TV, Film Producers Seek Profits In Streaming Niches

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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 leader.

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 business.

But content producersLions Gate Entertainment ( LGF ) andDreamWorks Animation ( DWA ) are shifting their business models to satisfy demand from customers such asAmazon.com ( AMZN ) andNetflix ( NFLX ). 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.

"NeitherComcast ( CMCSA ) 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 cable-TV firms.

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 targeted teenagers.

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 earlier.

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 movies.

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 Television.

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 earlier.

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 system.

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 billion.

In January, Discovery upped its stake in Eurosport to 51%. Eurosport carries tennis, skiing, cycling and soccer in eastern Europe.

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 (VOD) services.

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 audience size.

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.

What's Next?

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.

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
Referenced Symbols: AMZN , NFLX , CMCSA

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