14 to 24, which follows generations X
and Y, has become the consumer force driving rapid change in the
entertainment industry. Production companies, once limited to
cable television and movie theaters, now see their future in
serving up content over multiple networks and devices to these
increasingly mobile young consumers.
"Consumers have decoupled from the notion that TV shows have
to be watched on home TVs. (It's) particularly evident in
millennials, who now spend more time watching television and
movie content on non-traditional devices than on TVs," said
Gerald Belson, Deloitte's U.S. Media & Entertainment sector
The stocks in IBD's Leisure-Movies & Related industry
group once revolved primarily around producing movies and
launching them into theaters. That is still a big part of the
But content producersLions Gate Entertainment (
) andDreamWorks Animation (
) are shifting their business models to satisfy demand from
customers such asAmazon.com (
) andNetflix (
). The big Internet video streamers are buying more and more
original programming, fighting to snatch away eyeballs from cable
TV channels and the big four broadcast networks.
Much is still up for grabs.
) nor other video distributors nor Amazon norApple (AAPL)
norGoogle (GOOGL) have played their last card in the
video-on-demand space. We think Netflix investors who believe
Netflix will be the only game in town in the U.S. in three or
five years are overly optimistic," said Carlos Kirjner, analyst
at Bernstein Research.
Big Screens Still Breadwinners
Content companies are trying out new digital models, hoping
not to undermine their traditional cash cows. They include
box-office receipts, advertising and programming fees paid by
Movie studios Lions Gate and DreamWorks Animation still garner
the most revenue from box-office receipts. Developing the next
big franchise that can be monetized via rights for subscription
video on demand, pay TV or online streaming is key.
Mega-screen providerImax (IMAX) earns the bulk of its take
from its specialized screens installed in theaters. Its three
biggest moneymakers have been "Gravity," released last year;
"Avatar"; and the "The Dark Knight Rises."
Big-budget flops, like DreamWorks' most recent releases, can
drag on the stocks. Analysts have an eye on Lions Gate's new
release, "Divergent," expecting it to bring in less revenue than
the first "Twilight" and "Hunger Games" movies, which also
Increasing demand for TV shows from Internet video providers
such as Netflix and Hulu is giving content companies a boost.
Lions Gate's non-movie revenue is already sizable. DreamWorks'
TV-related growth isn't expected to kick in until 2015.
Netflix's U.S. subscriber growth, meanwhile, has been driven
by original programming such as "House of Cards." Netflix had
33.4 million U.S. subscribers as of Dec. 31, up 23% from a year
Netflix recently signed content deals with DreamWorks,Walt
Disney (DIS)/Marvel, Universal (owned by Comcast),Sony (SNE) and
Warner Brothers (owned byTime Warner (TWX).
Offering exclusive shows helps keep audiences loyal.
"On Wall Street, it's not about what you've done but whether
you can continually repeat it," said James Marsh, analyst at
Piper Jaffray. "If you win the Lotto for a million dollars, it's
worth a million dollars. If you have a system to win (the) Lotto
consistently, that gets a higher (trading) multiple. It's the
same thing in Hollywood."
Theaters still present consumers with their first opportunity
to see most major movie releases.
AMC Entertainment (AMC), a movie-theater chain with the
largest number of Imax screens globally, aims to improve the
out-of-home video experience, investing in leather recliner
seats, dine-in theaters and bar/lounges.
Meanwhile,Global Eagle Entertainment (ENT) provides Internet
access to airliners, whose passengers can watch live TV or
The Silver Screen Overseas
For an array of companies -- Netflix,Discovery (DISCA), AMC
Entertainment, Imax, DreamWorks and Global Eagle Entertainment --
international growth is key.
Box-office revenue in U.S. theaters rose just under 1% in 2013
to $10.9 billion, slowing from 2012's 6.5% growth, according to
the website Box Office Mojo.
Compare that with China, a market that Hollywood studios have
struggled to crack. For the first nine months of 2013, China's
box-office revenue jumped nearly 35% to $2.7 billion, according
to a Standard & Poor's report, using data from China's State
Administration of Press, Publication, Radio, Film and
However, foreign films' box-office revenues in China declined
5.2% to $1.13 billion over the nine-month period.
China is taking steps to open up its market, says S&P. In
2012, China raised the number of foreign film releases allowed
into its market each year to 34 from 20, with the increase
targeting releases in 3D or Imax formats.
Imax's Q4 international box office jumped 58% from just a year
Some 80% of Imax's new screen installations are set for
overseas, with most in China. Chinese conglomerate Wanda Group,
which acquired U.S.-based AMC Entertainment in 2012, agreed in
February to build 80 more Imax theaters in China. Up to 40 of the
new theaters will install Imax's next-generation laser-projection
Even more importantly, China has the world's largest number of
online video viewers -- roughly 450 million, or 80% of domestic
Internet users. The amount is expected to reach 700 million by
2016, says the China market-research firm iResearch.
But China's growth will benefit its domestic online video
firms, such as Youku Tudou, Sohu and Tencent-controlled QQ TV --
not foreign companies.
Broadcasters Without Borders
Netflix had 10.9 million international subscribers as of Dec.
31, up 79% from 6.1 million a year earlier.
This year, Netflix plans a major expansion in Europe. Netflix
now operates in the U.K., Ireland, the Netherlands and
Scandinavia, as well as Canada and parts of Latin America.
Analysts say the most likely target markets include France,
Germany, Italy, Spain and Turkey.
Discovery already has a big international business. Its
non-fiction content -- Animal Planet, TLC and science programming
-- is well-suited for translation overseas, analysts say.
Discovery's international revenue jumped 51.4% last year to
$2.47 billion, including recent acquisitions.
In 2013, Discovery acquired broadcaster SBS Nordic, the
Scandinavian operations of ProSiebenSat.1 Media, for $1.7
In January, Discovery upped its stake in Eurosport to 51%.
Eurosport carries tennis, skiing, cycling and soccer in eastern
Speculation surfaced in February that Discovery would partner
with BSkyB to bid jointly for the U.K. free-TV network Channel 5.
That deal has been put on hold, analysts say.
Digital Competition Tightens
Original content is rapidly becoming table stakes for Internet
video providers. Netflix and Amazon have been locking down
exclusive streaming rights for popular shows for years, but Apple
lurks as a rival.
"While Apple could become a formidable competitor to Netflix,
it could also be partner or suitor (buyer) over time," RW Baird
analyst William Power said in a report.
Any sign of significant slowing in Netflix's U.S. subscriber
growth would hit its stock. In early forays into original
content, Netflix has won plaudits with "House of Cards" and
"Orange Is the New Black."
"Competition in U.S. digital video streaming will grow tighter
in 2014 as Amazon Prime Instant Video, HBO Go, and Hulu Plus
offer compelling alternatives to Netflix's service," former
Morgan Stanley analyst Scott Devitt said in a report.
For movie studios, distribution windows are key. 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 subscription video-on-demand
One worry for theaters is that movie studios will further
experiment with "premium" VOD, making titles available on pay-TV
or subscription VOD sooner after their debut.
In March, Warner Brothers made "Veronica Mars" available on
demand from pay-TV companies as well as Apple's iTunes on the
same day that it was released in AMC theaters.
DreamWorks' early animated successes included "Shrek,"
"Madagascar" and "Kung Fu Panda." Its animated work faces stiff
competition from Disney's Pixar as well as
Universal/Illumination,Fox (FOX)/Blue Sky and Warner Brothers,
said Cowen & Co. analyst Doug Creutz.
DreamWorks aims to develop TV products based on animated films
such as 2010's hit, "How To Train Your Dragon."
Under a deal announced in June, 2013, DreamWorks is developing
300 hours of original TV shows for Netflix based on characters
from "Shrek," "Madagascar" and "VeggieTales." Those series will
debut in late 2014.
Lions Gate has ongoing deliveries to Netflix ("Orange Is the
New Black"), Fox ("Anger Management" and "Saint George") and ABC
and Hulu Plus ("Nashville").
Nielsen Holdings expects this fall to augment its TV
audience-ratings data with new data on tablet and smartphone
viewers . Some content companies have been reluctant to grant
online video rights because advertising revenue is tied to
In November, Discovery finally inked its first online
streaming deal with a pay-TV company, Time Warner Cable.
Satellite broadcasterDish Network (DISH) in March gained rights
for a Web-based subscription service that will stream TV shows,
sports and movies produced by Walt Disney -- another sign that
content firms are warming up to online distribution.
Forging new content-distributor partnerships is key.
Netflix's subscriber growth would be buoyed if it were added
as a simple app on Internet-enabled, set-top TV boxes. But
broadcasters would likely demand a share of revenue.
Discovery's subscription-VOD deal with Netflix expires in
2014. It has a similar deal with Amazon already in place.
In March, Imax and Walt Disney extended their relationship.
Imax will show several Marvel films as well as Disney's "Star
Wars: Episode VII" in 2015.
China and Asia loom large for Global Eagle Entertainment,
whose biggest customer by far is U.S.-based Southwest Airlines.
Air China, one of that country's big airlines, in February
announced a trial with Global Eagle.
DreamWorks may be a takeover candidate, speculates Goldman
Sachs. DreamWorks' "How to Train Your Dragon 2" sequel opens in
mid-June, and expectations are high.
Netflix will reach 65 million international subscribers by
2023, a six-fold increase, Bernstein Research forecasts. However,
it says that the expansion will erode overall profit margins.