Content Owners, Creators & Delivery Platforms - Where Are The Gainers?

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Thanks to disruptive content delivery platforms like Netflix (NASDAQ: NFLX), the business of delivering content to viewers has been seriously shaken.

At present there is fierce competition between media platforms, which could end up benefiting producers, and owners of content. Investors should be more forgiving and willing to accept higher valuations for studios and other companies that can license content to a growing number of platforms, and should demand lower valuations for platform providers.

Demolished DVD Sales

U.S. consumers cut home entertainment spending by 1.5% during the fourth quarter by spending fewer dollars on DVD purchases and rentals. Digital Entertainment Group estimated that the total spending for the last quarter of 2012 dropped to $5.66 billion, lower than $5.74 billion for the fourth quarter of 2011. Total expenditure on DVDs was almost flat for 2012, rising only 0.2% to $18 billion for 2012.

In contrast, spending on subscription services, video on demand, and downloads increased 25% to $1.49 billion during the quarter.

Studios have been counting digital sales, streaming services, and Blu-ray discs to counteract faltering purchases and rentals of traditional DVDs. During the quarter, the subscription DVD services and store rentals declined by 31% and 5.1%, respectively. Also for 2012, the subscription DVD services and store rentals declined by 28% and 24%, respectively. One bright spot was kiosk rental, which increased 7.8% during the last quarter and 16% for the year. DVD spending continued to decline, while expenditure on Blu-ray increased approximately 10% during the year. The total expenditure on packaged-media declined 5.5%.

Clearly packaged video media distribution is being disrupted fundamentally in the same way that packaged audio media distribution was disrupted by the internet over a decade ago.

Valuation Check

Investors should jump on low valuations for content providers. Viacom (NASDAQ: VIAB) is trading at a discount relative to its peers’ earnings multiples:

<table> <tbody> <tr> <td> <p><strong><span>Ticker</span></strong></p> </td> <td> <p><strong><span>Company</span></strong></p> </td> <td> <p><strong><span>P/E</span></strong></p> </td> <td> <p><strong><span>P/S</span></strong></p> </td> <td> <p><strong><span>P/B</span></strong></p> </td> <td> <p><strong><span>P/FCF</span></strong></p> </td> <td> <p><strong><span>D/E</span></strong></p> </td> <td> <p><strong><span>EPS Growth Next 5 Years</span></strong></p> </td> </tr> <tr> <td> <p><span>VIAB</span></p> </td> <td> <p><span>Viacom</span></p> </td> <td> <p><span>13.24</span></p> </td> <td> <p><span>2.09</span></p> </td> <td> <p><span>3.94</span></p> </td> <td> <p><span>16.24</span></p> </td> <td> <p><span>1.09</span></p> </td> <td> <p><span>13.9%</span></p> </td> </tr> <tr> <td> <p><span>CBS</span></p> </td> <td> <p><span>CBS</span></p> </td> <td> <p><span>17.42</span></p> </td> <td> <p><span>1.76</span></p> </td> <td> <p><span>2.5</span></p> </td> <td> <p><span>25.2</span></p> </td> <td> <p><span>0.58</span></p> </td> <td> <p><span>14.0%</span></p> </td> </tr> <tr> <td> <p><span>DIS</span></p> </td> <td> <p><span>Walt Disney</span></p> </td> <td> <p><span>16.72</span></p> </td> <td> <p><span>2.19</span></p> </td> <td> <p><span>2.37</span></p> </td> <td> <p><span>22.18</span></p> </td> <td> <p><span>0.36</span></p> </td> <td> <p><span>12.4%</span></p> </td> </tr> <tr> <td> <p><span>DISC</span></p> </td> <td> <p><span>Discovery</span></p> </td> <td> <p><span>16.72</span></p> </td> <td> <p><span>2.19</span></p> </td> <td> <p><span>2.37</span></p> </td> <td> <p><span>22.18</span></p> </td> <td> <p><span>0.36</span></p> </td> <td> <p><span>12.4%</span></p> </td> </tr> <tr> <td> <p><span>CMCSA</span></p> </td> <td> <p><span>Comcast</span></p> </td> <td> <p><span>18.39</span></p> </td> <td> <p><span>1.73</span></p> </td> <td> <p><span>2.19</span></p> </td> <td> <p><span>14.7</span></p> </td> <td> <p><span>0.79</span></p> </td> <td> <p><span>15.6%</span></p> </td> </tr> <tr> <td> <p><span>TWX</span></p> </td> <td> <p><span>Time Warner</span></p> </td> <td> <p><span>18.91</span></p> </td> <td> <p><span>1.64</span></p> </td> <td> <p><span>1.58</span></p> </td> <td> <p><span>25</span></p> </td> <td> <p><span>0.66</span></p> </td> <td> <p><span>12.0%</span></p> </td> </tr> <tr> <td> <p><span>TV</span></p> </td> <td> <p><span>Grupo Televisa</span></p> </td> <td> <p><span>26.88</span></p> </td> <td> <p><span>2.98</span></p> </td> <td> <p><span>3.56</span></p> </td> <td> <p><span>14.49</span></p> </td> <td> <p><span>0.93</span></p> </td> <td> <p><span>14.2%</span></p> </td> </tr> <tr> <td> <p><span>AMCX</span></p> </td> <td> <p><span>AMC Networks</span></p> </td> <td> <p><span>26.98</span></p> </td> <td> <p><span>3.04</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>15.74</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>21.2%</span></p> </td> </tr> </tbody> </table>

Coinstar (NASDAQ: OUTR) is trading at a discount compared to other firms that provide a platform to distribute media:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> <td> <p><strong>P/FCF</strong></p> </td> <td> <p><strong>D/E</strong></p> </td> <td> <p><strong>EPS Growth Next 5 Years</strong></p> </td> </tr> <tr> <td> <p><span>CSTR</span></p> </td> <td> <p><span>Coinstar</span></p> </td> <td> <p><span>10.21</span></p> </td> <td> <p><span>0.7</span></p> </td> <td> <p><span>2.5</span></p> </td> <td> <p><span>5.4</span></p> </td> <td> <p><span>0.66</span></p> </td> <td> <p><span>16.6%</span></p> </td> </tr> <tr> <td> <p><span>DTV</span></p> </td> <td> <p><span>DIRECTV</span></p> </td> <td> <p><span>13.11</span></p> </td> <td> <p><span>1.11</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>13.09</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>15.2%</span></p> </td> </tr> <tr> <td> <p><span>SJR</span></p> </td> <td> <p><span>Shaw Communications</span></p> </td> <td> <p><span>13.87</span></p> </td> <td> <p><span>2.06</span></p> </td> <td> <p><span>2.67</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>1.31</span></p> </td> <td> <p><span>4.0%</span></p> </td> </tr> <tr> <td> <p><span>CMCSA</span></p> </td> <td> <p><span>Comcast</span></p> </td> <td> <p><span>18.39</span></p> </td> <td> <p><span>1.73</span></p> </td> <td> <p><span>2.19</span></p> </td> <td> <p><span>14.7</span></p> </td> <td> <p><span>0.79</span></p> </td> <td> <p><span>15.6%</span></p> </td> </tr> <tr> <td> <p><span>DISH</span></p> </td> <td> <p><span>Dish Network</span></p> </td> <td> <p><span>22.98</span></p> </td> <td> <p><span>1.2</span></p> </td> <td> <p><span>158</span></p> </td> <td> <p><span>9.78</span></p> </td> <td> <p><span>95.18</span></p> </td> <td> <p><span>2.2%</span></p> </td> </tr> <tr> <td> <p><span>NFLX</span></p> </td> <td> <p><span>Netflix</span></p> </td> <td> <p><span>125.53</span></p> </td> <td> <p><span>1.56</span></p> </td> <td> <p><span>7.69</span></p> </td> <td> <p><span>302.69</span></p> </td> <td> <p><span>0.56</span></p> </td> <td> <p><span>23.2%</span></p> </td> </tr> <tr> <td> <p><span>AMZN</span></p> </td> <td> <p><span>Amazon</span></p> </td> <td> <p><span>3887.43</span></p> </td> <td> <p><span>2.15</span></p> </td> <td> <p><span>16.32</span></p> </td> <td> <p><span>116.39</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>31.2%</span></p> </td> </tr> </tbody> </table>

Comcast appears on both lists because it provides hook ups for consumers while at the same time it owns Telemundo and NBC.

Netflix Jumping into Exclusive TV Programming

Netflix is reviving the comedy TV show “Arrested Development” and will set up a new storyline that could be the basis for a new movie. Fox canceled the show in 2006 after airing it for three seasons. One of the program’s actors, Jason Bateman, said, “This isn’t season four. Hopefully this is act one of what becomes a feature film."

Although “Arrested Development” had already made a following among the 40 markets during its three seasons, Netflix plans to extensively advertise its return using billboards, print publications and alerts on its programs.

As part of its strategy to attract new subscribers and retain current customers, Netflix is adding more shows in its online streaming service, including Ricky Gervais’ comedy show “Derek;” “Hemlock Grove,” a drama by horror movie producer Eli Roth; and “House of Cards,” a political drama starring Kevin Spacey.

Every Company is Different

It’s not all roses for movie studios, and investors have to do a lot of homework to figure out what issues each company faces.

For instance, Viacom’s Paramount Pictures entered into a settlement with Melrose Investors 2 LP, a private equity movie financing fund that sued it in 2011, alleging that the studio over-stated production and distribution costs and understated the revenues of the 29 movies it co-financed.

Paramount spokesman Robert Lawson said, “The dispute was satisfactorily resolved.”  Melrose 2’ lawyer Mark Holscher declined to comment on the settlement except confirming that it was “satisfactorily resolved.”

The movies that Melrose 2 had co-funded to the tune of $375 million include TransformersTransformers 2Mission Impossible 2 and Flags of Our Fathers.  Those 29 films grossed about $7 billion, with Paramount receiving $600 million in distribution fees alone.

Conclusion

Require attractive valuations for content owning and content creating companies. Require even more attractive valuations for platforms as they fight each other for users.

At current low valuations, Coinstar is sufficiently cheap to warrant speculation on a platform provider. Viacom is cheap and should be considered as a buy candidate among its content peers, especially since it has settled its legal issues.


BillEdson11 has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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