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‘Holmes,’ ‘Blind Side’ Discs Drive Warner Q1 Profit

5 May, 2010 By: Erik Gruenwedel

Sherlock Holmes

Strong home entertainment sales and residual theatrical revenue from Sherlock Holmes, The Blind Side and Valentine’s Day contributed to Time Warner Inc.’s filmed-entertainment segment posting first-quarter (ended March 31) operating income of $307 million, up 43% from operating income of $214 million during the same period a year ago.

It was the studio’s eighth consecutive quarter of operating income growth.

Time Warner’s film unit, which includes Warner Home Video, posted a 2% increase in revenue to nearly $2.7 billion, from $2.6 billion last year.

Warner Home Video, which ended the quarter again tops in DVD/Blu-ray Disc market share, also reached agreements with Netflix and Redbox to make new release titles available to their customers after a 28-day retail window. Other revenue drivers included cable video on demand (VOD) and electronic sellthrough.

The company said home entertainment revenue increased 34% from the same period last year.

“Through these deals [Redbox and Netflix] should have enough product to satisfy their customers while at the same we expect to increase demand for DVD [and Blu-ray Disc] sellthrough and video-on-demand,” Bewkes said in an call with analysts.

Bewkes said WHV typically sells 75% of its packaged media content in the first four weeks of release. VOD carries higher margins than other rental formats.

The CEO said home entertainment revenue from two major releases since the deals were announced, Holmes and Blind Side, underscored the validity of the delays.

“As VOD gets more important, [the window] will be a bigger part of the equation, and not just the kiosk and by-mail delivery of films,” Bewkes said.

CFO John Martin said the macro home entertainment environment appeared to be stabilizing from a year ago, with declines in DVD offset by improvements in Blu-ray and digital.

He said electronic sellthrough revenue increased 29% in the quarter. Also, on the rental side, VOD buy rates were up 40%.

“Every digital transaction means more money to the studio than the comparable physical transaction,” Martin said.

Even though DVD sellthrough grew in March, Bewkes reiterated that challenges remain in that business. Meanwhile, digital and Blu-ray remain strong.

He said that the studios should continue to focus on growing the higher-margin formats, improving the rental economy by putting discount kiosks and by-mail in appropriate places on the distribution chain, controlling costs, and pushing tent-pole titles through the multiplatform distribution channels.

“That seems to be the answer that will lead to an up trend, not a down trend [in home entertainment],” Bewkes said.

Strong gains across multiple segments helped Time Warner report adjusted operating income of $1.4 billion (up 37%), the highest adjusted quarterly operating income in the media company's history.

Total revenue increased 5% to $6.3 billion, the highest growth in two years. Operating income rose 43% to $1.5 billion.

“We’ve made meaningful progress in the last few months toward our long-term strategic objectives,” said CEO Jeff Bewkes, in a statement.


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