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February 18, 2009

Monday Media Musings on a Wednesday: February 18, 2009

Time for some Monday Media Musings on a Wednesday morning.

Box Office Remains Strong with Time Warner running 1 and 2

The weekend box office was up 36% for the top 12 films keeping alive this year's winning streak. So far 2009 is up 15% vs. 2008, a truly impressive performance. Time Warner (TWX) got a nice boost from Friday the 13th which opened to a massive and much better than expected $42 million. The film is easily on track to be the best ever in the series. At a rumored production cost of just $19 million and with lots of old DVDs to revive, this is just the type of profitable hit every studio is after. TWX also got a nice hold for He's Just Not That Into You, the weekend's #2 film and down a modest 29% in its second weekend.

The sustained early strength in the box office this year is also good news to theater stocks including Regal Entertainment (RGC), Cinemark (CNK), and cinema advertising play National Cinemedia (NCMI).

Private Equity Invests in Bob Marley

A private equity firm is investing in Bob Marley's legacy. According to the Wall Street Journal, Marley products generated about $600 million in sales annually with most of the products being produced without permission of the Marley family. The family has made a deal with a private equity firm to tighten up licensing. The economics will be a 5-10% royalty, potentially generating $30-60 million in annual revenue to be split among the family and investors. If I had money to invest in Marley I'd do it, the guy remains his massive popularity on a global scale almost 30 years after his death. The Marley legacy also foots nicely with today's other huge merchandising opportunity, Barack Obama. The lesson here for investors is that major media companies have lots of content that generates extremely high margin licensing revenue if managed correctly. Disney is the runaway leader but look for other studios to do a better job as weakening DVD sales require new ways to generate profits.

Disney Tries Boys Channel

Disney (DIS) is rebranding Toon Disney as Disney CD in an attempt to create a network appealing to boys 8-14 and their Dad's. DIS has had an incredible success on The Disney Channel with girls themed programming including Hannah Montana and the Jonas Brothers. XD hopes to do the same thing for boys. Pixar's Cars has been a merchandising juggernaut proving that the boys market exists. According to SNL Kagan, CD reaches 72 million homes. Kagan estimates the network produced $185 million in revenue and $82million in EBITDA for a 44% margin in 2008. Monthly affiliate fees run 12 cents generating most of the revenue. Even if successful, XD will never match The Disney Channel which produces about $1.2 billion in revenue, $700 million in cash, and a 58% operating margin with almost $1 billion in revenue form an 86 cents per month affiliate fee. If XD can close the gap at all, the upside for DIS is real at both the network and through merchandising.

Local TV Stations in For Rough Year

Secular and cyclical challenges for local TV stations were front and center last week after a Wall Street Journal article highlighting the tough times for stations. The major broadcast network owners (DIS/ABC, NWSA/FOX, GE/NBC, CBS) own the largest stations in the major markets while many independent companies including some newspaper companies also own local TV stations. I think the very poor results at DIS and NWSA stations in 4Q08 and awful guidance is what put this issue front and center. Besides the huge challenges facing the auto industry, the largest advertiser for local TV, odd years are highly cyclical due to the lack of political advertising. The major networks envy cable networks which have a dual revenue stream from affiliate fees and advertising. In the next 5 to 10 years that is probably where ABC, CBS,, FOX, and NBC are headed, a transition which would leave the networks without a need for local presence. This whole process is very long-term and is reflected in station stocks via multiple contraction on top of the cyclical and secular pressure on earnings. CBS is most vulnerable due to lack of diversification. TV station groups not affiliated with the major networks include Hearst Argyle (HTV) and Sinclair Broadcasting (SBGI). Magazine publisher Meredith (MDP) owns a bunch of TV stations as does Gannett (GCI).

Posted by Steve Birenberg at February 18, 2009 10:05 AM in Monday Musings