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Analysts: Blu-ray May be Cause of Cinram Woes



By : Chris Tribbey | Posted: 10 Feb 2010


For a company whose shares were trading upwards of $7 in early 2008, it’s been a rough couple of years for Cinram International.

Since February 2008 the Toronto-based replicator has replaced both its chief executive and chief financial officers, had rounds of layoffs and seen steady year-over-year declines in both revenue and the number of DVDs replicated.

For 2006, Cinram reported full-year profit of $51.8 million, but 2007 and 2008 saw losses of $301.1 million and $25 million, respectively. The company has yet to report its 2009 fourth-quarter or full-year results, but each of the first three quarters of 2009 saw far less revenue and fewer replicated DVDs than the previous year’s comparable quarter.

And while the past two years have seen Cinram extend its replication agreement with Lionsgate and sign a multiyear deal with Universal for DVD replication in Western Europe, the Feb. 1 news that Warner Home Video would end its six-year relationship with Cinram on July 31 sent the replicator’s stock on the Toronto Stock Exchange tumbling more than 60% overnight, to just above $1.

Financial analysts who track Cinram were just as surprised as anyone when Warner left Cinram for Technicolor.

Adam Shine, an analyst with National Bank Financial, said it was expected that Cinram would “buckle to material price concessions during annual pricing discussions with its key accounts,” which included Warner (28% of 2009 company revenue), Fox (15%) and Lionsgate (8%).

“Nobody, however, expected Warner Home Video to terminate its contracts,” Shine wrote in a note to investors. He speculated that there’s more to the story of Warner and Cinram’s break-up than pricing.

“Part of the reason why Cinram was originally able to win Fox’s North American mandate a decade ago was because Technicolor [supposedly] hadn’t done a very good job handling VHS duplication/distribution of Titanic,” Shine told investors. “Ironically, just as James Cameron’s next film, Avatar, breaks all of Titanic’s records at the box office, we find ourselves witnessing a major re-shuffling of an important Hollywood
studio replication mandate. Coincidence? Yes.

“More to the story than pricing? We’re sure.”

Shine’s firm lowered Cinram’s revenue estimate to $1.079 billion from $1.268 billion in 2010, and to $765.4 million from $1.093 billion for 2011. He added that the lack of exclusive Blu-ray replication contracts may be what’s hurting Cinram most. In the third quarter of 2009, Cinram reported Blu-ray revenue of $4.7 million, which was actually down from the $5.5 million it reported in the second quarter.

“Most of this [Blu-ray] work is at present being done by Sony, which has been awarded these mandates as a result of extremely aggressive pricing, which Cinram either can’t or won’t match,” he said.

Cinram CEO Steve Brown has reportedly said the replicator is seeking a replacement for Warner, and will make sure “all affected employees and other stakeholders are given the absolute greatest consideration during this process.”

However, Salman Partners analyst Naser Iqbal said layoffs and restructuring at Cinram are an almost certainty, since Warner accounted for more than a quarter of the replicator’s business. Warner Home Video accounted for 97 Blu-ray releases in 2009, not including re-releases or boxed sets, according to data from the DVD & Blu-ray Release Report. That was the most among any of the studios.

Also according to the DVD & Blu-ray Release Report, Warner accounted for 764 unique DVD releases in 2009, not including re-releases or boxed sets. That was nearly 550 more than second-place studio Lionsgate, though that figure includes nearly 300 titles from Warner’s DVD manufacturing-on-demand program. Allied Vaughn handles replication for those titles.

“Customers like Warner aren’t just floating around out there,” Iqbal said. “All of the major customers are already taken, and it’s not likely any are going to move any time soon. I think [Cinram is] in for a tough road. I’m assuming they’re going to have to scale back.”

Paula Tait, EVP of sales and marketing for replicator Precise/Full Service Media, said the Cinram news is distressing for the DVD and Blu-ray replication business as a whole.

“Personally I am not sure that there is enough business for three major replicators in the current market,” she said. “I have heard speculation from those far more knowledgeable than me that consolidation to two major replicators would make the ultimate sense, when you factor in supply and demand, financial obligations, etc.

 “I would hate to see Cinram go away. They employ a lot of people and it’s distressing to see this business continue to consolidate.”

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