The Evolving Economics of the Filmed Entertainment         Industry                        1	  

Consumer Spending Trends: Media Outpacing Other Consumer                      Expenditures
                           "  ...
More Choices and More Complexity in Today’s Media                  Environment"      Global Media Consumption: Average Hou...
Total Global Box Office Revenue Expected to Grow 6%                   Through 2015 to $49B"                     Global Box ...
Total Global Filmed Entertainment Revenue Expected to Grow4% Through 2015 to $115B, With Most of the Growth Coming        ...
North American Filmed Entertainment Revenue: Expected 10-Year Growth of Only 3%, with Home Video Falling From 73% of      ...
with aggregate film counts up 8.7%, albeit still below the high of 2008 and mostly owing to the 13% gain for the major ind...
It is important to note that admissions are very much reflective of film product in any one  year, and 2011’s slight dip i...
Major Studio Releases Have Been Declining Steadily For thes on the Filmed Entertainment Industry 2012While the Growth Has ...
es on the Filmed Entertainment Industry 2012                                                                              ...
Top Films Steady in Their Overall Share of Total Domestic Box                           Office"Percentage of Total Yearly D...
es on the Filmed Entertainment Industry 2012                                                                BMO Capital Ma...
And Number of 3D Screens Has Growing Globally"        Worldwide 3D Screen Growth (in thousands)"                          ...
note a lack of consumer interest or a film’s success when often that decline is more of a re-   flection that opening week...
creators and the ability of many of these franchises to generate revenue is unparalleled in the             consumer marke...
MPAA member companies, which represent statistics from seven of the nine major studios, including Disney, Fox, MGM, Paramo...
success or to open a film strongly. We do not envision a scenario that will meaningfully re-  duce the spend per film in p...
And Cost to Market Those Films Also at an All-Time High"the Filmed Entertainment Industry 2012                  BMO Capita...
in small part related to currency and in large part to the success of many event films overseas.     That said, we expect ...
International Box Office Has Grown Three Times as Fast as                        Domestic…"           Worldwide Box Office (...
…However, International Growth is Expected to Slow in the                     Coming Years…"                     Global Bo...
Asia Pacific Filmed Entertainment Revenue 10-Year Growth of6% Driven by the Growth of Box Office (43% of All Revenue in     ...
the distributors share of box office to 25% from the mid-teens) should improve the busi-     ness to some extent. China ha...
Number of Movie Screens in China Has Exploded"   The Growth and Estimates of Digital Screens, 2007-2012"                  ...
Latin American Filmed Entertainment 10-Year Growth Also at6% with Box Office Making Up an Even Larger Share of Total       ...
EMEA Filmed Entertainment 10-Year Growth Slower at Only3% with Home Video and Cinema Advertising Making Up a         Large...
The Shrinking Window: Less Time Between Each Sales         Platform (Because of Piracy, New Platforms, New Sources of     ...
tives on the Filmed Entertainment Industry 2012                                                                   BMO Capi...
Source: SNL Kagan.While there may be little change in the release window for theatrical film to home video re-lease, the i...
Home Video: More Options Than Ever"                           Access and Choice: Then vs. Now"    20 Years Ago"          1...
Worldwide Home Entertainment Market: Not What it Used to                 Be, But Still Thriving"            Worldwide Home...
Total Global Home Video Revenue Only 2% Growth Through                         2015"                        Global Home Vi...
home video rental and sell-through business (SNL Kagan, Nielsen Media Research, Adams                            IHS, DEG,...
Home Video: Digital Downloads (EST) and Rental (TVOD/SVOD) on the Rise (With Rentals Far Surpassing Purchases)…"          ...
New Home Video Sell-Through Formats Carry Higher                  Margins…"       New Formats Carry Higher Margins: Sell-T...
…However, New Subscription/Rental Services Reduce theValue of Content: Netflix Per-Movie Spend of $0.48 Compared         Wi...
…A Trend That is Only Expected to Continue"                                    Growth in kiosk and subscription rentals sh...
April 3, 2012                    Media          …And These Streaming/Rental Services Have Cannibalized           EST at th...
…Led by the Rise of Many New Online Video Distributors/                 Content Aggregators"  Perspectives on the Filmed E...
Net Result is Intrinsic Values of the Major Studios Has Fallen               ~50% From their Peaks in 2007"           Our ...
Studios Hoping Ultraviolet Will Save Home Video"                     UltraViolet Usage Model"RegisteredDevices forDownload...
Television: As Popular As Ever…"es on the Filmed Entertainment Industry 2012                                              ...
The Rise of Web Video (and Related Viewing Habits) is                     Undeniable"Top US Online Content Properties Rank...
People Are Watching Fewer Videos on YouTube, But They AreWatching Longer Videos and Spending More Time on the Site"       ...
And Ad Spending is Expected to Follow Suit and Increasingly                     Move Online…"          US TV vs. Online Ad...
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2012 State of Media Presentation

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2012 State of Media Presentation

  1. 1. The Evolving Economics of the Filmed Entertainment Industry 1  
  2. 2. 
Consumer Spending Trends: Media Outpacing Other Consumer Expenditures
 " Cumulative Growth in Consumer Spending, 1960-2009" 2  
  3. 3. More Choices and More Complexity in Today’s Media Environment" Global Media Consumption: Average Hours Per Week" 3  
  4. 4. Total Global Box Office Revenue Expected to Grow 6% Through 2015 to $49B" Global Box Office Revenue ($US MM)" Growth   9.4%   8.7%   5.8%   4.6%  Source:  PWC   4  
  5. 5. Total Global Filmed Entertainment Revenue Expected to Grow4% Through 2015 to $115B, With Most of the Growth Coming from Asia Pacific and Latin American Regions" Global Filmed Entertainment Revenue ($US MM)" Growth   6.2%   5.8%   2.8%   2.6%   Source:  PWC   5  
  6. 6. North American Filmed Entertainment Revenue: Expected 10-Year Growth of Only 3%, with Home Video Falling From 73% of Total Revenue in 2006 to 67% by 2015" Total Filmed Entertainment North America ($US MM)" 73%   67%   31%   26%   Source:  PWC   6  
  7. 7. with aggregate film counts up 8.7%, albeit still below the high of 2008 and mostly owing to the 13% gain for the major independents and, to a lesser extent, a 1% increase for the majors. Exhibits 31-33 show the swings in releases by both major studios and independent producers. More and More Films Being Released: Despite a 3-year Given the transition in package media (BD/DVD) to digital and changing program lineups ofDownward Trend, # of Films Being Released in the US is Still premium cable networks (HBO, Showtime, Starz, etc.), evaporation of cheap production capi- Historically High…" tal will eliminate the marginal film project. Number of US Film Releases, 1990-2011" Exhibit 31. Number of US Film Releases, 1990-2011 25% increase 6% decrease Total Films Released 633 608 609 598 551 547 558 550 510 509 482 478 506 458 480 462 453 471 461 478 410 411 90 991 992 993 994 995 996 997 998 999 000 001 002 003 004 005 006 007 008 009 010 011 19 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 Source: Boxofficemojo.com, Motion Picture Association of America, and BMO Capital Markets and indus- try estimates. 7  
  8. 8. It is important to note that admissions are very much reflective of film product in any one year, and 2011’s slight dip is likely a result of the somewhat lackluster film product. We be- lieve the movie-going age demographic is widening as art, foreign, and specialty films find…However, Movie Admission 3D films. This can Has Been Declining, wider acceptance alongside higher-profile Per Capita only be beneficial to theater owners who have longedPeoplediversified movie-going base and thePer Year"have 1990-2011: for a more Seeing Fewer Films opportunity to ticket price up-charges. Exhibit 26. Average Movie Admissions per Capita, 1990-2011" Average Movie Admissions per Capita, 1990-2011 5.5 5.4 5.2 5.2 5.0 5.0 5.2 5.0 4.8 4.8 4.8 4.9 4.8 4.5 4.6 4.4 4.4 4.4 4.2 4.3 4.1 3.9 99 00 01 02 03 04 05 06 90 91 92 93 94 95 96 97 98 07 08 09 10 11 19 20 20 20 20 20 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 Source: Motion Picture Association of America, US Census Bureau, and BMO Capital Markets and indus- try estimates. 8  
  9. 9. Major Studio Releases Have Been Declining Steadily For thes on the Filmed Entertainment Industry 2012While the Growth Has Been in the Release of Past 20 Years BMO Capital Markets Independent Films" Exhibit 33. Films Released−Majors and Independents, 1991-2011 Films Released-Major and Independents, 1991-2011" 344 350 325 296 282 292 297 300 275 248 237 262 248 263 299 302 250 232 229 277 300 169 205 200 166 167 171 169 159 168 161 155 159 172 169 165 131 139 150 137 136 138 143 146 150 165 116 101 149 145 100 87 88 80 99 80 99 116 127 120 113 107 92 108 47 50 17 17 43 28% decrease 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 199 199 199 199 199 199 199 199 199 200 200 200 200 200 200 200 200 200 200 201 201 Other Independents Major Studios Top Independents Source: Motion Picture Association of America, boxofficemojo.com, Hollywood Reporter, and BMO Capital Markets and industry estimates. 9   The films released by the eight major studios (Disney, DreamWorks Animation, Fox, Univer-
  10. 10. es on the Filmed Entertainment Industry 2012 BMO Capital Markets US Box Office: Box Office Up But Admissions Down (With a sell tickets at a $3.00-plus premium and special events at as much as $25 premiums (Metro- politan Opera, World CupRise etc.).Average Ticket Price)"statistics are Large Soccer, in The North American exhibition industry detailed in Exhibit 81. Exhibit 81. Exhibition Statistics and Growth Trends, 2000-2011 Exhibition Statistics and Growth trends, 2000-2011" $10,595 Domestic Box Office (MM/$) $10,565 00-11 CAGR $10,174 =2.9% $9,663 $9,630 $9,155 $9,381 $9,240 $9,209 $8,841 $8,412 Recessionary 5 yr CAGR = Period 1.3% $7,448 ` Recessionary Period 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Admissions (mil) 1,576 1,532 5 yr CAGR = - 1,487 1,511 2.2% 1,421 1,406 1,404 1,413 1,379 1,341 1,339 1,283 00-11 CAGR =- 0.9% ` Recessionary Period Recessionary Period 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Avg Ticket Price 00-11 CAGR = $7.89 $7.93 % Increase 3.6% $7.50 $7.18 $6.88 5.2% 0.5% $6.41 $6.55 4.5% $6.21 4.4% $6.03 $5.81 5.0% $5.66 $5.39 3.2% 2.2% 5 yr CAGR = 3.6% 3.0% Recessionary 6.0% 2.7% 3.8% Recessionary Period Period 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 10   2000 2001 2002 2003 2004 2005 Screens +/- -2.3% -3.1% 1.9% 0.4% 1.8% 3.0% # Studio Films Released 3.7% 0.8% -0.8% 5.9% 8.9% -0.7%
  11. 11. Top Films Steady in Their Overall Share of Total Domestic Box Office"Percentage of Total Yearly Domestic Box Office of the Top 5, 10, 25, 50, and 100 Films" Titanic" 11  Source:  Box  Office  Mojo  
  12. 12. es on the Filmed Entertainment Industry 2012 BMO Capital Markets AveragetoNumber of Theaters Per Release vast majority of their ini- in the ber October). Nonperforming films are increasingly pulled from the Has Doubled tial screens at the end of the initial Past four-week run. Exhibit 47 details the increases over three- or 20 Years" the past 20 years in the average number of theaters in which a film is released. ExhibitAverage Number of Theaters Per Release, 1991-2011*" 47. Average Number of Theaters Per Release, 1991-2011* 2011 3,463 -1.0% 2010 3,497 6.1% 2009 3,296 -2.8% 2008 3,392 1.1% 2007 3,356 8.3% 2006 3,100 3.3% 2005 3,002 -1.2% 2004 3,038 0.9% 2003 3,011 0.5% 2002 2,996 2.3% 2001 2,930 5.7% 2000 2,773 -0.1% 1999 2,776 5.3% 1998 2,637 3.4% 1997 2,550 17.3% 1996 2,174 4.5% 1995 2,081 3.2% 1994 2,016 2.6% 1993 1,965 -1.4% 1992 1,993 17.2% 1991 1,700 -3.2% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 *Based on top 50 films with openings in more than 500 theatres. Percentages listed indicate year-over- year changes. Source: boxofficemojo.com and BMO Capital Markets and industry estimates. 12   Over the past ten years, we estimate that the average number of theaters per release has in- creased to 3,463 from 2,996, a 15.6% increase. The industry’s screen-to-film dynamics appear
  13. 13. And Number of 3D Screens Has Growing Globally" Worldwide 3D Screen Growth (in thousands)" 13  
  14. 14. note a lack of consumer interest or a film’s success when often that decline is more of a re- flection that opening weekend screen counts were sufficient to satisfy initial demand and the next event film released the following weekend captures the big audience.Increasing Importance of Opening Weekend: It Now Makes Up Over 32% of Total DBO" Exhibit 46. Opening Weekend as a Pct. of Domestic Box Office, 1990-2011* Weekend as a Pct. Of Domestic Box Office, 1990-2011*" Opening 33% 32% 35% 33% 30% 31% 32% 32% 27% 33% 25% 31% 24% 21% 22% 22% 28% 28% 20% 18% 20% 20% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *Based on films opening in 500+ theaters. Source: boxofficemojo.com and BMO Capital Markets and industry estimates. 14   The average number of theaters in which a film opens decreased 1.0% in 2011 on a 0.2% in-
  15. 15. creators and the ability of many of these franchises to generate revenue is unparalleled in the consumer marketplace. Others have become as successful in creating characters (Ice Age, Madagascar, Shrek, etc.) that have long half lives and will revisit consumers with new storiesAnimated Film Performance 2002 – 2011: 10-Year DBO CAGR for its loveable characters to tell. Exhibit 24 breaks out a number of of relevant statistics since 2002 for this genre of film. We the Only 7%" note that 110 notable animated films have been released theatrically since 2002. Exhibit 24. Animated Film Performance, 2002-2011 Animated Film Performance, 2002-2011" Films Released* 15 14 13 12 12 12 11 11 10 10 9 9 8 8 6 4 2 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *$1 million domestic box office or more Domestic Gross (MM/$) $1,536.5 $1,254.9 $1,260.2 $1,210.4 $1,157.4 $1,119.0 $1,050.3 $660.4 $608.3 $590.9 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Boxofficemojo.com and BMO Capital Markets, data as of March 29, 2012 15   The eight animated films released in 2010 generated the highest level of box office dollars in
  16. 16. MPAA member companies, which represent statistics from seven of the nine major studios, including Disney, Fox, MGM, Paramount, Sony, Warner Bros., and Universal and do not in- clude studio subsidiaries such as Sony Classics and Paramount Classics.Rising Costs to Release a Film: Production and P&A Expenses at an All-Time High" Exhibit 42. Average Release Cost/Film MPAA Member Companies, 2000-2011 Release Cost/Film MPAA Member Companies, 2000-2011" Average CAGR = 5.6% $138.9 ($Millions) $129.1 $120.7 $110.0 $112.6 $112.6 $105.2 $104.7 $105.8 $82.1 $82.4 $82.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E Source: The Motion Picture Association of America and BMO Capital Markets and industry estimates. 16   The average cost to produce a film intended for theatrical release in 2011 increased to $138.9
  17. 17. success or to open a film strongly. We do not envision a scenario that will meaningfully re- duce the spend per film in production or distribution away from the intermediate-term benefits of the transition to digital distribution. Dollar benefits, reduced overhead, incremental 3D con- tributions, and positive demand elements in the international market have given some studiosStudio Movies More Expensive to Produce Than Ever" a small level of justification for the increases in average spending per film. Overhead and out- put reduction should begin to chip away at overall average costs in the next year or two. Exhibit 43. Average NegativeMPAA Member Companies, Companies, Average Negative Cost/Film Cost/Film MPAA Member 2000-2011" 2000-2011 ($Millions) CAGR = 75% 4.5% $88.6 $82.0 $78.5 $70.8 70% $72.2 $66.3 $63.6 $65.7 $65.8 $54.8 65% $47.7 $47.8 60% 55% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E Negative % of Total Average Release Cost Source: The Motion Picture Association of America and BMO Capital Markets and industry estimates. 17   Advertising costs for the MPAA members have become a more significant portion of total film costs. Average per-film advertising costs for MPAA member companies were up an es-
  18. 18. And Cost to Market Those Films Also at an All-Time High"the Filmed Entertainment Industry 2012 BMO Capital Markets Exhibit 44. Average Ad Spend/Film MPAA Member Companies, 2000- 2011Average Ad Spend/Film MPAA Member Companies, 2000-2011" ($Millions) $46.3 40% $42.1 $36.1 $39.5 $34.8 $34.5 $35.9 $36.0 $34.2 35% $31.0 $30.4 $24.0 30% 25% 20% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E Advertising % of Total Average Release Cost Source: The Motion Picture Association of America and BMO Capital Markets and industry estimates. 18   The print cost for the top films in release in 2011 was down as digital delivery becomes a
  19. 19. in small part related to currency and in large part to the success of many event films overseas. That said, we expect the international box office to continue to generate an ever-increasing percentage of the revenue for top films released annually as more theaters are built and “mid-Increasing Importance of International Box Office: Making up a dle class” economies emerge and grow. larger and larger multiple of US Box Office" Exhibit 27. International Box Office as a Percentage of Domestic, 2002-2011 International Box Office as a Percentage of Domestic, 2002-2011" 225.7% 200.7% 177.0% 188.0% 166.8% 171.8% 177.4% 161.5% 114.7% 118.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Motion Picture Association of America, Variety, and BMO Capital Markets and industry estimates. 19   We believe significant growth opportunities exist worldwide for filmed entertainment product
  20. 20. International Box Office Has Grown Three Times as Fast as Domestic…" Worldwide Box Office ($ in billions)" CAGR for International = 9.6%! CAGR for US = 3.9% ! 20  
  21. 21. …However, International Growth is Expected to Slow in the Coming Years…" Global Box Office Revenue ($US MM)" CAGR  for  all   Interna6onal  =  7.4%   CAGR  for  US  =  4.6%    Source:  PWC   21  
  22. 22. Asia Pacific Filmed Entertainment Revenue 10-Year Growth of6% Driven by the Growth of Box Office (43% of All Revenue in 2006 Rising to 56% by 2015)" Total Filmed Entertainment in Asia Pacific ($US MM)" 51%   34%   63%   47%   Source:  PWC   22  
  23. 23. the distributors share of box office to 25% from the mid-teens) should improve the busi- ness to some extent. China has become the second-largest foreign market for US films (behind Japan) at $2.02 billion (up 35% in 2011) from barely a top 20 market five years5-year CAGR 51 visualizes the growthand Admissions of 35% and 15%, ago. Exhibit of Chinese BO in the Chinese exhibition industry since 2006. Clearly, China is an important source ofTicket Price is on the window. Respectively (Average growth even beyond the theatrical Rise)" Exhibit 51. Chinese Exhibition Industry, 2006-2011 Chinese Exhibition Industry, 2006,2011" Year Box Office ($/MM) Admissions (MM) Average Ticket Price 2006 $328.6 176.2 $1.86 2007 $433.9 195.6 $2.21 2008 $606.7 209.8 $2.89 2009 $906.2 263.7 $3.43 2010 $1,506.7 373.9 $4.03 2011 $2,026.0 414.5 $4.88 Source: I.H.S Screen Digest, BMO Capital Markets, and industry estimates. 23  
  24. 24. Number of Movie Screens in China Has Exploded" The Growth and Estimates of Digital Screens, 2007-2012" 24  
  25. 25. Latin American Filmed Entertainment 10-Year Growth Also at6% with Box Office Making Up an Even Larger Share of Total Revenue" Total Filmed Entertainment in Latin America ($US MM)" 51%   34%   63%   47%   Source:  PWC   25  
  26. 26. EMEA Filmed Entertainment 10-Year Growth Slower at Only3% with Home Video and Cinema Advertising Making Up a Larger Share Than in Other Territories" Total Filmed Entertainment in EMEA($US MM)" 62%   51%   45%   34%   Source:  PWC   26  
  27. 27. The Shrinking Window: Less Time Between Each Sales Platform (Because of Piracy, New Platforms, New Sources of Content)"Filmed Entertainment Industry 2012 BMO Capital Markets Exhibit 71. Release Windows by Month Release Windows by Month (2011)" Months 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 plus Domestic Theatrical $7.93 Average Ticket Price, $11.03 for 3D, a $10.2 Billion Business International Theatrical $24 Billion in Revenues Super VOD (includes hotels) $25-$30 SVOD, $12-$18 Hotel Domestic Sell Through $18 Gross Wholesale, a $9 Billion Business International Sell Through $18 Gross Wholesale Domestic Rental (Digital & $10-$17 Gross Wholesale Physical) Streaming $2.50-$4.50 International Rental $18 Gross Wholesale Domestic Premium Pay TV HBO, Starz, Showtime International Premium Pay TV Domestic & International Cable Domestic & International Broadcast Source: BMO Capital Markets 27   VOD/streaming/subscription, etc. services are gaining traction, but the studios are still getting paid! VOD is finally gaining traction beyond events such as sports and concerts as consumers pushed the buy button 25% more in 2011. Increasingly, the convenience, HD quality, closure
  28. 28. tives on the Filmed Entertainment Industry 2012 BMO Capital Markets The following graph delineates the number of days a film takes to go from the theater to DVD Shrinking Theater to Video Window" release. In a sense, Exhibit 96 may be overstating the shrinkage factor in 2011 as the exclusiv- ity period of sell-through now masks the 28-day embargo to which most rentailers have agreed. Exhibit 96. Theater to Video Release Window, 2002-2011 Theater to Video Release Window, 2002-2011" (Days) DVD Surpases VHS Revenues Digital Era Begins 167 Sell Through Peaks 155 Blu-Ray Era Begins 146 135 134 132 133 130 130 117 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: SNL Kagan 28   The top 20 films of 2011 saw an average of 126 days between theatrical release and home
  29. 29. Source: SNL Kagan.While there may be little change in the release window for theatrical film to home video re-lease, the interval between packaged media and VOD release has reversed itself, reflecting the Shrinking Home Video to VOD/PPV Window"studios view of home video rental economics. The VOD window went to an average of 17days prior to the DVD release in 2011. VOD is often available in fewer days than home videorentals for most of the video rentailers that use either subscription- or Internet-based services.Exhibit 67. MovieMovie Release Window, 2000- 2011" Release Windows, 2000-2011 Home Video to VOD/PPV PPV Era (days) 60 58 51 VOD Era 50 45 45 44 43 Streaming 40 38 Era 34 31 30 19 20 10 4 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -10 -20 -17Source: SNL Kagan. 29  
  30. 30. Home Video: More Options Than Ever" Access and Choice: Then vs. Now" 20 Years Ago" 10 Years Ago" Now" EST" Blu-ray 3D" Cloud" Kiosk VHS" DVD" (Electronic)" Subscription" Blu-ray" Flash" UltraViolet" Mobile Video" VOD" DVR" PPV/NVOD" Digital Copy" Kiosk (Physical)" 30  Source: SNL Kagan! Streaming"
  31. 31. Worldwide Home Entertainment Market: Not What it Used to Be, But Still Thriving" Worldwide Home Entertainment ($ in billions)" " Not What It Used To Be … But Still Thriving" 31  
  32. 32. Total Global Home Video Revenue Only 2% Growth Through 2015" Global Home Video Revenue ($US MM)" Source:  PWC   32  
  33. 33. home video rental and sell-through business (SNL Kagan, Nielsen Media Research, Adams IHS, DEG, Home Media Magazine, Rentrak, etc.), some of which are within a couple of per- centage points of each other for the variety of published home video statistics. We have en- deavored to use estimates that are balanced within the statistical spectrum. The trends ob- served using any of the credible sources typically reveal the same macro picture even if the US Home Video: 10-Year Decline of Physical Sales and dollar amounts vary: the rental market has leveled off with subscription and lower-cost kiosk models growing, while the sell-through market has seen a meaningful decline on secular Rentals. Digital Increasing, But Not Making Up the Gap" changes and growing preference for digital access/storage. Blu-Ray is slowly capturing pack- aged media buyers, helped in large part by consistent sub-$100 hardware pricing and growing use of BD drives in laptops. Exhibit 59. Home Video Sales and Rental Revenue, 2002-2011 Home Video Sales and Rental Revenue, 2002-2011" Peak Sales $20,000 (Library Benefit) Recessionary $15,000 $Millions $10,000 $5,000 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Rentals $8,291 $7,847 $7,595 $7,496 $7,148 $6,886 $6,490 $6,178 $5,673 Sales $12,779 $14,059 $13,898 $13,871 $13,329 $12,385 $10,870 $10,026 $8,952 Digital $700 $700 $800 $1,000 $1,300 $1,600 $2,100 $2,260 $3,416 Total $21,770 $22,606 $22,293 $22,367 $21,777 $20,870 $19,459 $18,464 $18,041 Rentals Sales Digitalctives on the Filmed Entertainment Industry 2012 and Source: IHS, DEG, BMO Capital Markets and industry estimates BMO Capital Markets Consumer Home Video Spending Patterns, 2003-2011" Exhibit 60. Consumer Homerental spending on an absolute basis is threefold: 1) ki- In our view, the decline in consumer Video Spending Patterns, 2003-2011 osks are turning $4.00 rentals into $1 per day or slightly over per $2 transaction on average; 70.0% 2) streaming-VOD is replacing both physical rental and sales models but is more heavily tak- 60.0% ing share from the sales side; and 3) EST options are taking business away at least at the mar- 50.0% gin. 40.0% 30.0% Consumers are transitioning to the high-definition format (Blu-Ray), a desirable companion to 20.0% the home 10.0% theater and high-definition television world as well as the emerging 3D world. Blu- Ray also has the benefit for studios/distributors of making piracy more difficult and costly. 0.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 DVD Rental 23.3% 26.8% 29.6% 32.4% 32.4% 32.0% 31.1% 28.7% 23.6% Each high-definition disk carries a manufacturing cost of less than $1.00 as opposed to the Blu-Ray DVD Rentals DVD S.T. 0.0% 48.8% 0.0% 56.5% 0.0% 60.1% 0.0% 61.3% 0.2% 60.3% 0.9% 56.3% 2.2% 50.3% 4.8% 44.8% 7.9% 37.2% $0.60 or so cost of the DVD product. It should also be noted that high-definition movies run Blu-Ray DVD S.T. 0.0% 0.0% 0.0% 0.0% 0.8% 3.0% 5.5% 9.5% 12.4% Digital 3.2% 3.1% 3.6% 4.5% 6.0% 7.7% 10.8% 12.2% 18.9% closer to 20 gigabytes versus the 3-5 gigabytes of the standardBlu-Ray DVD S.T. DVD Rental Blu-Ray DVD Rentals DVD S.T. DVD. Utilization of MPEG-4 Digital 33   Source: Adams Media Research and BMO Capital Markets and industry estimates. versus the current MPEG-2 technology should bring the amount of gigabytes per film down significantly. There are not many positives for the video rentailers, and we are not sure that the economics will change appreciably, even after the bankruptcy process for some, because the financial
  34. 34. Home Video: Digital Downloads (EST) and Rental (TVOD/SVOD) on the Rise (With Rentals Far Surpassing Purchases)…" We expect digital platform revenue to grow to" $5.6 billion by 2015, driven by rental" 34  
  35. 35. New Home Video Sell-Through Formats Carry Higher Margins…" New Formats Carry Higher Margins: Sell-Through" 35  
  36. 36. …However, New Subscription/Rental Services Reduce theValue of Content: Netflix Per-Movie Spend of $0.48 Compared With the Old $3 Rental From Blockbuster…" Out of the $7.99 monthly Netflix streaming fee," consumers are spending $0.50 per film streamed," lowering the incentive to consume films in other" channels like higher studio margin EST or TVOD" 36  
  37. 37. …A Trend That is Only Expected to Continue" Growth in kiosk and subscription rentals shifting " revenues to lower contribution margin"Source: Morgan Stanley Research, Company data"*Includes physical and digital sell-through, Brick and Mortar rentals, Cable VOD, and Transactional Online VOD (ie iTunes, Amazon, etc)"**Includes subscription VOD (ie Netflix streaming, Amazon Prime, Hulu Plus), Kiosk rentals, and Netflix DVD-by-mail" 37  
  38. 38. April 3, 2012 Media …And These Streaming/Rental Services Have Cannibalized EST at the Expense of Overall Home Video Revenue…"onomics, New Platforms, Blu-Ray, Valuation Exhibit Cm purchase tonomics? Rental revenues pass sell-through in ‘11, a trend’11, expect to continue…" Rental revenues pass sell-through in we a trend we expect to continue... lieves that 80% $30,000given shifts in 70% $25,000 ell-thru. 60% $20,000but given 50% $15,000 answer is yes. 40% $10,000e VOD andars but these 30% Rental spending surpasses sell- thru for first time since 1998 $5,000 20% $0 98 99 00 01 02 03 04 05 06 07 08 20 E 09 20 E 10 20 1 20 E 20 E E 1 14 12 13 15 16 19 19 20 20 20 20 20 20 20 20 20 20 20 20 despite rising Tot HV revs (right axis) Rental as % of total (left axis) ST as % of total (left axis)s been rising Source: Company Data, Morgan Stanley Research growth in d kiosk 38   Given the relative economics of rental vs. sell-thru andt by sharp Kiosk and Netflix vs. other rental channels (see Exhibit D),hysical
  39. 39. …Led by the Rise of Many New Online Video Distributors/ Content Aggregators" Perspectives on the Filmed Entertainment Industry 2012 BMO Capital Markets Major Online Video Distribution Exhibit 15. Major Online Video Distribution Players Players" Product How it Works Pricing & Availability Partners Outlook Amazon VOD 50,000 + TV shows and movies available through TV Shows are $0.99-$2.99 per episode to rent or Sony, Panasonic, Roku, TiVo, Samsung, major studios a la carte model has narrower appeal than streaming to PCs, several Internet-connected TVs, Blu- own, some free; available now and networks subscriptions; no live TV programming ray players, set-tops, and game consoles iTunes iTunes Store offers over 65,000 TV shows and 10,000 TV Shows are $0.99 per episode to rent or own, ABC/Disney, Fox, BBC America for rentals; major no live TV programming; $0.99 next day rentals dont movies for rent/purchase HD movies are $3.99 to rent; available now studios and networks have wide support Google TV Users can search for and access linear TV listings, available now Sony, Dish Network, Logitech, Best Buy initial approach is to enhance existing TV services YouTube, and other Internet video and run Internet- and provide expanded access to Net video based applications on TV Hulu Free content includes 2,600 current primetime TV Hulu Plus $9.99/month; current in private beta 225 content providers, including owners NBC, Fox, content is largely broadcast shows; no live sports or shows and 1,000 movies; Hulu Plus, premium service, and ABC news; may be "good enough for some at an available on various devices attractive price point Netflix 20,000 + movies and TV shows available to stream to Subscription plans start at $7.99/month; available Tivo, Roku, Sony, LG, Panasonic, Apple, Nintendo Wii, content still lags availability on TV; no live TV more than 100 devices, including many TVs and Blu-ray now Microsoft Xbox, Best Buy Insignia programming (except Starzs linear channel on PCs), players but model could incorporate live events Walmarts Vudu 16,000 + HD streaming movies on demand, many Rentals are $0.99-$5.99; Purchases are $4.99- LG, Samsung, Sharp, Toshiba, Vizio; major movie content catalog is mostly movies; aimed at high-end available in 1080p HD, through compatible Internet $24.99, TV seasons are $15-$43 studios niche connected TV Apple TV Internet set-top provides streaming access to rentals of $99; available now ABC/Disney, Fox, BBC America for rentals rental model unproven and content selection limited; TV shows and movies, plus Netflix, YouTube, Netflix feature not differentiated purchased iTunes content Boxee Application and web content guide designed for TV Boxee-based set-top from D-link; $299 available MLB.tv, Pandora, Comedy Central content is not differentiated, will have difficulty displays; has nearly 40,000 TV shows primarily from now crossing over to non-tech audience broadcast networks Microsoft Xbox 360 Game console allows access to Netflix, ESPN3.com, $299, available now, Rentals are $4.99, Netflix, ESPN, major studios and cable networks access to ESPN3 is unique but not enough to prompt movies, and TV shows on demand Downloads are $9.99-$24.99 cable cancellations Panasonic Viera Cast Internet service that provides video, information, and Free with select HDTVs, Blu-ray players; Netflix, YouTube, Fox Sports, Amazon, Pandora, most attractive feature may be Netflix streaming entertainment available now Bloomberg Roku HD Internet set-top that provides access to Netflix on Starts at $59; available now Netflix, Hulu Plus, Amazon, MLB.tv, UFC Devices appeal is mainly as a Netflix client demand and other content Samsung Samsung Apps platform provides access to video, Free with select HDTVs, Blu-ray players; Blockbuster, Netflix, YouTube, Vudu, Yahoo Widgets, content lineup currently not differentiated from other games, and information services available now Pandora, eBay, Twitter, Skype Internet connected consumer electronic devices Sezmi Hybrid broadcast/Internet-delivered service with access Receiver system is $150; broadcast only service Local TV stations and groups; Best Buy; major movie service designed as cheap alternative to to local TV stations, some VOD and Internet content is $4.99/month; available in 26 markets; studios; some cable programmers cable/satellite TV but traction to date is unclear and cable programming $19.99/month with 23 cable networks in LA only Sony PlayStation 3 Net-connected gaming console provides access to Starts at $299; available now PlaySation Network service provides TV shows and Devices main selling proposition as a game machine Internet video content, including some original programs movie rentals and purchases; as well as Twitter, rather than TV service Facebook, and other apps; Netflix streaming TiVo Premiere DVR Access to Internet delivered movies, video clips, TV Starts at $299; available now Amazon, Netflix, Blockbuster, YouTube, Music Choice, DVRs core value still relies on traditional TV shows, and apps via DVR Hulu Plus, 1,000 + Internet content publishers LG NetCast Internet delivered TV shows, movies on demand, and Free with select HDTVs, Blu-ray players; Netflix, Roxio CinemaNow, Yahoo Widgets, Pandora, content lineup not differentiated from competing information available now Vudu, YouTube Internet connected consumer electronic devices. Best Buys Cinema Now6,000 TV episodes and 3,000 films Rentals are $2.99-$3.99; Download/Own are Fox, Time Warner Access to Best Buy custimer base is helpful. $9.95-$19.95 39   Source: Multichannel News and BMO Capital Markets and industry estimates. The movie download business has conceptual appeal, especially if piracy issues are ad-
  40. 40. Net Result is Intrinsic Values of the Major Studios Has Fallen ~50% From their Peaks in 2007" Our estimates of the intrinsic value of the film studios " have fallen ~50% since “peak” levels in 2007" 40  
  41. 41. Studios Hoping Ultraviolet Will Save Home Video" UltraViolet Usage Model"RegisteredDevices forDownloads HOUSEHOLD DISCRETE MEDIA STREAMING ACCESS(12 device domain) (single copy) (three simultaneous streams) 41  
  42. 42. Television: As Popular As Ever…"es on the Filmed Entertainment Industry 2012 BMO Capital Markets Exhibit 104. Total Household Hours:Minutes TV Viewing Per Day, Total Household Hours: Minutes TV Viewing Per Day, 1999-2011" 1999-2011 8:52 8:47 8:38 8:34 8:21 8:24 8:18 8:14 8:14 8:11 (Hours:Minutes) 8:09 8:01 7:55 7:55 7:42 7:39 7:40 7:31 7:26 7:12 00 01 02 03 04 05 * * * * * * 06 07 08 09 10 11 20 20 20 20 20 20 20 20 20 20 20 10 9- 0- 1- 2- 3- 4- 5- 6- 7- 8- 9- 0- 99 00 00 00 00 00 0 00 00 0 00 1 1 2 2 2 2 2 20 2 2 20 2 20 *Live +7 Source: Nielsen , BMO Capital Markets, and industry estimates. 42   Exhibit 105. Adults 18-24 Hours:Minutes TV Viewing Per Day,
  43. 43. The Rise of Web Video (and Related Viewing Habits) is Undeniable"Top US Online Content Properties Ranked by Unique Video Viewers, April 2012*" *Total US-Home and Work Locations" Content Videos Only (Ad Videos Not Included)" 43   Source: comScore Video Metrix"
  44. 44. People Are Watching Fewer Videos on YouTube, But They AreWatching Longer Videos and Spending More Time on the Site" Watching YouTube" 44  
  45. 45. And Ad Spending is Expected to Follow Suit and Increasingly Move Online…" US TV vs. Online Ad Spending, 2011-2016 ($ in billions)" 45  

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