hoc opus

So our friends over at Great Magna Global USA have decided to reevaluate the home entertainment category destroying DVRs (after resizing the market). And, according to Media Daily News, based upon current behavior and uptake rates, DVR adoption and use may be no better than current pay channel buy rates -- or a third of U.S. TV homes.

As the article notes,

"The problem comes from lower-disposable-income cable customers who are averse to paying more monthly fees for their in-home TV entertainment."

As to the larger issue of the sales of DVDs, in whatever form they may take and downloading of digital content, well, if digital content is going to be delivered in the form of downloads to separate media boxes in the home, this would indicate that adoption rates will likely not be as great as for DVD players. And that whenever the crisis crosspoint may occur, it's further out than most believe.

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And just as quickly, it appears that DreamWorks won't be consumed by the mothership just yet. Variety reports today on the end of the two-month exclusive negotiation window for the potential acquisition of DreamWorks by NBCUniversal and the breakdown in discussions.

While focusing on an apparent price change by NBCUniversal that would bring the sale below the initial $1 billion level, the article points to Steven Spielberg as the greater cause of disruption. Desiring creative control and an intact organization, DreamWorks used the price change as reason to walk away from the table.

Variety makes clear that Universal will still be looking for acquiring content to fill the big empty pipe they are regaining from the UIP slimdown with Lions Gate still seen as prey around town (despite moves to bulk up). Also, there are other studios that may find DreamWorks a tasty morsel, including Paramount -- with its own UIP pipeline issue -- and Disney -- with an unclear future with Pixar, DreamWorks Animation is an alternative.

At the end of the day, that price point may be the key obstacle. Noting that with only a 60-title library the relative valuation far exceeds that of MGM when it was acquired by Sony, Variety intuits that financial buyers would not step up.

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The most dramatic way to fight potential government regulation changes is to throw out a really really really big number that would generally cause a citizenry to protest a decision. Or at least make reelection of affirmative voting legislative members more difficult. The cable industry in the United States was first with $115 billion.

And now the British film industry has thrown out 3.1 billion Pounds (which is nearly twice that in dollars), and a very big number for that country. Why are they up in arms? Back in August, the UK government released its initial proposal for the scheme to replace the current tax incentive system, news which was quickly followed up by analysis indicating that future expected benefits would be of a magnitude less than those available today.

Perhaps in anticipation of this attack, Variety carried an article in early September discussing the implication of the new regulations on limiting UK production and film restrictions:

"The danger, however, is that this will also discourage British producers with a legitimate creative and commercial ambition to tell stories that are not purely or even predominantly British."

The Financial Times lent its support to the reports implications prior to release and then dutifully reported the loss of 300 million Pounds of production in 2004 and estimated loss of the same in 2005.

With consultation for the new scheme ending October 21st, British producers are pressing hard for a continuation of the benefits currently available, which have brought in the dollars and impact of studio movies. As noted in Variety, "The report, by Oxford Economic Forecasting, reveals that most of this benefit came from Hollywood movies shooting in the U.K."

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Image Entertainment Inc., a distributor of DVDs and entertainment programming (see Criterion United), is the subject of an unsolicited bid from Lions Gate Entertainment Inc. and has engaged a financial services firm to advice it on the tax-free share-swap merger estimated in the range of 0.38 to 0.42 shares of Lions Gate for each share of Image (see the 8K).

Image announced the bid on September 13th and in its press release response, Business Week notes:

Martin W. Greenwald, Image Entertainment's president and CEO, said in a statement that the company was not for sale and that its value is "far greater than what is being offered."

The letter spelled out Lions Gate's intentions:

"This acquisition would be consistent with our desire to broaden and deepen our library of filmed entertainment, as well as to add an important musical component, and, as we discussed, to introduce (Image Entertainment) as a new studio label focusing on specialty theatrical content," co-Chairman and Chief Executive Jon Feltheimer wrote in the letter.

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In yet another sober reminder that we don't truly understand the future until it is the past, MediaWeek brings us news that DVR penetration has slowed and, ahem, might not grow as fast as predicted. "[T]he latest "On Demand Quarterly" report from Magna Global, which cites data from both DirecTV and Time Warner cable indicating that consumers are not flocking to DVRs as quickly as originally expected."

So why I am highlighting some rather anticlimactic information? Well, hopefully it will bring some perspective to the apocryphal trumpeting that the media has perpetrated with respect to the death of box office, the death of the theatrical release and the simultaneous death and prominence of DVD. Clearly there are issues to understand, such as the rapid escalation of marketing costs bringing into question the value of a theatrical release that is shortly followed with a similar campaign shilling the DVD. However, imminent threat is not one of the issues. Let's get some analysis without the heaping of gloom.

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Is it really a surprise that, with new leadership and the growing importance of the international market to rescue poorly performing domestic movies, Brad Grey stepped up to bring the world back to Paramount? Madagascar, which did gross nearly $200 million at home, also grossed $305 million overseas, leading DreamWorks Animation to hope for a new franchise. In a move signaling his further desire to reshape Paramount, Grey has announced the dissolution of United International Pictures, the joint studio distribution entity that has been handling non-domestic distribution for Paramount and partner Universal.

As reported in Variety, "UIP was formed in 1981, when U and Par partnered with MGM and United Artists to release their films overseas through a single distribution apparatus. MGM and UA exited the partnership in 2000."

As of 2007, Universal will take eight territories and Paramount seven, with each able to utilize the other's operations for the first two years, while they create their own offices. At the end of the day, UIP will still operate in 20 territories, but with the exception of Japan and Korea, they represent areas where maintaining an independent office is not supported by the size of the market -- Argentina, Denmark, Greece, Hungary.

While UIP has been very successful with the release of blockbuster films, studios always felt shortchanged by an entity that could never devote its full attention to one studio's product and by a perception of less success with smaller titles. There is also a further rehashing in Variety, coverage in The Hollywood Reporter.

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The terms of the $525 million credit facility allow Marvel to fund films with budgets between $50 million and $165 million. Although Marvel will be financing all initial development costs out of pocket, once a picture has been greenlit, those moneys already spent will be reimbursed through the credit facility. And what's keeping Merrill in the lending business at Marvel? Theatrical film rights to the characters under development, should the slate not soar.

For Paramount, the deal was the first under Grey's administration and provides it with content to fill its slate and pockets while avoiding risking company capital. Marvel keeps a much larger portion of exploitation proceeds, paying Paramount a fee for marketing and distribution. Arriving prior to the announcement of the dissolution of UIP, this provides an indication of where Paramount is going to get the international fare it needs to fill its foreign distribution pipeline.

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According to Variety, one studio is demanding C.O.D. from Blockbuster and two others have "taken out third-party insurance for receivables to protect themselves from possible delays in payment by Blockbuster on upcoming titles." This is not an unexpected situation for the home entertainment supplier, but it has driven Blockbuster to cancel its third quarter dividend and is changing the way it has been acquiring new titles. Blockbuster "obtained about 70% of its rental DVDs via rev share in the second quarter, compared with its typical quarterly average of about 50%." This can't be too hard of a situation for the studios, who typically earn more revenue through revenue sharing arrangements. And given that this outlet "represent[s] approximately 12%-15% of revenue in most cases," for the studios, this is not a situation that will create dire circumstances for Blockbuster.

Of course, this news and prior warnings of a reduced rental and sales market doesn't look good compared to the valuation boost competitor Netflix has experienced on word that "it will hit 5 million subscribers sometime in 2006, a year ahead of its previously stated goal."

What should we take from all this? That the home entertainment market is in flux, in both slowing growth rates -- against a very large base -- and preferred delivery mechanisms. The dollars likely won't disappear, but the players may shift. Such is evolution.

Posted by Marc at 09:39 PM | Permalink | Comments (0) | TrackBacks (0)

As reported in The Hollywood Reporter, "Even when moviegoers cite other reasons for going to theaters less often than they used to, they still circle back to the quality of films as the root cause for their disaffection."

One key conclusion of the survey that should be factored into studios' decision regarding the collapse of windows is that "the study said that when a movie's DVD release closely follows its theatrical debut, consumers often consider it the sign of a bad movie."

And the winning quote from the article:

Asked to sum up the attitude of disaffected moviegoers, Bradley said: "Going to the movies used to be fun and exciting. It used to be an event. It's none of those anymore."

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