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Analyst Drops Boom on Hollywood

7 Jul, 2008 By: Erik Gruenwedel

Hollywood got hit with a strike July 7 that had nothing to do with labor or residuals.

In a series of research notes, Anthony DiClemente, media analyst with Lehman Brothers in New York, significantly downgraded fiscal earnings per share estimates for CBS Corp., News Corp., The Walt Disney Co., and Time Warner Inc. — citing emerging threats of digital distribution, digital video recorders and falling ad-revenue, among other issues.

While the analyst specifically outlined apprehension regarding the corporate parents of 20th Century Fox Film Corp., Warner Bros. Pictures, Walt Disney Studios Home Entertainment and MySpace.com, among others, his “digital is too disruptive for movies/TV” mantra affects the entire Hollywood supply chain.

Viacom Inc., which owns Paramount Pictures and is having its best theatrical season ever, emerged relatively unscathed as its target share price was cut to $32 from the upper thirties.

DiClemente said News Corp.'s heightened exposure to falling newspaper ad revenue and economic downturn will continue to limit its options acquiring third-party entertainment properties.

He said CBS is the largest publicly traded radio and TV broadcaster and had the most exposure to traditional types of media, including publishing.

DiClemente cut from $25 to $15 News Corp.'s price per share target. He cut CBS' price per share goal to $16 from $25, and $14 per share from $20 for Time Warner.

“We believe the feature film and television content business is on the verge of structural changes that appear destined to have a direct impact on the core revenue and profits of entertainment business models,” DiClemente said. “Content may no longer be king in the entertainment business.”

The analyst said technological changes such as legal and illegal downloads that radically altered the music industry, could materially disrupt the core economic models of film (including home entertainment) and TV studios.

The report said the apparent rate of decline in DVD sales was outpacing most discernable growth by digital.

DiClemente said with Warner Bros. representing significant studio, home entertainment and TV programming suppliers, digital distribution could adversely affect 37% of Time Warner's earnings before interest, tax and depreciation (EBITDA).

The note said Fox studios and 20th Century Fox Home Entertainment represent 19% of News Corp.'s fiscal 2009 estimated revenue and operating income.

“We believe the growing threats of digital distribution of film/TV content, [online movie distribution and DVRs] pose risks to the Fox film/TV business, which we believe is entering a period of secular decline,” DiClemente said.

He said Fox's assets contribute about 60% of News Corp.'s consolidated group revenue and 70% of its operating revenue.

Edward Woo, media analyst with Wedbush Morgan Securities in Los Angeles, said concerns in Hollywood about following the downward spiral of the music industry are not new.

He said the proliferation of pirated movies available online poses an even greater impact on revenue going forward.

“I think things can get rough if they don't find a solution to piracy, which should be the bigger threat than the DVR,” Woo said.

Rob Enderle, independent media analyst with The Enderle Group in San Jose, Calif., recalled similar concerns when the VCR emerged.

“Change brings with it opportunities and risks,” Enderle said.

The analysts said those opportunities revolve around getting more content to people when and where they want to consume it. He said the current ad-supported TV model has been broken for decades.

“Even if you didn't fast forward, how many people leave the room or simply ignore TV ads?” he said.

Enderle said the market is expanding and digital distribution eventually will benefit the studios. When this benefit becomes reality will depend mostly on how quickly the studios learn to monetize the increased services they will be providing.

“It's simply the way things work,“ he said.

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