Monday Media Musings: February 23, 2009

Here's the morning after Oscar edition of Monday Media Musings.

The Bull Market Can Found at Your Local Theater

The good news at the box office continues. Based on data form BoxOfficeMojo.com, the top 12 films were 33% this weekend. This leaves the 2009 winning streak intact with every weekend up year-over-year. Year-to-date, the box office is up 19% vs. 2008, and 34-39% vs. 2004 thru 2007. We can never determine what exactly drives the box office (just like the stock market) but strength since early fall 2008 will forever support the thesis that the box office is recession resistant.

Theater stocks seem poised for a good 1Q although the last few quarters form Regal Entertainment (RGC) including last week's report are a reminder that translating ticket sales to EPS is not as simple as it seems.

The #1 film this weekend was Tyler Perry's Madea Goes to Jail. With $41 million, the film is easily the best opening for the series which now numbers six films. Madea Goes to Jail is a welcome piece of news for Lionsgate (LGF) following a big miss in its December quarter earnings that dragged the stock down 21% since reporting on February 9th.

Will Sports TV Rights Survive Global Recession?

The first major TV sports right contract awarded during the recession was won by BSkyB (BSY) when it added to its rights for English Premier League football for the next three years. BSY won of the 5 of the 6 game packages for $2.33 billion over 3 years. Setanta, a UK pay TV business, won the 6th package but under the current contract has two packages. Rumors were hot and heavy that ESPN would bid aggressively and win at least one package but the dominant US sports network was shut out. The six packages were broken into 23 games each. On a price per game package, the new deals are virtually identical to the current contracts, a surprising result given the global economic turmoil which has been particularly harsh on the UK. All together, the rights sold for $2.57 billion.

On the one hand, ESPN lost a chance to firmly establish its newly branded ESPN service throughout Europe. However, given the immense cyclical and secular pressures, losing the bidding is probably a positive for ESPN. ESPN's participation is another reminder that Disney CEO Bob Iger was serious when he said that the company would continue to invest in its brands even as it looked to cut costs.

Domestic Sports Networks Seem to be Holding Value

Sticking with sports, Tribune recently announced it would sell its 25% stake in Comcast SportsNet for $75 million, placing a value of $300 million, or about $60 per subscriber on the entire network. This price matches the sales f similarly sized networks in the Pacific Northwest, Pittsburgh, and the Rocky Mountains in December 2006. Regional sports networks have always been valuable as they attract strong local ratings which attract advertisers. More importantly, the networks are able to get very high monthly affiliate fees providing a recession resistant revenue stream that is usually a solid majority of revenues. The value of regional sports networks can be seen by comparing the $60ish per subscriber values to recent cable networks sales such as Sundance Channel ($17 per sub, May 2008), The Weather Channel ($16 per sub, July 2008), and Oxygen ($12 per sub, September 2007). Thanks to SNL Kagan for all the subscriber data included in this comment.

There is no concentration of regional sports large enough to drive an investment story. The SportsNet sale does, however, provide support for one of the major non-DirecTV assets of Liberty Entertainment (LMDIA). The more secure those values the greater the investment case for closing LMDIA's 30% plus valuation gap to DTV. A long LMDIA/short DTV investments seems particularly attractive in this bearish environment.

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).

Monday Media Musings: February 9, 2009

Monday Media Musings is back despite battling a major technology crash at Northlake. Servers are back and all the backup systems functioned well.

Box Office Booming in 2009

Americans continue to go to the movies. Whether it is a relatively cheap night, a desire to leave their troubles, or just a hot streak of good films from Hollywood, the theory that movie ticket sales are recession resistant continues to gain credibility.

After a good fourth quarter (+1.5%) against tough comparisons, 2009 is off to a great start. The latest weekend was up 47% for the top 12 films. Every weekend this year is up with the year-to-date gain at 18%.Studios have been trying harder to reduce seasonality which partially explains the strength. January and February used to be a dumping ground. This can be seen by the fact that vs. 2007 the box office is up 43%, vs. 2004 thru 2006 it is up 34-37%.

The most direct winners from sustained box office strength are the movie theaters. Regal Entertainment (RGC) has acted surprisingly well since it cuts is dividend and took the pressure off its balance sheet. RGC still has a 7% current yield. Also benefiting is National Cinemedia (NCMI) which began to rally after announcing a good 4Q and providing better than feared guidance for 2009. NCMI is the dominant player in in-theater advertising, one of the few secular growth segments of advertising.

Among the studios, Fox/News Corporation is off to the best start with four of the top ten films of the year, all of which have manageable production budgets that should make them nicely profitable. Fox had a tough year in 2008 which was reflected in the collapse in NWSA's Filmed Entertainment profits reported last week.

Russians Love Movies

If you think Americans are heading to the movies, get a load of the Russians. Variety recently reported that the Russian box office rose 47% in 2008. Early in the year a strong ruble helped comparison but strength in dollars continued t year end despite the rubles collapse. U.S. studios did well in Russia in 2008 but the #1, #3, and #5 films were all Russian. The best U.S film was Madagascar: Escape 2 Africa which brought in $40 million. To give you some perspective, in the US, Madagascar 2 grossed $180 million. Its total international gross stands at $395 million but should ultimately reach over $400 million. There is no obvious stock market play on the Russian box office but when looking at the Hollywood studios it is important to remember that box office is growing outside the U.S. and often represents more than 50% of a film's total gross.

Digital TV Transition Delayed Until June

After a false start in the House of Representatives, the plan to delay the transition to all digital broadcast TV was approved on its second vote. This is a slight negative for the major cable and satellite TV companies. There may be 6-7 million homes that do not subscribe to cable or satellite and will lose their TV signal in June unless they purchase a converter box of subscribe to a multichannel service. The delay means more of these homes will opt for the converter reducing the opportunity for new subscriptions. The numbers are not huge but in an environment of intense competition, consumer cost cutting, and growing access to and fears about watching TV on the internet any boost to TV subscriptions is helpful. Comcast and Time Warner Cable are probably the biggest losers.

Live Nation and Ticketmaster Discussing Merger

The two giants of the concert business (LYV and TKTM) are discussing a merger. LYV is mostly in the concert promotion and venue ownership business while TKTM dominates online ticketing. LYV has launched its own ticketing service representing a serious threat to TKTM. Both companies are attempting to diversify to provide more services to bands and concertgoers. Concerts have become very important to bands as revenues form albums have suffered from free, illegal digital downloads. This merger is gong to face serious scrutiny in Washington as it will eliminate competition in ticketing. TKTM is already controversial due to its high ticket fees. Artists may not like the merger either as they do not want to be beholden to a single entity for touring. Bruce Springsteen has already come out publicly against the merger. Analysts think the deal could be good for both companies but I am very skeptical any deal can get regulatory approval.

Monday Media Musings: February 2, 2009

The Super Bowl, the biggest media and advertising event of the year is over. I don’t have any Monday Media Musings about the big game but there is still plenty going of other things going on in the media world.

Televisa and Univision Settle

Televisa (TV) and Univision settled their long standing litigation. TV will receive higher royalty fees under its deal to provide exclusive programming to Univision until 2017. Terms were not disclosed but all the incremental revenue will flow to the bottom line for TV. TV will not be taking an equity stake in Univision which was perceived as a possible negative outcome for TV in any settlement. The settlement is good news for TV shares. TV is a good stock to keep on your radar screen in anticipation of an eventual upturn in advertising.

Paramount Going Solo on 3-D Screens

Viacom's Paramount studio will be providing financing alternatives to theaters to help with digital and 3-D upgrades. Paramount will distribute several high profile 3-D films in 2009 and has a long-term tie with Dreamworks Animation (DWA), which is at the forefront of the 3-D movement. Clearly, Paramount has extra incentive to get the lagging 3-D upgrade cycle moving. The terms look to be neutral to Paramount from a financial perspective. If 3-D can charge a premium ticket price and proves popular, there is upside for Paramount on the distribution side. Other winners from 3-D include DWA and Disney (DIS) as animated films is where most of the releases will be.

Uncertainty Over Digital TV Transition

The Senate voted unanimously to delay the digital TV transition from February to June. In a surprising move, the House blocked the move as House Republicans used minority veto power on this particular piece of legislation to block it. As many as 6-7 million homes currently receive only analog signals and will be cut off from TV reception without a converter or a subscription to cable or satellite TV. The transition is a small positive to cable and satellite companies as some significant portion of the analog households will likely subscribe. The other alternative is purchase a government subsidized digital converter. A delay is designed to allow more access to converters so it would be a modest negative to cable and satellite companies as fewer households would opt for a subscription. Given the unanimous vote in the Senate I think the delay could be back on the table setting up a small short side trading opportunity in the cable and satellite stocks.

Movie Production and Releases are Falling

Variety reported that there will be about a 5% drop in movie releases in 2009 with most of the decline emanating from the major studios owned by the big entertainment conglomerates. The writers strike and now fear of an actors strike are one factor behind the drop but mostly the big studios are looking to cut costs. Production and marketing costs can easily run from $50 to $150 million per film and many pictures are not profitable. The major studios are choosing to focus on fewer big franchise films, looking for one or two winners per year that can produce operating profits of several hundred million through the initial windows. A slightly less crowded release schedule also may give films a bit more time to find legs. Theater owners could see higher margins if films develop greater legs but the studios stand to benefit the most from cost savings. If a studio could actually consistently produce blockbusters it would be a big help to financial results but the creative side is impossible to predict.

Cinema Advertising Holding Up Well

National Cinemedia (NCMI) rose about 15% Friday after preannouncing 4Q results at the high end of expectations and providing a preliminary 2009 outlook for flat results. Given the virtual collapse in other advertising driven media these are fantastic results. Cinema ads are major growth story in advertising. In the US cinema ads have a low single digit market share but reach upper single digits in Western Europe. Studies show high recall and advertisers can be highly confident of knowing how many people they are reaching. As cinema advertising market share increases, NCMI is poised to be a growth stock when advertising growth resumes. There is always risk of an unusually bad year at the movies but the underlying business is healthy and growing, something that can not be said about many advertising categories. The stock looks a little expensive on the new guidance but is another one to keep on your potential buy list.

Monday Media Musings: December 29, 2008

This is the first of new series of column I will write. Each Monday, I will review media news and notes from the prior week which slipped past my other commentary but may be material for the companies and stocks involved. Let's call it "Monday Media Musings."

New York Times Red Sox stake for sale as Ad Revenues Continue Their Collapse

Several media outlets revealed that NYT is looking for a buyer for its 17.5% stake in New England Sports Ventures which owns the Boston Red Sox and the New England Sports Network regional sports channel which broadcasts most the team's games. Many Yankee and Red Sox fans don’t know that the big bad, elitist Times from hated the hated home of the Yankees owns a significant piece of the equally hated-Red Sox. While NYT needs the cash, this is a sale that has greater meaning as it puts things right in the world of sports.

NYT paid $75 million for the stake in 2002. The team is still viewed as near its peak value despite the economy which has pressured values of other sports teams. A valuation at over $1 billion would bring NYT $175 million pretax, quite useful against several hundred million in upcoming debt maturities and regular double digit declines in advertising revenue.

Speaking of ad revenue, NYT reported horrible numbers for November last week. Total ad revenue fell 21% 2with ever reported category having a decline larger than the year-to-date decline. The worst category by far was classified which had a 33% drop as help wanted and real estate has an accelerating collapse. National ads fell 21% with movies, books, auto, and financial services leading the decline. Perhaps most troubling, even internet advertising fell 4%. Display ads remained positive but the collapse in online classifieds dragged down total growth.

Until revenue declines moderate there is little hope for any sustained positive action in NYT shares. December will be no better than November according to management and early 2009 looks equally bleak.

Disney Ends Narnia Partnership

Disney announced it was pulling out of its 50/50 partnership with Walden media to produce what had been seven films based on the Narnia series. The first film in the series released in December 2005 grossed $745 million globally including $291 million in North America. The second film, released last May, pulled in $419 million globally but just $142 million domestically. With production and marketing costs steadily rising and arguments over release dates and creative direction, Disney decided to continue to prune its movie production and exit the partnership.

Despite the lesser gross of the second film, I am a bit surprised by this move....

....Disney needs big multi-movie franchises to drive its tightly integrated content and distribution engine. I suspect that the 50/50 nature of the partnership and increasing confidence in the Pixar led animation team led management to decide to step away from Narnia.

In the short run this move will provide a boost to FY10 results as marketing and production costs will not be incurred. Whether it process a smart move in the long run will be determined by the success of future Narnia movies (Walden will likely find another partner) and Disney's own films. I remain concerned that Disney has hit a rough spot in ad sales and content generation which will lead to below consensus results and the loss of its premium multiple.

Internet Ads Becoming More Obnoxious

The Wall Street Journal reports that internet companies are lowering standards to attract as much advertising as possibility. While internet advertising remains in positive territory, growth rates have fallen to 10% or less in most categories. To combat the decline, internet companies are taking more intrusive ads including ads in categories previously avoided such as liquor. The moves parallel Google's decision to take liquor ad and beer ads and NBC's decision to take liquor ads on its TV network. Look for more and larger ads that roll across your screen or contain video.

Among media companies internet ads are most important for Time Warner due to AOL and News Corporation due to My Space. Newspapers companies are also looking to the internet for growth as print ads continue to disappear. NYT and Gannett have the most at stake.

Favorite Stocks Have Mixed Week

Each Monday I'll look back at news and stock price action on the media and telecom stocks owned in Northlake client and my personal accounts. Last week's holiday shortened trading saw little news and mixed results as the S&P 500 fell 1.7%. CETV held in strongly dropping just 5 cents for the week. The stock has double off its November low with movement being dictated greatly by currency changes. DISCA fell 2.6% last week on no news. DWA dropped 2.3% as Madagascar 2 wound down its domestic theatrical run. International receipts continue to track well with the film halfway through its run abroad and could be a driver to better tan expected 1Q09 results. TWX fell 3% giving back the prior week's gains that were fueled by renewed rumors of an imminent deal to merge AOL with Yahoo. The action in these media stocks I own were similar to the rest of the media stock universe which had a quiet and down week.