Current Environment ............................................................................................1Industry Profile......................................................................................................8Industry Trends ...................................................................................................11How the Industry Operates...............................................................................18Key Industry Ratios and Statistics...................................................................24How to Analyze an Entertainment Company .................................................26Glossary................................................................................................................31Industry References...........................................................................................33Comparative Company Analysis ......................................................................35This issue updates the one dated March 15, 2012.The next update of this Survey is scheduled for March 2013.Industry SurveysMovies & EntertainmentTuna N. Amobi, CFA & CPA, Media & Entertainment EquityAnalyst September 13, 2012CONTACTS:INQUIRIES & CLIENT RELATIONS800.firstname.lastname@example.orgSALES877.email@example.comMEDIAMichael Privitera212.firstname.lastname@example.orgS&P CAPITAL IQ55 Water StreetNew York, NY 10041
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 1 CURRENT ENVIRONMENTChina increasingly beckons to HollywoodUntil recently, China—the world’s most populous country and one of the fastest-growing emergingmarkets—has posed a myriad of challenges for filmed entertainment companies in the US, after relativelyfruitless attempts in the past decade. Among such hurdles were censorship of content, protectionism,stringent media ownership caps and regulations for foreign-controlled entities, lack of legal and politicaltransparency, cultural differences, bureaucracy, and piracy.Now, based on the turn of events over the past few months, it appears that the Chinese market is becomingmore welcoming toward foreign studios. For instance, under its previous quota system, China had allowedonly 20 foreign film releases into its market each year, primarily outside of an imposed blackout period thatcoincided with popular movie-going seasons (e.g., the Chinese New Year). However, following anannouncement in February 2012 by Chinese Vice President Xi Jinping and his US counterpart Joe Biden,this limit was raised to 34 for films made in 3Dor IMAX formats. China has also increased theshare of earnings for foreign studios fromabout 13%–17% to 25% of the movies’ boxoffice sales in China.These developments have received a positiveresponse from the Hollywood film studios thathave been trying for years to break into one ofthe most lucrative market in the world. Whilebox office revenue growth in the US andCanadian markets has been dropping, China’sbox office revenues have been growing at a fastpace. China’s box office revenues grew 31% to$2.1 billion in 2011 from around $1.6 billionin 2010, largely driven by 3D movies. In thefirst half of 2012, Chinese box office growth increased 37% over the same period in 2011. Box officerevenues in the country are expected to reach over $5 billion by 2015. In the first half of 2012, foreign films(38 releases) accounted for 70% of total box office sales in the country, while local films (91 releases)accounted for the remaining 30%.Amid the weak growth in box office revenues, as well as declining DVD sales in the home market,Hollywood studios see the lifting of restrictions as an advantage. Further, Yang Buting, China’s movieinfrastructure official, in March 2012 appealed to Hollywood to enter into partnership agreements withChinese studios, saying that these recent developments are a win-win situation for both countries.Movie studios in renewed mating dance with Chinese partnersFollowing these recent developments aimed at cross-country collaboration, the market has witnessed aflurry of deals in which US studios are entering into joint ventures with Chinese studios. For instance, inFebruary 2012, DreamWorks Animation SKG Inc. entered into a joint venture with China Media Capital,Shanghai Media Group, and Shanghai Alliance Investment Ltd. to set up a new company, OrientalDreamWorks (45% owned by DreamWorks; 55% by the Chinese partners). The new entity will beginoperations in Shanghai this year, and will develop and produce Chinese animated and live-action moviesand programs for China, as well as other countries around the globe.In a similar deal in April 2012, Walt Disney Co. announced that it has entered into a partnership with theanimation unit of China’s Ministry of Culture and Tencent Holdings Ltd., China’s largest Internet serviceprovider, to develop animated content for China and other countries. Disney, through its Pixar and WaltChart H05: CHINABOX OFFICESHARES BY FILMCOUNTRY OFORIGINHong Kong2%Others2%Taiwan (incl.co-produced)5%China/HongKong co-produced14%China-made14% United States63%CHINA BOX OFFICE SHARES BY FILMCOUNTRY OF ORIGIN—FIRST HALF, 2012Source: ChinaFilm Biz.
2 MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 INDUSTRY SURVEYS Disney Animation cartoon studios, will focus on concept creation and market research. The company hasalso committed to train local talent in China to create animated content.In May 2012, News Corp. announced that it will buy a 19.9% equity stake in Beijing-based Bona FilmGroup from the company’s founder Yu Dong. Bona is one of the largest film distributors in China and thisdeal will help News Corp. gain a stronger foothold in China’s film market.Major Chinese theater operator makes key US acquisitionChinese players also are actively pursuing opportunities to expand in the US market. The latest example ofthis reverse flow is the May 2012 deal between Dalian Wanda Group Co., a privately owned Chineseconglomerate that operates 86 theaters in China, and film production and distribution businesses, and AMCEntertainment Holdings Inc., the second largest US movie theatre chain. The deal would mark the biggestacquisition of a US company by a Chinese player in the entertainment sector thus far, and is subject toregulatory approvals in both the US and China.According to the deal’s terms, Wanda will acquire AMC for a total value of $2.6 billion, includingapproximately $2 billion in assumed debt. Wanda will also make an additional $500 million investment inAMC for operating initiatives. According to the companies, the combination will result in the creation ofthe world’s largest theatre group. With regulatory approvals already received by late July, the deal isexpected to close by the end of August.DOMESTIC BOX OFFICE PRIMES FOR STRONG GAINS IN 2012In the first half of 2012, domestic box office gross receipts have shown solid growth, reaching about $5.4billion, up 9.6% from around $4.9 billion in the first half of 2011. The top grossing films in the first half of2012 were Marvel’s The Avengers, TheHunger Games, The Amazing Spider-Man, Dr. Suess’ The Lorax,Madagascar 3: Europe’s Most Wanted,Brave, Men in Black 3, Ted, and SnowWhite and the Huntsman. In its second-quarter earnings call in July 2012, AmyMiles, the CEO of Regal Entertainment,noted that there has been a considerableincrease in premium-format films thathave driven box office revenues lately.Also, the company thinks that theincreasing trend in the industry ofconversion to digital cinema (a factorthat has contributed to operational andcontent management efficiencies) to beone of the primary drivers of anexpected near-term increase in M&Aactivities.For full-year 2011, domestic box officegross receipts were down 3.7%, toabout $10.2 billion, with another yearof declining attendance, down 4.6%. These results were partly offset by a relatively modest increase inaverage ticket prices, up 0.9% from 2010, according to data from boxofficemojo.com, an online source formovie and box office information. Last year marked the third consecutive year of domestic box officereceipts that topped $10 billion (the streak began with an all-time record of $10.6 billion that was attainedin 2009). In addition, 2011’s box office benefited from having the fifth consecutive summer box officeseasonal record—up 1.0% to about $4.4 billion, according to the National Association of Theater Owners,an industry trade group. Including several summer blockbusters, the top grossing films in 2011 were HarryB01: DOMESTICTHEATRICALMOVIE HITSDOMESTIC THEATRICAL MOVIE HITS — 2012(Ranked by US box office, in millions of dollars)BOX OFFICE (MIL.$)MOVIE DISTRIBUTOR US WORLDWIDEMarvels The Avengers* Buena Vista 614.4 1,458.5The Hunger Games* Lionsgate 405.0 680.9The Amazing Spider-Man* Sony 217.7 538.2Dr. Seuss The Lorax* Universal 213.9 310.9Madagascar 3: Europes MostWanted*Paramount/DreamWorks206.3 476.4Brave* Buena Vista 202.7 249.5MIB 3* Sony 175.2 615.7Ted* Universal 170.4 201.7Snow White and the Huntsman* Universal 152.2 371.021 Jump Street Sony 138.4 197.8Safe House Universal 126.2 202.5The Vow Sony/ScreenGems125.0 193.6Prometheus* Fox 124.8 299.9Journey 2: The Mysterious Island Warner Bros. 103.9 325.9Magic Mike* Warner Bros. 97.7 97.7NOTE: Movies released in 2012; all receipts were not necessarily collected inthe year that a movie was released. *Still in theaters as of July 2012.Source: boxofficemojo.com.
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 3 Potter and the Deathly Hallows: Part 2,Transformers: Dark of the Moon, TheTwilight Saga: Breaking Dawn Part 1,The Hangover Part II, Pirates of theCaribbean: On Stranger Tides, FastFive, Mission: Impossible—GhostProtocol, Cars 2, Sherlock Holmes: AGame of Shadows, and Thor.HOME VIDEO MARKET SHOWSSIGNS OF STABILIZATIONSince reaching a peak in 2004, thecontinued decline in aggregate US homeentertainment spending (i.e., combinedsell-through and rentals across allformats, including DVDs, Blu-ray, anddigital) slowed down in the second halfof 2011, when spending actually increased 1% for the period. Such spending had declined 5.1% year overyear in the first half, with the decline partly attributable to difficult release comparisons for the early part of2011. For full-year 2011, home entertainment spending dropped 2%. Heading into 2012, the homeentertainment market has showed further signs of stabilization. For the first half of 2012, aggregatespending increased 1.4% over the first half of 2011.The first-half increase in home entertainment spending was largely due to the 2.5% growth in spendingrecorded in the first quarter, whereas second-quarter growth was comparatively low at 0.3%, according tothe latest data from DEG: the Digital Entertainment Group, an industry trade organization. Spearheadingthe increase was consumer spending on such formats as Blu-ray (high-definition) discs, electronic sell-through (EST), and video-on-demand (VOD) services. On that score, in the first half of 2012, sales ofpackaged media declined 3.6%, to $3.7 billion, which was offset by relatively strong growth of 13.3% inBlu-ray discs. The top sellers for the first half of 2012 included The Twilight Saga: Breaking Dawn, Part 1,Puss in Boots, Sherlock Holmes: A Game of Shadows, Alvin and the Chipmunks Chipwrecked, and Hop.For full-year 2011, sales of packaged media plunged 13.3%, to $8.9 billion, on continued erosion of DVDsales, partly offset by relatively strong growth of 20% in Blu-ray discs. The top sellers included Harry Potterand the Deathly Hallows: Part I, Tangled, Harry Potter and the Deathly Hallows: Part II, Cars 2,Bridesmaids, Rio, Megamind, The Help, Despicable Me, and Red.Looking ahead, we expect packaged media to face more pressure over the next few years, but continuedstrong growth in Blu-ray should increasingly mitigate the decline. By the end of June 2012, the US installedbase of Blu-ray disc playback devices (including set-top box and game consoles) had exceeded 42.1 millionhomes, according to the DEG, which also estimated the installed base of HDTV sets at more than 80million US homes.Newer outlets mitigate the demise of brick-and-mortar storesAs sell-through spending has declined in recent years, more consumers are shifting to relatively lower-pricedrental services such as Netflix Inc. and Coinstar Inc.’s Redbox. In addition, personalization and time-shifting have also spurred the advent of video-on-demand (VOD) services, as well as electronic sell-through(EST) outlets such as Apple’s iTunes and Amazon.com.Total US consumer spending on home entertainment rentals (excluding VOD) in the first half of 2012declined 26%, to about $2.3 billion, as continued strong growth in subscription-based mail-order andstreaming service providers (Netflix and others) and $1-per-night kiosks (such as Redbox) failed tooutweigh a 33.3% plunge in brick-and-mortar outlets. By the end of June 2012, Netflix and Redbox hadapproximately 27.6 million subscribers (including 3.6 million outside the US) and 38,500 kiosks,Table B03: DOMESTICTHEATRICAL MOVIEINDUSTRY PROFILEDOMESTIC THEATRICAL MOVIE INDUSTRY PROFILEAVERAGE TICKET--- BOX OFFICE --- -- ADMISSIONS -- --------- PRICE --------- NO. OFYEAR MIL. $ % CHG. IN MIL. % CHG. DOLLARS % CHG. SCREENS*2011 10,174 (3.7) 1,283 (4.2) 7.93 0.5 NA2010 10,566 (0.3) 1,339 (5.2) 7.89 5.2 39,2332009 10,596 10.0 1,413 5.3 7.50 4.5 38,8342008 9,631 (0.3) 1,341 (4.5) 7.18 4.4 38,7942007 9,664 3.8 1,405 (0.1) 6.88 5.0 38,4152006 9,210 (5.2) 1,406 (8.1) 6.55 3.2 37,6882005 8,841 1.6 1,379 (1.3) 6.41 3.0 36,4352004 9,381 (0.2) 1,511 (4.0) 6.21 4.0 35,6502003 9,240 11.4 1,532 8.5 6.03 2.7 35,6882002 9,155 8.0 1,576 3.2 5.81 4.6 35,5062001 8,413 3.3 1,487 (2.8) 5.66 6.3 36,379NA-Not available. Note: Percentage changes based on unrounded data.Source: Box Office Mojo; *National Association of Theatre Owners.
4 MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 INDUSTRY SURVEYS respectively. (See the “Industry Trends” section of this Survey for further discussion on the growing impactof Netflix and other over-the-top video services.)In 2011, consumer spending on home entertainment rentals (excluding VOD) declined 3%, to about $5.7billion, with a 28.8% drop reported by brick-and-mortar outlets.In 2010, home entertainment rentals declined 2%, to about $6 billion, on the heels of separate bankruptcyfilings by Blockbuster Inc. (whose 1,700-store chain was subsequently acquired in April 2011 by DISHNetwork Corp.), and Movie Gallery Inc. (which resulted in a closure of more than 800 stores). Lookingahead, we expect disappearing brick-and-mortar stores to exert further pressure on home video rentals,against continued gains by Netflix and Redbox.Meanwhile, digital transactions have provided a bright spot for the home video market. In the first half of2012, consumer spending on home entertainment through digital outlets jumped 77.7%, to $8.4 billion,according to DEG, on 11.6% and 21.9% growth in VOD and EST outlets, respectively. For full-year 2011,consumer spending on home entertainment through digital outlets grew 51.2%, to $3.4 billion, on 9.0%and 6.7% growth in VOD and EST outlets, respectively. This continued strong performance came on top ofa 19% growth of digital sales in 2010, to $2.5 billion, with VOD and EST up 21% and 16%, respectively,to $1.8 billion and $683 million.MUSIC CHALLENGES RESURFACE AMID CONSOLIDATIONAfter showing some encouraging trends in 2011, music sales once again declined heading into 2012.According to the latest data from market research firm Nielsen Soundscan, total album sales across allformats—both physical and digital (minus track-equivalent albums)—dropped about 3.2% during the firsthalf of 2012, to 150.5 million units (on a 10.8% drop in current albums, which was offset to some extentby a 5.4% gain in catalogs). Leading the sales charts in the first half of 2012 were Adele’s 21, LionelRichie’s Tuskegee, One Direction’s Up All Night, Whitney Houston’s Greatest Hits, and Various Artists’Now 41.Meanwhile, in 2011, total album sales gained about 1.3% to330.6 million units (on an 8.9% gain in catalogs, versus a 4.2%drop in current albums), marking the first gain for the musicindustry since 2004. The top sellers in 2011 were Lady Gaga’sBorn This Way, Michael Buble’s Christmas, and Lil Wayne’s ThaCarter IV.Even so, for the music industry, a continued erosion of CD salestriggered by secular headwinds (i.e., the transition from physicalformats) had led to double-digit sales declines over the past severalyears. In 2010, album sales fell 13% to 326.2 million units, afterplunging 13% in 2009, 14% in 2008, and 15% in 2007. Even worse, physical album sales (mainly CDs) fell20% in 2010, to 314.9 million units, after dropping 16%, 21%, and 19% in the preceding three years.However, 2011 saw somewhat of a recovery in total CD sales with a single-digit sales decline of 5.7%.Amid shifts in music consumption, the past several years also saw significant shrinkage of retail shelf spacefor CDs sold through mass merchants and big-box outlets such as Wal-Mart Stores Inc., Best Buy Co. Inc.,and Target Corp. We have also seen the bankruptcies of other major chains selling CDs, such as CircuitCity, as well as other independent specialty outlets.Digital music sales remain strongIn recent years, digital music sales, mainly comprising online and mobile downloads, have provided a brightspot for the music industry, helping to partly offset continued declines in CD sales. After overtaking Wal-Mart Stores in February 2008 to become the largest US music retailer, Apple’s iTunes store remains thedominant player in the US digital music market, with Amazon Inc.’s MP3 store also garnering a growingportion of digital music sales.Table B07: TOP-SELLINGALBUMSTOP-SELLING ALBUMS OF 2011*NUMBERSOLDARTIST ALBUM (THOUS.)Adele 21 5.82Lady Gaga Born This Way 2.45Michael Buble Christmas 2.10Lil Wayne Tha Carter IV 1.92Jason Aldean My Kinda Party 1.58*Includes digital sales.Source: Billboard.
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 5 During the first half of 2012, US sales of digital tracks increased 5.6% to 698 million units, according toNielsen SoundScan. The top digital songs in the first half of 2012 included Gotye Feat Kimbra’s SomebodyThat I Used To Know, Fun Feat, Janelle Monae’s Party We Are Young, Carly Rae Japson’s Call Me Maybe,Kelly Clarkson’s Stronger (What Doesn’t), and Nicki Minaj’s Starships.In 2011, US sales of digital tracks rebounded 8.5% to 1.27 billion units. The 2011 improvement in sales ofdigital tracks came after a deceleration to a relatively modest 1% growth in 2010, to about 1.17 billionunits. By comparison, digital track sales advanced 8%, 27%, and 45% in 2009, 2008, and 2007,respectively, while digital album sales rose 16%, 32%, and 53%.Meanwhile, digital album sales (which account for about one out of every three album purchases) increased13.8% to 57.2 million in the first half of 2012. For full-year 2011, such sales grew 19.5% to 103.1 million,on the heels of a 13% gain in 2010 to 86.3 million. In 2011, the top-selling artists in the digital categorywere Adele, Lady Gaga, Mumford & Sons, Jay Z and Kanye West, and Lil Wayne.Cloud-based music services hitting the mainstreamA new generation of cloud-based (or so-called “locker”) music services has emerged to foster a seamlesspersonalization of content across multiple platforms. Through Internet or mobile network connections,consumers may access files or applications from remote servers and download to various devices such aslaptops/PCs, smartphones, tablets, and other gadgets.This space has increasingly attracted key potential players, including major technology companies such asAmazon.com Inc., Google Inc., and Apple Inc. All three companies have unveiled cloud-based musicofferings, which are free or available for monthly price points ranging from $20 to $24.99 (depending onstorage capacity entitlements and other features).Launched in March 2011, Amazon’s Cloud Drive service offers a cloud-based streaming solution that isintegrated with its digital music store (AmazonMP3). Among its features are the ability to re-download anycontent uploaded by users to the Cloud Drive, and the ability to stream all of the music stored online to anyappropriately equipped Android device. In May 2011, the Google Music (beta) service made its highlyanticipated debut. A cloud-based service that also offers social networking features and pay-for-downloadcapabilities, Google Music is accessible through web-based music players or Android-enabled mobiledevices.In June 2011, Apple unveiled its iCloud service that allows users to store data (e.g., music files, photos,calendar, and applications) for an automatic download (including music purchases from iTunes) to multipledevices, including iPhones, iPods, iPads, and PCs running Mac OS X or Microsoft Windows. Importantly,iCloud offers a “scan and match” feature (in agreement with the major recorded music companies) thatallows users to match their entire song collection for easy downloading from more than 20 million songs inthe iTunes database. This feature serves as a key distinction from the offerings of both Amazon and Google,where users must upload their music to the cloud.Competition in the cloud-based music space further intensify with the US launch in July 2011 of Spotify, afast-growing “all-you-can-eat” streaming service, which has about 10 million registered users and 1.6million paid subscribers in Europe. In collaboration with the major labels, Spotify’s three-tiered offeringincludes a free ad-supported service, a $4.99/month ad-free version, and a $9.99 premium plan that includesmobile streaming. Separately, in June 2011, Pandora Media Inc., an Internet radio company with more than150 million registered users in the US that offers personalized streaming features, had an initial publicoffering (IPO). Other cloud-based music offerings include RealNetworks Inc.’s Rhapsody, Sony’s Qriocity,and CBS Corp.’s Last.fm.EMI auction portends further consolidationIn November 2011, EMI Group PLC, the world’s third largest music company, agreed to be acquired byUniversal Music Group and Sony Music Entertainment in two separate deals worth a combined $4.1 billion.In the first deal, Universal Music would take control of the recorded music division of EMI for $1.9 billion.This deal is subject to approval by both US and European regulators. The European Commission believes
6 MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 INDUSTRY SURVEYS that the proposed acquisition would give Universal too much market power and ultimately affectcompetition in the market.In the second deal, completed in June 2012, Sony Music acquired EMI’s publishing division for $2.2 billion,after getting approval from the US Federal Trade Commission. With this acquisition, Sony became theworld’s largest music copyright company, with control over more than two million copyrighted songs.According to Music & Copyright, an online music industry newsletter, the acquisition of EMI (which hadabout a 19% share of the music copyright market) increased Sony’s market share from 12% to about athird of the entire market. Other leading players include Universal Music Publishing Group (22% marketshare) and Warner Chappell (14%).Meanwhile, the worldwide music industry has been dominated by four major companies (Universal MusicGroup, Sony Music Entertainment, EMI Group PLC, and Warner Music Group Corp.) that together hadnearly 90% of the market. In July 2011, Warner Music, the world’s fourth largest music company, wasacquired by privately held Access Industries Inc. for $8.25 a share in cash. Including the company’s entiremusic recording and publishing operations, the overall transaction was valued at $3.3 billion (includingabout $2 billion of assumed debt).COMPANY STRATEGY UPDATENews Corp. unveils corporate split to unlock valueIn June 2012, News Corp. announced a plan to separate its publishing, and media and entertainmentbusinesses, into two publicly traded companies. In the transaction, shareholders of Class A Common andClass B Common Voting shares would get an equivalent number of shares in the new company. The plan,which is subject to regulatory approval, is expected to be completed in about 12 months. Rupert Murdochwould serve as the chairman of both companies and CEO of the media company; Chase Carey would bepresident and COO of the media company.The new publishing company would consist of News Corp.’s newspaper businesses in the US, the UK, andAustralia, as well as its book publishing business, and its marketing services and digital media divisions. Thenew media and entertainment company would include the broadcast and cable networks, along with thefilm and TV businesses (including the pay TV business and other TV stations).Lionsgate outlines vision for the Summit integrationIn January 2012, Lionsgate Entertainment Corp. acquired privately held Summit Entertainment LLC in a$412.5 million cash-and-stock merger of two of Hollywood’s largest independent studios. According toLionsgate, the acquisition will strengthen its position in international markets. Further, it expects thismerger to be significantly accretive in fiscal 2013 (ending March 2013).With this acquisition, Lionsgate’s business scale has drastically improved, giving the company much greaterexposure to overseas markets. In its fiscal 2012 fourth-quarter earnings call in May 2012, the companynoted that it is on track to integrate the operations of the two companies. With regard to the deal, thecompany has been focusing on improving its overhead-to-revenue ratio, and to pay down a $500 millionterm loan that was used to partly fund the acquisition.MGM eyes another reincarnationMetro-Goldwyn-Mayer Inc. (MGM), the independent Hollywood studio, filed for bankruptcy in November2010 and emerged in late December after a protracted process that wiped out nearly $5 billion of debt. Itslibrary of over 4,000 titles includes such franchises as James Bond, The Pink Panther, and Rocky. As part ofthe reorganization plan, MGM received a new $500 million credit facility toward restarting its filmproduction. Before the bankruptcy filing, an attempted auction for the debt-laden studio had failed togenerate any successful bids from a number of strategic or financial buyers.After a recent capital infusion under a new management team, the company resumed its movie productionand, in July 2012, announced plans for an IPO. While further details of the planned IPO are yet to beannounced, the studio expects the IPO to facilitate additional fundraising for its productions. The studio’s
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 7 much-anticipated upcoming releases in late 2012—Skyfall (a new James Bond movie) and The Hobbit—areexpected to help elicit a greater response for its public offeringOUR OVERALL MOVIES & ENTERTAINMENT INDUSTRY OUTLOOKOur neutral outlook on the movies and entertainment sub-industry reflects a backdrop of continuedweakness in US macroeconomic data (including consumer confidence and unemployment) that could furtherrein in consumer discretionary spending in the near term, versus stronger growth from internationalemerging markets. We see continued evolution of newer distribution windows and platforms creating bothopportunistic and disruptive scenarios for entertainment content providers.Meanwhile, ongoing shifts in media consumption are significantly reshaping the industry landscape, amid aconvergence of content, technology, and services. In addition, increased broadband connectivity and a shifttoward time-shifted and personalization are spurring a new generation of multi-media applications, whichincreasingly allow consumers to access content when, where, and how they want it. While cloud-based“locker” services are rapidly evolving, and major technology companies join the battle to control the livingroom (e.g., Apple TV and Google TV), a continued proliferation of smartphones and tablets (like the iPad)could further energize an “apps”explosion that could become the latestbattlefront for content providers.With traditional formats (such as DVDs)and distribution channels (like pay TV)now in decline or reaching saturation,content providers are spurring dynamicshifts to newer formats (e.g., Blu-ray and3D), innovative windows (such aspremium VOD and EST), online platforms(like TV Everywhere), or mobile devices(including smartphones and tablets).While streaming platforms (e.g., Pandora,Spotify) are fueling the growth of thedigital music market that is still dominated by pay-for-download services (e.g., iTunes), online video sites(e.g., Netflix, Hulu, YouTube) are also becoming popular streaming destinations, even as brick-and-mortarstores (such as Blockbuster and Movie Gallery) are facing extinction. With social networking platforms (likeFacebook and Twitter) also taking root, changing consumer habits are spurring a convergence of content,technology, and services. Content providers are experimenting with new business models, while trying toavoid a potential cannibalization of traditional distribution windows.Despite a notable improvement thus far in 2012, we remain relatively cautious on the overall box officeoutlook, amid secular pressures in movie attendance, partly offset by higher contributions from premium-priced 3D movies. While the home video market is also being buffeted by secular headwinds related to DVDsales, we expect strong growth in Blu-ray discs, digital consumption, and newer rental windows (e.g.,Netflix and Redbox) to provide some bright spots. However, since 2011, a secular decline in album salesappears to have moderated, while attendance at concerts and other live events also seems on the mend, withsome blurring of the lines between recording labels and concerts promoters.Beyond continued exploitation of feature films and television, we expect 2012 results to reflect furtherbenefits of a healthy advertising rebound and relatively steady worldwide affiliate revenues, plus increasedmonetization of digital streaming (e.g., Netflix, Amazon, and Hulu) and enhanced merchandise licensingopportunities. Meanwhile, the merger and acquisition (M&A) environment could remain active, afterLionsgate’s recent acquisition of Summit, the EMI auction, and Warner Music’s going-private deal, as wellas the Comcast/NBCU and Disney/Marvel combinations. Chart H01: M&EStock Price Index305070901101301501701902102004 2005 2006 2007 2008 2009 2010 2011 20127008009001,0001,1001,2001,3001,4001,5001,600Movies & Entertainment Index (Dec. 30, 1994 = 100; left scale)S&P 500 Composite (1941-43=10; right scale)MOVIES & ENTERTAINMENT STOCK INDEX PERFORMANCESource: Standard & Poors.
8 MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 INDUSTRY SURVEYS INDUSTRY PROFILEBranded premium content shapes the long tailSince the early 1990s, the US movie and entertainment business has experienced remarkable growth thanksto expanding audiences, pipelines, and content. These industries provide products and services for audiencesaround the world, including new films shown in theaters, video and music titles, and a wide range oftelevision shows. Through various kinds of distribution arrangements, content owners receive their revenuesfrom various sources, such as the sale or rental of their products to consumers, advertising sales, andsubscription services.Meanwhile, the convergence of media platforms, combined with the expansion in media outlets and thecontinued creation of new ways to package and format content, are providing opportunities and challenges toall participants. For example, the explosion in social networking and user-content sites is not only acceleratingcontent fragmentation, but also moving a large degree of control away from businesses and into the hands ofconsumers. Furthermore, the growth in digital formats has sharply boosted competitive conditions in themedia and entertainment landscape.THE FILM INDUSTRYMovies remain a cornerstone of the US entertainment industry, with consumers paying billions of dollarsannually to watch films in various formats. In 2011, around 1.3 billion movie tickets were sold in NorthAmerican theaters—an average of about 3.5 million tickets per day—for a box office total of about $10.2billion. Meanwhile, consumers also spent approximately $18.4 billion on home video purchases and rentalsacross a variety of formats, down approximately 2% from around $18.8 billion in 2010.For any given film, box office receipts and home video sales (both domestic and international) account foran overwhelming portion of revenues. However, other channels, such as TV licensing and pay-per-view, aswell as emerging platforms such as video-on-demand (VOD) and Internet downloads, also contribute ameaningful (although significantly smaller) portion of a film’s total ultimate earnings over its life span.Table B04: DiverseEntertainment operations& assets of Movie & TVcompaniesDIVERSIFIED OPERATIONS & ASSETS OF MAJOR MEDIA AND ENTERTAINMENT COMPANIESNBC NEWS SONY TIMEAREA CBS CORP. DISNEY UNIVERSAL CORP. CORP. WARNER VIACOMBasic cable network(s) ■ ■ ■ ■ ■ ■ ■Billboards/posters ■ ■Book publishing ■ ■ ■ ■Broadcast TV network(s) ■ ■ ■ ■ ■Broadcast TV station(s) ■ ■ ■ ■Film production/library ■ ■ ■ ■ ■ ■ ■Internet/broadband sites ■ ■ ■ ■ ■ ■ ■Magazines/newspapers ■ ■ ■Merchandising ■ ■ ■ ■ ■ ■ ■Premium cable network(s) ■ ■ ■Radio stations/networks ■ ■Recorded music label(s) ■ ■Theme parks/resorts ■ ■TV production/library ■ ■ ■ ■ ■ ■ ■Note: Some relatively minor operations may be excluded. Includes significant equity interests in jointventures or other companies.Source: S&P Capital IQ Equity Research.
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 9 The movie releases of six major film studios—all owned by conglomerates—have typically accounted for80%–85% of domestic box office revenues in any given year. These companies are Warner Bros. (TimeWarner Inc.), Paramount Pictures (Viacom Inc.), 20thCentury Fox (News Corp. Ltd.), Walt Disney Pictures(Walt Disney Co.), Sony Pictures (Sony Corp.), and Universal Pictures (Comcast Corp.).Among the independent studiosare Metro-Goldwyn-Mayer(MGM); LionsgateEntertainment Corp.,DreamWorks Animation SKGInc. (whose films aredistributed by Viacom’sParamount), DreamWorksSKG (distributed by Disney’sTouchstone Pictures); TheWeinstein Co., and CBSCorp.’s CBS Films. SummitEntertainment was acquired byLionsgate in January 2012,making Lionsgate by far thelargest of the independentHollywood studios, while twoother formerly independentstudios—Pixar AnimationStudios and MarvelEntertainment Corp.—wereacquired in 2006 and 2009 byDisney, which in turn divestedMiramax Films to certain independent parties in2010.Movie theatersMovie theaters retain about 50% of the dollarsthat consumers spend at the domestic box office,with the remainder going to the distributors asfilm rental fees. The three largest filmexhibitors—Regal Entertainment Group, AMCEntertainment Inc., and Cinemark USA Inc.—represent over 40% of the more than 39,000 UStheatrical indoor movie screens. IncludingCarmike Cinemas Inc. and CineplexEntertainment LP, the top five theater chainsrepresent about half of the total screen count.TELEVISIONThe Big Four English-language broadcastnetworks in the US are ABC (Walt Disney Co.), CBS (CBS Corp.), FOX (News Corp.), and NBC (Comcast).The CW Network debuted in fall 2006, after a merger of CBS’s UPN and Time Warner’s WB networks.There are two major Spanish-language broadcast networks in the US: Univision (Univision CommunicationsInc.) and Telemundo (Comcast).In January 2012, News Corp. entered the Spanish-language market through the formation of a joint venturewith Colombia-based RCN Television Group that will run MundoFox, a new Spanish-language televisionnetwork catering to the US Hispanic market. The network is scheduled to launch during the fall season ofTable B05: LargestNorth AmericanTheater ChainsLARGEST NORTH AMERICAN THEATER CHAINS(Ranked by number of screens, as of June 2010)AVERAGE NO.NO. OF NO. OF OF SCREENSCHAIN LOCATIONS SCREENS PER LOCATIONRegal Entertainment Corp 548 6,777 12.4AMC Entertainment* 378 5,336 14.1Cinemark USA** 293 3,825 13.1Carmike Cinemas 242 2,268 9.4Cineplex Entertainment 130 1,347 10.4Rave Motion Pictures 62 936 15.1Marcus Theatres 54 668 12.4Hollywood Theaters 49 546 11.1National Amusements 34 450 13.2Harkins Theatres 30 429 14.3Totals 1,820 22,582 12.4*Includes Loews Cineplex. **Includes Century Theatres.Source: National Association of Theatre Owners.B02: DOMESTICBOX-OFFICEMARKET SHARESDOMESTIC BOX-OFFICE MARKET SHARES(In percent)2011BOX OFFICEREVS.DISTRIBUTOR 2006 2007 2008 2009 2010 2011 (MIL. $)Paramount 10.3 15.5 16.4 13.9 16.2 19.2 1,957Warner Bros.111.6 14.7 18.4 19.8 18.2 17.9 1,826Sony / Columbia 18.6 12.9 13.2 13.7 12.1 12.5 1,274Buena Vista 16.2 14.0 10.5 11.6 13.8 12.2 1,241Universal 28.9 11.4 11.0 8.4 8.3 10.2 1,04120th Century Fox 315.2 10.5 10.5 13.1 14.0 9.6 978Summit Entertainment 4… … 2.4 4.5 5.0 4.0 412Weinstein Company 2.5 0.4 0.5 1.9 0.8 2.9 296Relativity … … … … 0.1 2.2 228Lionsgate 43.6 3.8 4.5 3.8 4.9 1.8 184Total, major distributors 86.9 83.2 87.4 90.7 93.4 92.5 9,436Others 13.1 16.8 12.6 9.3 6.6 7.5 738TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 10,1741Currently owned by Time Warner Inc. 2Currently owned by NBC Universal, which is80% owned by General Electric Co. 3Largely owned by News Corp. 4Lionsgateacquired Summit Entertainment in January 2012.Source: Box Office Mojo.
10 MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 INDUSTRY SURVEYS 2012. In late July 2012, ABC News signed a definitive agreement to form a joint venture with UnivisionNews to launch an English-language network. The new network will have a TV channel, along with awebsite and social media platform that will serve English-speaking and bilingual Hispanics with news andother programs focused on them. While the name for the new network is yet to be decided, the network’swebsite and its social and mobile media content are scheduled to launch sometime during the summer of2012; the TV channel is expected to launch in the first half of 2013.In addition, there are approximately five hundred cable and satellite TV networks across the entirespectrum. These include basic cable channels (e.g., ESPN, TNT, TBS, USA, MTV, Nickelodeon, Lifetime,Syfy, FX, Cartoon, Discovery, Fox News, CNN), an array of Spanish-language networks (e.g., Univision’sGalavisión, Discovery en Español, Fox Sports en Español, MUN 2, ESPN Deportes and GOL TV), as wellas premium subscription channels (e.g., HBO/Cinemax, Showtime, and Starz/Encore, and EPIX).THE MUSIC BUSINESSTotal US album sales across all formats—both physical and digital (minus track-equivalent albums)—dropped around 3.2% in the first half of 2012, to 150.5 million units. In 2011, album sales increasedapproximately 1.3%, tonearly 330 million units,up from 326 millionunits in 2010, accordingto Nielsen SoundScan, amarket research firm. Webelieve thatapproximately two-thirdsof the industry’s revenuebase is currently derivedfrom the sales of CDsand other physicalformats, with theremainder represented bydigital revenues(downloads, mobile, etc.)Three distributorsdominate the worldwiderecorded music industry:Universal Music Group(part of France-basedVivendi SA); Sony MusicEntertainment (part ofJapan-based Sony Corp.);and Warner MusicGroup Corp. (based in the US). (In November 2011, Universal and Sony agreed to acquire UK-based EMIGroup PLC, the world’s third largest music company, in two separate deals, subject to regulatory approvals.While Universal’s deal to acquire EMI’s music division awaits regulatory approval, Sony Music completedits deal to acquire EMI’s publishing arm in June 2012.) These three companies typically account for close to90% market share of US music sales.The live entertainment segment of the industry mainly generates its revenues from ticket sales related to thepromotion of music concerts and other events. Concert promoters also derive a growing portion of revenuesfrom ancillary sources such as online fan clubs, sponsorships, merchandising, and endorsements. The liveentertainment market is highly consolidated, with the newly created Live Nation Entertainment Inc. by farthe dominant player, while Anschutz Entertainment Group’s AEG Live is the second largest.B08: RECORDEDMUSIC INDUSTRYSALES PROFILERECORDED MUSIC INDUSTRY SALES PROFILE--- UNITS SHIPPED (MIL.) --- ---------- VALUE (MIL. $) ----------2000* 2004** 2010 2000* 2004** 2010PHYSICAL SHIPMENTS (MILLION UNITS SHIPPED)CD 942.5 767.0 225.8 13,214.5 11,446.5 3,361.3CD Single 34.2 3.1 1.2 142.7 15.0 3.3Cassette 77.3 5.2 0.0 630.6 23.7 0.0LP/EP 2.2 1.4 4.0 27.7 19.3 87.0Vinyl single 4.8 3.5 0.3 26.3 19.9 2.2Music video 18.2 32.8 9.1 281.9 607.2 178.8Total physical shipments† 1,079.2 814.1 240.5 14,323.7 12,154.7 3,635.2DIGITAL DOWNLOADS (MILLION UNITS DOWNLOADED)Singles 0.0 139.4 1,162.4 0.0 138.0 1,366.8Albums 0.0 4.6 83.1 0.0 45.5 828.8Kiosk‡ 0.0 0.0 1.7 0.0 0.0 6.4Music video 0.0 0.0 18.1 0.0 0.0 36.1Total digital shipments 0.0 144.0 1,265.3 0.0 183.5 2,238.1Mobile downloads 0.0 0.0 220.5 0.0 0.0 526.7Subscription 0.0 0.0 1.5 0.0 0.0 200.9Digital performance royalties … … … 0.0 6.9 249.2TOTAL MUSIC SHIPMENTS 1,079.2 958.1 1,727.8 14,323.7 12,345.1 6,850.1*Peak year for CD sales. **First year of digital sales. Note: Sales represent manufacturersshipments, net of returns. Dollar values are based on suggested retail prices, which in manycases exceeded actual prices. †Includes DVD audio and SACD. ‡Includes singles and albums.Source: Recording Industry Association of America.
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 11 INDUSTRY TRENDSOver the past few years, the landscape of the movie and home entertainment industry has continued to evolverapidly, as technological developments continue to affect the traditional means of content distribution,creating further shifts in the industry’s economics. These trends have been spurred by continued changes inconsumer behavior, amid a shift toward increased personalization of on-demand content.Facing declining sales on the saturation of physical formats such as CDs and DVDs, the music labels andfilm/TV studios are actively seeking to monetize their content by expanding into digital distribution. Forexample, these content providers are leveraging the growing popularity of various direct-to-consumer onlinedistribution channels and rapidly growing social networking sites, while also addressing the needs ofconsumers who wish to have access to such content while on the move.In the TV business, cable networks have significantly ratcheted up their investments in originalprogramming in recent years, helping them to garner a greater share of viewers from the major broadcastnetworks that have faced steady audience erosion. The Internet and other emerging platforms also help toexplain a secular increase in audience fragmentation across the TV landscape.Increasingly, consumers are making personal recordings at home directly onto their computers or wirelesshandheld devices. For content providers, changing consumer habits and a proliferation of online and mobileplatforms have necessitated a new way of thinking on delivery mechanisms, as older technologies becomeincreasingly obsolete. S&P Capital IQ (S&P) expects consumer time-shifting and place-shifting to spurfurther convergence of content, technology, and services.ONLINE VIDEO PLATFORMS CONTINUE TO EVOLVEThe competitive landscape for multi-channel video programming distributors (MVPD) is undergoing somemajor changes, as fiber-based video (and broadband) services from telcos go against traditional cable andsatellite TV providers (for a more detailed discussion, see the Broadcasting, Cable & Satellite Survey). Inmore recent years, we have also seen the rise to prominence of online video distributors (OVD), the continuedevolution of which we expect to have longer-term implications for content providers and distributors.The relatively nascent and rapidly growing OVD space—essentially providing streaming video overbroadband connections (also known as “over-the-top” services)—has a number of major players. Theseinclude Netflix Inc., Hulu, and Amazon.com Inc., as well as Wal-Mart Stores Inc.’s Vudu. For years, Netflixhas been the market leader in the OVD space and has emerged as a major catalyst for change in the movieand entertainment landscape through distribution pacts with all of the major film studios and severaltelevision networks. Netflix has firmly established itself as a major player in the acquisition of contentrights, placing it in competition with the traditional TV providers and premium cable channels. However,competition in the online video space is likely to intensify in the years ahead.For instance, in February 2012, Verizon Communications Inc. and Coinstar Inc. entered a partnershipagreement to launch an online streaming video service in the latter half of the year. The new service is expectedto compete directly with Netflix by allowing streaming, as well as downloading, of video content both onlineand through various devices such as smartphones, in addition to physical DVD rentals at kiosks. AlthoughRedbox’s DVD rental kiosks are profitable for Coinstar, it remains to be seen how much each company willbenefit from a venture that combines kiosks with a streaming service.Hulu is a joint venture of three major broadcast networks (Disney’s ABC, News Corp.’s FOX, and Comcast’sNBC) and one of the top US online video destinations. The site offers a large selection of television shows(including prime-time hits) and movies from about 260 individual content providers. Initially launched in2008 as an ad-supported service, the site in 2010 added a subscription-based offering that also providesaccess for a selection of smartphones (including the iPhone) and Internet-connected devices (e.g., smart TVsand game consoles), Blu-ray players, and tablet devices such as Apple’s iPad.
12 MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 INDUSTRY SURVEYS In addition to their online video streaming services, these players in the last few years have entered the fieldof original programming. For instance, Hulu First has launched two original content programs: A Day inthe Life, a documentary, in 2011, and Battleground, a sitcom, in February 2012. Netflix, in its first forayinto original content series, launched Lilyhammer in February 2012. The company also acquired firstexhibition rights to 26 episodes of House of Cards, a political drama starring actor Kevin Spacey that isscheduled to debut in late 2012. In October 2011, Google announced that several new channels onYouTube will offer original series.Meanwhile, Amazon is emerging as a strong competitor among OVD players. For online streaming,Amazon, in February 2011, launched its Prime Instant Streaming service that offers over 17,000 movies andTV series. The company’s offer of unlimited streaming of a growing selection of movies/TV titles tomembers of its Prime loyalty program is accessible through web browsers on computers, smartphones, andtablets, as well as certain Blu-ray players and some set-top boxes. The company enjoys a competitiveadvantage as it provides streaming services at a lower price than competitors such as Netflix.TV Everywhere still on the longer-term horizonThe so-called TV Everywhere initiative was launched in the summer of 2010 and represents an attempt bytraditional pay TV providers, in collaboration with certain programmers, to defend their business turfB12: ENTERTAINMENTCOMPANIES’ GROWINGTROVE OF ONLINEOUTLETSONLINE DISTRIBUTION—ENTERTAINMENT COMPANIES HOLDINGS AND PARTNERSHIPSCOMPANY SAMPLE OWNED AND OPERATED ONLINE PROPERTIES* SAMPLE DISTRIBUTION PARTNERSCBS BNET, CHOW, CNET, CBS.com, CBSNews.com, Amazon, Apple, BuddyTV, Chumby,CBSSprts.com, GameSpot,Last.fm, MaxPreps.com, Fancast, Mefeedia, Metacafe, MSN,Metacritic, mySimon, Search.com, TechRepublic, TV.com, Netflix, Roku, TVGuide.com, WindowsUrbanBaby.com, ZDNet Media Center, Yahoo!, Google/YouTubeDisney ABC.com, ABCFamily.com, ABCNews.com, Disney.com, Apple, AOL, Fancast, MSN, MySpace,DisneyChannel.com, Disneys Club Penguin, ESPN.com, Netflix, Yahoo!ESPN360.com, Hulu.com, Playdom.comNBC Universal AccessHollywood.com, Bravo.com, ChillerTV.com, AOL, Apple, Fancast, iTunes, MSN,CNBC.com, DailyCandy, eonline.com, exercisetv.tv, Netflix, Yahoo!g4tv.com, golfchannel.com, Fandango.com, Hulu.com,iVillage.com, MSNBC.com, mun2, mystyle.com,msnbc.com, NBC.com, NBCNews.com, NBCOlympics.com,Oxygen.com, SyFy.com, Sleuth, Telemundo.com,USANetworks.com, versus.com, weather.comNews Corp. AmericanIdol.com, Askmen.com, careerone.com.au, AOL, Apple, Fancast, Google, Hulu, MSN,CARSguide.com.au, Fox.com, FoxNews.com, Netflix, Yahoo!FoxSports.com, Hulu.com, IGN Entertainment, Milkround,News.com.au, Scout.com, truelocal.com.au,whatifsports.comTime Warner Cinemax.com, CNN.com, CNNMoney.com, CWTV.com, Apple, BitTorrent, Gube, Facebook,Digital City, Essence.com, Fanhouse.com, Flixster.com, Google/YouTube, Netflix, Yahoo!Games.com, Golf.com, HBO.com, HBOSports.com, IN2TV,InStyle.com, Life.com, Mapquest.com, Myrecipes.com,NME.com, ParentDish.com, PawnNation.com, People.com,Pixcetera.com, Platform A, Propeller, RealSimple.com,Rottentomatoes.com, Shoutcast.com, SI.com, Stylelist.com,TheBoomBox.com, TheWB.com, Time.com, TMZ.com,Truveo, Userplane, Wallet.com, WarnerBros.com, When.comViacom Atom.com, BET.com, AddictingGames.com, CMT.com, AOL, Apple, DailyMotion, GoFish, Hulu,ComedyCentral.com, EPIX.com, Gametrailers.com, MeeVee, MSN, Netflix, Veoh, Yahoo!Logo.com, MTV.com, MTVFilms.com, Neopets.com,Nickelodeon.com, Noggin.com, Paramount.com,ParentsConnect.com, Quizilla.com, Shockwave.com, SocialExpress, Spike.com, TVLand.com, VH1.com, XfireSource: S&P Capital IQ Equity Research; company reports.
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 13 against a continued encroachment by OVD players amid increased concerns with “cord-cutting” (as furtherdiscussed in the Broadcasting, Cable & Satellite Survey).Under the TV Everywhere initiative, authenticated pay TV subscribers are provided access to streaming videosof full-length episodes of a growing selection of TV shows and movies) across multiple platforms, both withinor outside the home (e.g., TV, PC, tablets, and mobile devices) at no additional cost. For example, Comcast’sXfinity online TV service recently offered more than 20,000 TV episodes and 2,000 movies.This initiative now counts several dozen participating networks and has been deployed to a majority of USpay TV homes. It has made some key strides in the period since its launch. Time Warner’s HBO GO, forexample, is accessible by the premium channel’s subscribers through AT&T, Charter Communications Inc.,Comcast, Cox Communications Inc., DIRECTV, DISH Network, Suddenlink Communications, andVerizon FIOS.Despite the rising coverage, the initiative is still far from providing customers with the same level of servicesthat are provided in the form of at-home subscription services. One impediment is the difficulty in obtainingthe content rights for live TV (versus OVD players) from content providers that are increasingly seeking toexploit non-traditional distribution windows. Still, the rising demand for live TV requires pay TV operatorsto find ways to serve customers in an efficient manner and save its customer base from moving to OVDplayers.INTERNATIONAL UPSIDE FOR FILMED ENTERTAINMENTAmid an increasingly saturated domestic box office, US film and television studios have increasingly lookedfor stronger growth opportunities in the international markets of Asia Pacific, Latin America, and EasternEurope and, to a lesser extent, the Middle East and Africa. Among several emerging markets that haveexperienced superior growth in box office in recent years (relative to developed markets) are China, India,Russia, Brazil, South Africa, and the UnitedArab Emirates.The US entertainment industry’s internationalpresence is extensive. Despite increasedcompetition from local productions,American movies and TV shows typicallyaccount for a substantial market share inseveral international territories, whereconsumer interest and access to USentertainment have been boosted by theconstruction of multiplex theaters (e.g., inEurope) and growth in the number ofbroadcast, cable, and satellite outlets.Foreign demand is typically strong for the big-budget films that are a staple of the US movieindustry. In the United States, films aremarketed to a domestic population of more than 300 million—far greater than the populations of manyother developed countries. The large US market, plus the acceptance of English as an international language,gives US moviemakers a much bigger prospective revenue base than their foreign counterparts. In addition,movie videos from US companies enjoy a sizable overseas market.Consequently, the proportion of international contributions to overall box office performance has steadilyincreased over the past decade. This is especially true of popular franchises with global appeal—such asHarry Potter, Star Wars, Spider Man, Shrek, Pirates of the Caribbean, Toy Story and Transformers—forwhich international contributions can far eclipse the film’s domestic box office performance. Also, with 3Ddeployment continuing apace, international markets accounted for about 61% of worldwide 3D screensthat had been rolled out by the end of 2011; 3D deployment is discussed in more detail later in this section.Chart H02:WORLDWIDE BOXOFFICE9.2 9.6 9.6 10.6 10.6 10.216.3 16.6 18.118.8 21.0 22.4051015202530352006 2007 2008 2009 2010 2011US/Canada InternationalSource: Motion Picture Association of America.WORLDWIDE BOX OFFICE(Billions of dollars)
14 MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 INDUSTRY SURVEYS Meanwhile, US suppliers of TV programs have also been tapping new international opportunities amidincreased demand for licensing of their shows, especially as more channels become available throughoutEurope and Asia Pacific, as well as Latin America, the Middle East, and Africa. Worldwide demand forprogramming should benefit from expanded services, including satellite TV.With the US accounting for less than 15% of the world’s more than 800 million TV households, USprogram suppliers have significant growth opportunities overseas. For example, with the benefit ofinternational licensing, we believe that just three of Disney’s ABC prime-time shows—DesperateHousewives, Grey’s Anatomy, and Lost—generated nearly $1 billion in operating income in the five fiscalyears through 2011.MORE STUDIOS EMBRACE SOCIAL MEDIA MARKETINGThe continued rise of social media usage portends one of the latest and most compelling shifts in mediaconsumption over the last several years, amid a growing popularity of social networking platforms—a trendthat S&P expects to continue in the years ahead. Currently, this fast-growing domain is benefiting fromcontinued strong growth of Facebook, Zynga, and Twitter, each of which has several hundred million users.Consequently, as more users embrace emerging social media platforms, movies and entertainment contentproviders have sought to capitalize on this trend by distributing their content through partnerships withsome of the major social networking sites, or by making select acquisitions. For example, in March 2011,Warner Bros. studio launched a pilot test to make certain titles (e.g., The Dark Knight) available for rentalon Facebook for up to 48 hours. In July, this test also included Paramount Pictures, which placed the entirecatalog of its Jackass films for rental on Facebook. While these studios have offered previously releasedmovies on Facebook for rental, Lionsgate initiated a trend in January 2012 by offering a new release,Abduction, on Facebook on the same day that it was sold through other channels such as DVDs, digitaldownload, and Blue-ray.In 2010, we saw a number of notable acquisitions by media and entertainment companies that we thinkincreasingly underscore the growing impact of the social networking arena. In July, The Walt Disney Co.Inc. acquired Playdom, an online social gaming platform, for about $763 million, as well as Tapulous, adeveloper of mobile games and apps (the price was not disclosed). Also in July, Viacom Inc. acquired SocialExpress Inc., a social games developer (for an undisclosed price).The traditional ways of marketing and promoting movies are changing, as studios take increasinglydramatic cost-containment measures, while at the same time respond to rapid changes in technology andconsumer habits. Over the next several years, we expect traditional film marketing functions to continue toevolve, as studios experiment with new ways to reach their audiences through the most cost-efficient means.The best example of a company using new marketing strategies is Lionsgate with The Hunger Gamesmovie. The company undertook marketing initiatives for over a year before its release, which not onlyhelped in creating a huge fan base for the movie, but also in selling millions of copies of the ‘Hunger Games’trilogy in the US alone. Lionsgate spent around $45 million for the promotion, compared to more than$100 million usually spent on such major releases.Meanwhile these social networking sites have also become increasingly valuable tools for the studios togenerate audience buzz well before a film’s release, as well as during its early theatrical run. We believeParamount’s Paranormal Activity offers one of the most potent cases of how clever marketing and word-of-mouth buzz helped transform a micro-budget film into one of 2009’s biggest movie phenomena. Beginningits theatrical run with midnight-only screenings in 12 college towns across the US, the film quickly developedinto a nationwide hit. After more than a million requests by fans visiting the film’s website demanding ashowing in their city, Paramount expanded the film’s release nationally, where it played to packed theaters forfour months, propelling the $15,000 movie to more than $100 million at the domestic box office.Disney is another player successful in generating audience attention before the release of its movies, ToyStory 3 and The Muppets. The company used social networking platforms such as Facebook, Twitter,
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 15 Google+, and created pages for the movies as well as its characters. Further, by offering chances to see anadvance screening of the movie or to win movie tickets for friends, by simply liking the fan page, the Disneypromotion campaign was quite a hit.With movie distribution through social media gaining momentum in the market, we see an upcoming trendof companies offering movies with a social element to it. Last year, a startup firm, flickme, launched alibrary of over 1,000 movies that were available to users through Facebook and Twitter. The socialsteaming startup had such participants as Sony Pictures and Warner Bros. backing it. According to thefounders of flickme, the service was started because the streaming services provided by companies likeNetflix were not dynamic and digital movies had lost their personal/social element.Shifting paradigm for content distribution channelsWith a continued saturation of traditional windows of film distribution—theatrical release, home video, andpay TV—the major content providers are aggressively exploring newer channels to exploit such content. Asa result, we see a shifting paradigm for content distribution, aiming to counterbalance the desire for fastergrowth from emerging distribution platforms, against a potential cannibalization of traditional distributionplatforms that still account for an overwhelming portion of the studios’ revenues and profits.Under the traditional release windows, studios would typically release films into the home video marketafter a 90- to 120-day theatricalrun. Meanwhile, the gap betweenthe theatrical and home videowindows has shrunk systematicallyin the past few years, even forsome high-profile films such asDisney’s 2010 release of Alice inWonderland. This trend hasconsequently encounteredincreased resistance from theateroperators such as RegalEntertainment Corp., AMCEntertainment, and CinemarkHoldings Inc.In addition, the gap between theDVD and VOD release windows,which has traditionally rangedfrom 30 to 45 days, has shrunk (orincreasingly overlapped) in recentyears. In 2010, for example, thenumber of titles released into bothwindows simultaneously (day-and-date) more than quadrupled fromonly 10 such releases in 2007.These trends have accelerated asstudios increasingly grapple with avariety of windows for newerrental channels, such as Netflixand Redbox.Franchise installments strategyprovides a hedgeIn the movie industry, producing asequel—a follow-up to a previouspopular film—can lead to boxB01: ALL-TIME TOP BOXOFFICE FILMSALL-TIME TOP BOX OFFICE FILMS(Ranked by domestic box office revenues, in millions of current dollars)BOX OFFICE (MIL.$) YEAR OFMOVIE DISTRIBUTOR US WORLDWIDE RELEASEAvatar Fox 761 2,782 2009Titanic* Paramount 659 2,185 1997Marvels The Avengers* Buena Vista 614 1,459 2012The Dark Knight Warner Bros. 533 1,002 2008Star Wars: Episode I - ThePhantom Menace†Fox 475 1,027 1999Star Wars Fox 461 775 1977Shrek 2 DreamWorks 441 920 2004E.T.: The Extra-Terrestrial Universal 435 793 1982Pirates of the Caribbean:Dead Mans ChestBuena Vista 423 1,066 2006The Lion King Buena Vista 423 952 1994Toy Story 3 Buena Vista 415 1,063 2010The Hunger Games* Lionsgate 405 681 2012Spider-Man Sony 404 822 2002Transformers: Revenge of theFallenParamount/DreamWorks402 836 2009Harry Potter and the DeathlyHallows Part 2Warner Bros. 381 1,328 2011Star Wars: Episode III -Revenge of the SithFox 380 849 2005The Lord of the Rings: TheReturn of the KingNew Line 378 1,120 2003Spider-Man 2 Sony 374 784 2004The Passion of the Christ Newmarket 371 612 2004Jurassic Park Universal 357 915 1993Transformers: Dark of theMoonParamount/DreamWorks352 1,124 2011The Lord of the Rings: TheTwo TowersNew Line 343 926 2002Finding Nemo Buena Vista 340 868 2003Spider-Man 3 Sony 337 891 2007Alice in Wonderland (2010) Buena Vista 334 1,024 2010Forrest Gump Paramount 330 677 1994Current domestic box office totals as of July 2012. Lists all films over $325 millionin domestic revenues, when measured in current dollars. *Still in theaters as ofJuly 2012. †Includes original release and later 3D version.Sources: boxofficemojo.com; the-movie-times.com.
16 MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 INDUSTRY SURVEYS office success. Of the top 50 domestic box office hits of all time, more than half were follow-up installmentsof established franchises with built-in audiences, such as Harry Potter, Indiana Jones, Iron Man, Lord of theRings, The Matrix, Pirates of the Caribbean, Spider-Man, Shrek, Star Wars, Transformers, The TwilightSaga, and Toy Story.The sequel strategy is alive and well. So far in 2012, five of the top 10 were follow-up installments: Marvels’The Avengers, The Dark Knight Rises, The Amazing Spider-Man, Madagascar 3: Europe’s Most Wanted, andMen in Black 3. In 2011, nine of the top 10 were sequels: Harry Potter and the Deathly Hallows: Part 2,Transformers: Dark of the Moon, The Twilight Saga: Breaking Dawn Part 1, The Hangover Part II, Piratesof the Caribbean: On Stranger Tides, Fast Five, Mission Impossible – Ghost Protocol, Cars 2, and SherlockHolmes: A Game of Shadows. In 2010, five of the year’s top 10 films at the domestic box office were sequels:Toy Story 3, Iron Man 2, The Twilight Saga: Eclipse, Harry Potter and the Deathly Hallows; Part 1, andShrek Forever After.Movie adaptations of popular TV shows—such as Sex in the City—are similar to movie sequels, in thatconsumers’ familiarity with characters and story lines means that the film could ride some of its built-inaudience at the box office. Studios also produce remakes or new variations based on earlier films. However,translating a popular book or TV show into film is no guarantee of a major hit.APPS EXPLOSION FUELS NEW BATTLEFRONT FOR CONTENT PROVIDERSThe past few years have witnessed an exponential increase in multimedia applications (apps), driven bycontinuing shifts in media consumption, as consumers opt for increasingly personalized on-demand content,accessible on any device, in any place, at any time. This trend has spawned a plethora of applications,devices, and platforms aiming to enhance or otherwise enrich consumers’ overall experience.Amid the multiplication of consumer touch points, S&P believes the ongoing development of online andmobile applications could become another battlefront for movies and entertainment content providers.Thanks to platform vendors and operating system providers, including social media destinations such asApple, Google, Amazon, Facebook, and Twitter, this ecosystem has supported a continued development ofthird-party applications.Broadband connectivity breeds smart applicationsAmid the ubiquity of broadband connectivity, a shift to personalization has highlighted a need for solutionsthat facilitate a seamless multi-platform integration. An explosive growth in online and mobile apps reflectsa continued proliferation of smartphones, tablets, and other mobile devices. For the three-month periodended June 2012, an average of nearly 234 million Americans (ages 13 and older) used mobile devices,according to comScore Inc., an audience measurement firm, and smartphone penetration had grownsignificantly, to over 110 million users. Meanwhile, Apple’s iPad had sold several tens of million units sinceits April 2010 launch, fueling an intensifying war in the tablet space.Meanwhile, a growing number of initiatives by some major companies aim to foster in-home connectivity,such as Google TV, Apple TV, and Yahoo’s Connected TV. Satellite TV providers such as DIRECTV GroupInc. and DISH Network Corp. have also begun to focus on broadband-enabled boxes to allow access ofonline content for their subscribers.THEATERS ON TRACK WITH CONTINUED ROLLOUT OF 3D SCREENSIncreased consumer awareness (and popularity) of 3D movies over the past few years, thanks in part toAvatar’s record-breaking performance in 2009, has spurred a continued buildout of 3D screens by movietheaters. Meanwhile, an accelerated pace of 3D deployment seems evident from a rapid growth in thenumber of 3D screens worldwide, which more than doubled to nearly 22,000 screens in 2010 and furthergrew to over 35,000 screens in 2011, based on data from IHS Screen Digest, a market research firm. In thedomestic market, by the end of 2011, nearly 13,000 of the 39,600 US screens were 3D-capable.
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 17 In 2007, the Digital Cinema Implementation Partners (DCIP)—a joint venture of the three largest USexhibitors, Regal, AMC, and Cinemark—had announced plans for a multi-year buildout of 3D screens. Asof late August 2012, these companies had substantially completed a targeted 3D buildout of a relativelysignificant portion of their overall screen count (e.g., about 40% in the case of Regal) and were on track tofully equipping the remaining portion of their screens with digital projection equipment by early 2013.3D movie releases continue to ramp upThe buildout of 3D screens has led to asteady increase in the number of domestic 3Dreleases in recent years. From just seven filmsin 2007, the number of 3D releases morethan tripled to 25 in 2010, and to 48 in2011, according to data from Rentrak, anaudience measurement firm. In 2010, 3Dfilms accounted for approximately 20% ofthe domestic box office tally, thanks topremium ticket pricing of 25%–30% aboveregular 2D tickets. In 2011, 3D filmsaccounted for 18% of domestic box officesales. The top movies in 2010 in 3D wereToy Story 3, Alice in Wonderland,Despicable Me, Shrek Forever After, andHow to Train Your Dragon. In 2011, there were also some major 3D releases (a total of 35 3D films and 13IMAX films), including Harry Potter and the Deathly Hallows: Part 2, Pirates of the Caribbean: OnStranger Tides, Cars 2, Kung Fu Panda 2, and Captain America: The First Avenger.3D TV channels slower to take offWhile film studios are devoting more resources to 3D movies as theaters embark on a multi-year screenbuildout to sustain increased demand, recent strides in 3D broadcast technology have thus far had relativelylittle impact on consumer adoption of in-the-home 3D television viewing. Among some cited hurdles for in-the-home 3D viewing are the dearth of 3D content, higher-priced sets (versus comparable HDTV sets), andthe inconvenience and potential cost of requisite eyeglasses.Still, 2011 saw the official debut of a number of pioneering 3D television channels, including Disney’s ESPN3D sports channel, which plans to broadcast about 100 live sports events in the first year, following itshistoric 3D broadcasts during the 2010 World Cup. Other debuts include 3D net (for TV shows andChart H03:US/CANADA 3DFILM RELEASESAND BOX OFFICE0246810122006 2007 2008 2009 2010 20113DBox office 2DBox officeSource: Motion Picture Association of America.US/CANADA 3D FILM RELEASES AND BOX OFFICEUS/CANADA 3DBOX OFFICE (BILLIONS OF DOLLARS)051015202530354045502006 2007 2008 2009 2010 20113DFILM RELEASESChart H04: DIGITALSCREENS0102030405060702006 2007 2008 2009 2010 2011US/Canada InternationalSource: Motion PictureAssociation of America.DIGITAL SCREENS(In thousands)
18 MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 INDUSTRY SURVEYS movies), a joint venture of Sony Corp., Discovery Communications Inc., and IMAX Corp. Meanwhile, in2010, DIRECTV unveiled three dedicated high-definition 3D channels: a linear 3D HD channel, a pay-per-view channel, and an on-demand movie channel.HOW THE INDUSTRY OPERATESCompanies in the movie and home entertainment industry are involved in the creation and delivery ofvarious kinds of programming for consumers. Traditionally, this programming is recorded on film, tape, ordisc so that it can be seen or heard repeatedly.Increasingly, recorded entertainment is being stored in various other newer digital formats (online, mobile,etc.), which can preserve a higher quality of images and sounds, and make them easier to transmit and copy.In addition, many entertainment events that are broadcast live are likely to be recorded, and thenrebroadcast at future times and/or made available to consumers across various formats.Large, diversified companies dominate the industry. Among the biggest are Walt Disney Co., News Corp.Ltd., Time Warner Inc., CBS Corp. and Viacom Inc., as well as Comcast Corp. (which controls NBCUniversal Inc.) and Sony Corp. These companies finance the development of new products, have extensivelibraries of products, and often own distribution channels for bringing content to the public.The ownership of diverse entertainment businesses creates opportunities for cross-promotion. Companiescan gain an economic edge from owning both the product (such as a TV show) and the distribution channel(such as a broadcast network). Additional opportunities to leverage trademarks, copyrights, and “creativeassets” (i.e., writers, producers, actors, and the content they produce) are arising in the evolving multimediasector. For example, a popular movie can spawn a best-selling music album or a video game, a novel caninspire a film, and so on.However, a single company’s ownership of both content and distribution is no guarantee that its offeringswill be well received by audiences. Ultimately, consumers will spend their money on the movies, programs,and music that they like and that are delivered conveniently and economically. In addition to self-producedcontent, several programming packagers and distributors rely on content from outside sources.MOVIES: AN ESCAPE FROM REALITYThe six major Hollywood film studios are Time Warner’s Warner Bros., Walt Disney’s Buena Vista, NewsCorp.’s Twentieth Century Fox, Viacom’s Paramount, Sony/Columbia, and NBC Universal Inc.’s Universal.These studios typically account for close to 80% of the market share in terms of box office revenues.Movies today usually are made under a contract signed by a major distributor, a production company, anda collection of freelance talent. With a major theatrical film, a distributor typically funds a movie from startto finish or provides a portion of the financing in return for fees and a share of the proceeds. In some cases,a producer grants theatrical distribution rights to one party and sells home video rights to another; onoccasion, the international rights may also be parceled out separately.In many cases, the company handling the film’s theatrical release also owns its distribution rights in thehome video market. After arranging to have videos manufactured, the distributor usually sells them to videoretailers. It also may distribute them through a revenue-sharing agreement, under which the distributor andretailer share consumers’ rental fees for a video title, or otherwise makes them available for purchase orrentals through electronic services.For many films, movie theater sales are no longer the principal source of revenues. Today, profitability oftendepends heavily on a film’s home video sales, as well as pay-TV licensing and merchandising, andincreasingly, new media outlets. Still, box office performance will likely influence a film’s performance inother back-end channels; strong ticket sales can create built-in consumer awareness that could allow a filmto continue to generate revenues in ancillary channels for several years thereafter.
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 19 Spiraling film costs increasingly on the radarIn addition to the costs of film production, other expenses associated with film distribution includeadvertising and duplication (making multiple copies for theaters), dubbing or subtitling the movie forforeign markets, and manufacturing and marketing the film’s home video release. In addition, creative talentinvolved in a movie may be contractually entitled to a portion of the film’s revenues or profits.Production costs vary widely. While the average cost to make and market a movie is over $100 million,some high-profile special-effects movies, such as Avatar or Pirates of the Caribbean, can cost severalhundred million dollars. From a financial standpoint, the spiraling cost of film production creates a highdownside risk for high-priced films that significantly underperform lofty box office expectations, of whichthere are numerous examples. Still, a significant number of low-budget films (costing $15 million or less)have also produced outsized returns across the various distribution windows taken together.Even so, most movies are not big moneymakers, and breakout commercial successes are typically rare. Inthis business, as in the music and television sectors, the successes must pay for the failures. According to theMPAA, six of 10 movies lose money on their original investment in their domestic theatrical run. Thus,most films must rely on the home video and other back-end channels to recoup their investment and make aprofit. In addition, a recent influx of money hedge funds and private equity firms has allowed studios tohedge their downside risks.Dynamics of scale efficiencies and entry barriersIn the filmed entertainment business, scale has some obvious advantages. A large firm can diversify its riskby developing a variety of projects, while the sheer volume of its products gives it more influence withtheater owners and TV networks. In addition, factors such as brand-name recognition, managementexperience, relationships with creative talent, and product distribution capabilities tend to favor the larger,more established companies.Relative to some capital-intensive or highly regulated sectors, entry barriers in the filmmaking anddistribution business are not extreme. Over the past decade, the industry has seen a growth market in recentyears for independent films (“indies”). Despite some retrenchment (as discussed in the “Industry Trends”section of this Survey), a number of newer players have arrived on the scene, including CBS Feature Films,The Weinstein Co., Relativity Media LLC, and Summit Entertainment (acquired by LionsgateEntertainment in January 2012).However, long-lived success does not come easily. The ability of smaller companies to join the ranks of theindustry leaders varies according to sector. Salient factors include access to capital, regulatory barriers, andmanagement skill.Movie exhibitors as key stakeholdersMany of today’s cinemas are multiscreen theater complexes. This format lets theater operators attract moremoviegoers by offering a variety of films—and thus maximizes the value of their real estate. Multiscreentheater complexes also permit economies of scale, in that employees and facilities—the concession standsand box office, for instance—can serve patrons of more than one movie. Multiplex (or megaplex) facilitiestypically have fewer seats per screen than do single-screen theaters, so this format can also boost averagecapacity utilization.A theater operator’s largest expense is the rental of movies from distributors. Exhibitors license films by eithernegotiating directly with distributors or submitting bids to them. Rental fees, which average roughly 50% ofticket sales, are based largely on a revenue-sharing formula. Typically, if the fee is determined in advance, adistributor will receive either a percentage of box office receipts (which may decline as a film’s theatrical runlengthens) or a percentage of the amount that admission revenues exceeded a negotiated figure.During a film’s theatrical run, if the movie exhibitor’s weekly percentage of box office receipts increasesover time, it provides an incentive for the exhibitor to keep the film on its screens longer. In addition, rentalfees may be subject to a settlement process that is negotiated after a film’s theatrical run has concluded,based upon a movie’s performance.
20 MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 INDUSTRY SURVEYS A given film typically reaps the bulk of its box office revenues within just a few weeks of its release—with thehighest in its opening week—before increased competition sets in as other releases jump into the fray. Still, afilm’s life span can last several years before its entire revenue stream is exhausted. Although a movie’s boxoffice revenues often are tallied publicly, a specific movie’s full cost structure is seldom disclosed.During the 1990s, the US movie theater industry over-expanded, opening more than 15,000 new moviescreens while closing an insufficient number of older screens. Because of this and other factors, about half ofthe 12 largest US film exhibitors entered bankruptcy proceedings between 1999 and 2001. By the end of2011, there were nearly 39,600 US movie screens in about 5,700 theater locations across the US, accordingto the National Association of Theater Owners, an industry trade group.Videos for sale or rentA variety of material is now available on digital versatile discs (DVDs; often called “digital video discs”when referring to movies), which have largely replaced videocassettes. Movies probably account for morethan 70% of video rentals and at least 60% of the dollars spent on video purchases. New theatrical moviestypically are released on DVD about three to four months after their theatrical debut. In addition, somemovies are not shown in theaters but are released directly to consumers as videos.Suppliers of home videos seek to maximize revenues and profits by forecasting levels of demand fromretailers and consumers at different price points. Videos that have a relatively high retail purchase price ($25or more) are generally targeted for rental activity, while lower-priced DVDs, particularly those available forless than $20, are more likely to be purchased by consumers, though they also generate significant rentals.In some cases, especially with videos that are aimed at rentals by consumers, a retailer may acquire a videoat a relatively low cost, and then have a revenue-sharing arrangement with the distributor, wherebyconsumer rental spending is split between the two parties. In other cases, a retailer may pay more for avideo but is entitled to retain all of the customer’s rental fee or purchase price. Rentals have benefited fromthe growing popularity of $1-per-night kiosks such as Redbox, as well as DVD-by-mail and streamingservices such as Netflix Inc.TV LANDSCAPE: A GAME OF MUSICAL CHAIRSThe four major broadcast networks (ABC, CBS, NBC, and FOX) remain a primary force in US televisionprogramming. These networks are the largest providers of high profile, first-run shows—as well as “eventprogramming” extravaganzas like the National Football League’s Super Bowl and the movie industry’sAcademy Awards—that provide advertisers with the broadest audience reach possible.Nevertheless, in recent years, audiences have continued to migrate from TV broadcasters to the cablenetworks, many of which have significantly increased their overall programming investments. Some popularand award-winning original cable shows, past and present, include Sex in the City, The Sopranos, and TrueBlood (on HBO); Rizzoli & Isles and The Closer (TNT); The Shield, Nip/Tuck, and Rescue Me (FX);Dexter, Weeds, and Brotherhood (Showtime); Monk and Burn Notice (USA); Army Wives (Lifetime); MadMen and Breaking Bad (AMC); and SpongeBob (Nick). Many cable networks also present off-networkreruns of shows that originally aired on the broadcast networks.Networks as marquee programming conduitsAll of the major broadcast network companies own TV stations; they also have affiliate relationships withTV stations owned by others. The networks typically provide their owned stations and affiliates with 15 to22 hours of programming per week. In exchange, networks obtain the right to sell the bulk of theadvertising time during the periods when their shows are airing. Many affiliates also receive a fee, calledcompensation, from their networks.When affiliates are not airing a network show, they offer programming that they have either purchasedindependently (such as a syndicated show) or produced in-house (such as local news). Although costs aretypically higher for shows that they produce themselves, affiliates get to sell more advertising time duringsuch programs than during network offerings. At times, an affiliate chooses to fill traditional network time
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 21 with shows that the station has acquired independently from other program suppliers. (For more details, seethe “Syndication: a complementary business model” heading later in this section.)Independent stations as local distribution alliesIndependent stations, which are not affiliated with a broadcast network, bear full responsibility for fillingtheir schedules with programming and for selling advertising time. They incur all of the costs and keep all ofthe revenues associated with doing so.Program suppliers as arbiters of contentThe production of TV shows is similar to the movie business in many ways. Good cash flow from programlibraries helps to finance new shows. Larger companies often contract for or jointly produce shows withsmaller firms, and often distribute and market programs produced by others. The creation of a successfulshow by any production business can help generate additional network commitments.Major program suppliers for the networks include Time Warner Inc.’s Warner Bros. Television Group,News Corp.’s Twentieth Century Fox Television, CBS Corp.’s CBS Paramount Television, NBC UniversalTelevision Group, Sony Pictures Television, and the Walt Disney Co.’s Touchstone Television ProductionsLLC. All of these businesses (or their parent companies) also are full or part owners of a broadcast networkand/or cable networks.Network licensing for program schedulesThe broadcast networks often obtain first-run prime-time shows from program suppliers through licenseagreements, which let them air each episode of a series several times. This arrangement is generally moreaffordable for the networks than producing programs themselves, the cost of which can significantly exceedthe network license fee—especially in the early years of production.When a program supplier licenses a show to a network for less than the cost of production, it may offsetsome or all of the deficit by selling the program to foreign markets. However, even after foreign sales areincluded, a supplier may accept a deficit in the hope of ultimately profiting through off-network syndication(selling reruns to individual TV stations or cable channels). The desirability of a program’s rerun rights isdetermined largely by the size of its audience and its longevity on broadcast network TV.In a licensing arrangement, the program supplier retains ownership of a show. However, broadcast networkcompanies are increasingly producing or acquiring ownership interests in shows that they air. Doing so usuallyinvolves a higher initial investment, but it can also generate greater returns if a program becomes a hit.Syndication: a complementary business modelSyndicating a TV program means licensing a program to individual TV stations around the United States ona market-by-market basis. TV programs are also licensed to cable networks. Network affiliates andindependent TV stations alike buy syndicated shows, although each has a different amount of time to fill.The syndication market comprises sales to both kinds of stations, as well as to cable networks.Affiliates buy such programs to fill airtime that is not used for network programming. While the affiliatemust pay such programming costs itself, it gets to keep any advertising revenues gained during that time.Independent stations, which must fill their own schedules entirely—because they do not have a network todo so for them—have an even greater need to license syndicated shows.The peak viewing period for syndicated shows is typically from 7 p.m. to 8 p.m. in the eastern and Pacific timezones, and from 6 p.m. to 7 p.m. in the central and mountain zones—the hour before the broadcast networksstart their prime-time schedules. Suppliers of new shows often find it difficult, if not impossible, to displacesuch proven successes as Wheel of Fortune and Entertainment Tonight in these valuable time slots.The development of the FOX, as well as the now-defunct UPN and WB networks, had convinced manyindependent stations to become affiliates, reducing the need for syndicated programming. Two kinds ofsyndication—first-run syndication and off-network syndication—are described later in this section. (InSeptember 2006, the UPN and WB networks merged into a single new network, the CW Network.)
22 MOVIES & ENTERTAINMENT / SEPTEMBER 13, 2012 INDUSTRY SURVEYS First-run syndication. First-run syndication involves new shows created specifically for licensing in thesyndication market. A program supplier may decide to distribute a program this way if networks are notinterested in airing it for various reasons—because they already have similar shows, do not like the proposedprogram, or consider its potential audience too narrow. For some program suppliers, having a show debutin first-run syndication may be more lucrative than licensing it first to a network and then as reruns.Few first-run syndicated shows succeed in attracting audiences comparable to the prime-time networkofferings. Many syndicated shows air during the daytime or late evening, when overall viewership is relativelylow. None of the first-run syndication shows that have debuted in recent years has become a big hit.Many first-run syndicated programs, such as talk and game shows, are relatively low-budget productions. Forprogram suppliers, this eases the cost of getting into the business. However, first-run syndicated programs alsocan create a glut of programming alternatives, making the market highly competitive. Off-network syndication. Off-network syndication involves program episodes that are licensed for airingas reruns after first being shown on network TV. Such shows have strong market appeal, due to viewers’familiarity with and loyalty to them.Some programs enter rerun syndication while new episodes are still being produced for a network—CSI:Crime Scene Investigation, with new episodes airing on CBS, is one example. Other syndicated shows, such asI Love Lucy, left the networks long ago. A new crop of off-network or rerun shows becomes available eachfall, at about the same time that the networks present their new first-run programming.Suppliers base the prices they charge to show reruns on various factors: the show’s degree of networksuccess, the financial health and programming needs of prospective buyers, and the supply of similar showsbeing offered at a given time. Prices may vary widely.Syndicated reruns can be highly lucrative for a program supplier, helping to offset the losses from failedshows. In addition, reruns of half-hour comedies generally tend to attract larger audiences (and thus to earnmore for the station selling the ad time) than those of hour-long dramas. Recently produced hour-longdramas (which cost more to produce than comedies) have aired primarily on cable channels.With many syndicated programs, suppliers receive at least a portion of their revenue from selling ad time onthe stations that air their shows. This process, known as bartering, is similar to the arrangement that broadcastnetworks have with affiliates. In return for providing a show, the program supplier receives ad time ratherthan monetary compensation from the TV station. The supplier, in turn, sells the ad time to other parties.When purchasing time on syndicated shows, national advertisers typically look for shows that can reach atleast 70% of the TV households in the United States—a large enough audience to attract the interest ofnational advertisers. The more a show is expected to be watched, the greater success a syndicator will havein selling it to a group of TV stations.MULTI-CHANNEL DISTRIBUTORS: CHALLENGING THE STATUS QUOPay TV service in the US—otherwise know as multi-channel video—is primarily received through one ofthree major providers: cable and satellite TV operators, and most recently, one of the two major traditionalphone companies. By the end of 2011, nearly 100 million of the 114.5 million US TV homes, or over 87%,were subscribers to one or more of those services, a highly saturated market. (A further discussion of the keyplayers may be found in the Broadcasting, Cable & Satellite issue of Industry Surveys.)Cable system operators provide a convenient delivery medium for entertainment and information, and thushave a significant bearing on the usage and value of content that it delivers to consumers. The cableindustry—which recently accounted to about 63% of the US pay TV market—comprises hundreds ofpipeline companies that deliver cable signals to consumers’ homes via wired systems in return for monthlyfees, which are partly used to defray programming costs and to support their infrastructure investments.