Industry Surveys Movies & Entertainment

Microsoft Word - mhe_1214 CLOSE 12-22-14Please see General Disclaimers on the last page of this report.
Current Environment ............................................................................................ 1
Industry Profile ...................................................................................................... 9
Industry Trends ................................................................................................... 12
Key Industry Ratios and Statistics ................................................................... 24
How to Analyze an Entertainment Company ................................................. 25
Glossary ................................................................................................................ 30
Industry Surveys Movies & Entertainment Tuna N. Amobi, CFA, CPA, Consumer Discretionary Sector Equity Analyst
DECEMBER 2014
SALES 877.219.1247 [email protected]
MEDIA Michael Privitera 212.438.6679 [email protected]
S&P CAPITAL IQ 55 Water Street New York, NY 10041
Topics Covered by Industry Surveys
Aerospace & Defense
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INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / DECEMBER 2014 1
CURRENT ENVIRONMENT
A continued evolution of over-the-top streaming video
The past few months have witnessed several announcements across the media and entertainment landscape geared toward an acceleration of Internet television offerings—also known as over-the-top (OTT) streaming services—generally bypassing the need for cable or satellite subscription. Notable among these are plans by, HBO, a premium cable channel owned by Time Warner, Inc., to launch a stand-alone streaming video service in 2015. Of note, HBO recently had approximately 30 million subscribers in the US, while Netflix had about 7 million more. Household viewers have been paying for cable to watch live sports at ESPN or popular HBO shows such as Game of Thrones; however, in the past couple of years, viewers have been seeking more choices online, resulting in cancellations in what TV viewers perceive as expensive cable subscriptions.
It is expected that the HBO streaming service will be priced at $13–$16 a month, compared with the current HBO subscription cost of about $15 a month, which is split with cable and satellite TV providers, as these are the companies that promote the service. HBO CEO Richard Plepler said that the service would attempt to target 10 million US homes that have high-speed Internet but not a cable TV subscription.
Separately, another move toward streaming videos among programming giants is the multi-year licensing deal signed by Walt Disney Co.’s ESPN and the National Basketball Association (NBA). Pursuant to that deal, the cable TV company acquired rights for a potentially imminent launch of a new OTT service, which would stream out-of-market NBA games. The NBA, which currently offers a streaming product called “League Pass,” will be part owner of the service.
Other potential entrants set for intensifying battles in OTT streaming Separately, CBS Corp. recently unveiled its own digital subscription video service for both live streaming and video on demand (VOD). The service will be available across the company’s 14 US markets and will include episodes of current shows, such as The Big Bang Theory and NCIS, one day after live broadcast. More than 5,000 episodes of “CBS Classics” will also air, including Star Trek, Cheers, and MacGyver. According to CBS, advertisements on the live stream will be the same as those on the traditional CBS broadcast, but the typical 12 to 16 minutes an hour of on-demand programming ads will be cut 25%. CBS Classic shows will be ad-free.
In additional announcements, other companies also announced plans for OTT services. For example, Sony Corp.’s OTT service is expected to debut in 2015. This will include programming from Viacom—the parent network of Comedy Central, MTV, and Nickelodeon, among others. Also expected to launch a new OTT offering in 2015, DISH Network Corp. recently secured programing rights from Disney, Scripps Networks Interactive, Inc., and others. Yet other pay TV providers, such as DirecTV and Verizon Communications, Inc. have unveiled their own OTT plans, as well.
Netflix unveils potentially disruptive plans for movie releases In October 2014, Netflix announced that it would release next year’s sequel to Crouching Tiger, Hidden Dragon, at the same time as it hits IMAX theaters. However, top major theater chains, Regal Entertainment, Carmike Cinemas, and Cinemark USA, balked at the plan and said they would not screen the film in their theaters, which comprise about one-quarter of the 418 IMAX theaters in the US. They argued that the simultaneous release of the sequel is the latest encroachment of Netflix into the traditional entertainment industry. According to an article in the Los Angeles Times on October 1, 2014, Netflix is intensifying its portfolio by improving its line-up of movies and TV shows in the face of rising competition from Amazon and Hulu.
Also in October, Netflix signed a deal with screen actor Adam Sandler to produce and star in four feature films that will be available exclusively on Netflix. This marks the first time that the company plans to produce its own film. Following the announced simultaneous showing of Crouching Tiger, the partnership
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with the actor, who ranks as one of the most popular on Netflix, is the second announced deal that reflects how the company has upset the traditional model for releasing movies.
BOX OFFICE PACE RETREATS FROM PRIOR RECORD
As of early December, the 2014 year-to-date domestic box office gross receipts had tallied $9.66 billion, which represent a 4.8% retreat from a record $1.05 billion achieved in both 2013 and 2012, according to data from boxofficemojo.com. In large part, this was due to a sharp decline over the last summer, after four
consecutive seasonal records through the summer of 2013. Trade publication Variety noted on August 28, 2014 that, except for Guardians of the Galaxy and The Fault in Our Stars, this year’s blockbusters and sequels were lacking the “thrill of discovery,” resulting in commercial repercussions. The top-grossing films in 2014 included Guardians of the Galaxy, Captain America: The Winter Soldier, The LEGO Movie, Transformers: Age of Extinction, Maleficent, X-Men: Days of Future Past, Dawn of the Planet of the Apes, The Amazing Spider-Man 2, Godzilla (2014), and 22 Jump Street.
Through the current year-to-date period, approximately 1.18 billion movie tickets were sold, versus annual totals of 1.34 billion and 1.36 billion in 2013 and 2012, respectively. Meanwhile, the average ticket price for the current year period was $8.12, little changed from $8.13 in 2012 but up 2.1% versus $7.96 in 2012.
Domestic box office gross receipts reached a record $10.9 billion in 2013, up 0.8% from $10.8 billion in 2012, according to data from boxofficemojo.com, an online source for movie and box office information.
Last year marked the fifth consecutive year of domestic box office receipts that topped $10 billion. Domestic box office gross receipts were up 6.5% in 2012, but fell 3.7% and 0.3% in 2011 and 2010, respectively. Attendance (as measured by tickets sold) was down 1.3% to an estimated 1.34 billion tickets in 2013, compared with 1.36 billion tickets in 2012. In the first ten months of 2014, the domestic box office gross receipts totaled nearly $8.3 billion.
The share of 3D revenues is declining domestically, even as the 3D market is witnessing growth internationally. According to “Theatrical Market Statistics 2013,” published by the Motion Picture
Association of America (MPAA), 3D box office revenues were down 1% in 2013, despite the increase in the number of 3D screens in the US and Canada to 15,782 in 2013 compared with 14,734 in 2012.
International box office stays on rescue path After a sharp 15% decline in last summer’s domestic box office, Hollywood is turning more than ever to the international marketplace to rescue sales, even if the World Cup hurt box office revenues in key soccer
Table B03: DOMESTIC THEATRICAL MOVIE INDUSTRY PROFILE
DOMESTIC THEATRICAL MOVIE INDUSTRY PROFILE
AVERAGE TICKET
YEAR MIL. $ % CHG. IN MIL. % CHG. DOLLARS % CHG. SCREENS*
2014* 8,948 NA 1,102 NA 8.12 NA NA 2013 10,923 0.8 1,344 (1.3) 8.13 2.1 NA 2012 10,837 6.5 1,362 6.1 7.96 0.4 39,056 2011 10,174 (3.7) 1,283 (4.2) 7.93 0.5 38,974 2010 10,566 (0.3) 1,339 (5.2) 7.89 5.2 38,902 2009 10,596 10.0 1,413 5.3 7.50 4.5 38,605 2008 9,631 (0.3) 1,341 (4.5) 7.18 4.4 38,201 2007 9,664 3.8 1,405 (0.1) 6.88 5.0 38,159 2006 9,210 (5.2) 1,406 (8.1) 6.55 3.2 37,765 2005 8,841 1.6 1,379 (1.3) 6.41 3.0 37,040 2004 9,381 (0.2) 1,511 (4.0) 6.21 4.0 35,795
2003 9,240 11.4 1,532 8.5 6.03 2.7 35,016 NA-Not available. Note: Percentage changes based on unrounded data. Source: Box Office Mojo; *National Association of Theatre Ow ners.
Chart H06: US SCREENS BY TYPE
0
5
10
15
20
25
30
35
40
45
Digital 3D Digital non-3D Analog
Source: Motion Picture Association of America.
US SCREENS BY TYPE (In thousands)
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / DECEMBER 2014 3
markets this year. According to an article in the Hollywood Reporter in October 2014, the foreign appetite for American movies remains strong. Growth in sales has been remarkable in China and Brazil, according to the article, as Chinese box office rose 32% to $3.55 billion in the first nine months of 2014, almost equal to the full-year total in 2013. Topping the list was Transformers: Age of Extinction, which raked in more than $300 million in China and more than $1.07 billion globally.
STALLING THE HOME ENTERTAINMENT MARKET
Since reaching a peak of $21.8 billion in 2004, aggregate US home entertainment spending (i.e., combined sell-through and rentals across all formats, including DVDs, Blu-ray, and digital) has declined or stayed flat.
Spending totaled $18.2 billion in 2013, up 0.7% from $18.0 billion in 2012, which in turn was up 0.2% from $17.96 billion in 2011. Year to date through September 2014, spending totaled $12.51 billion, a 0.9% decline from a year ago.
According to data from the Digital Entertainment Group (DEG), an industry trade organization, consumer spending on formats, such as Blu-ray (high-definition) discs, electronic sell- through (EST), and subscription streaming, remains relatively healthy and growing. In 2013, sales of packaged media declined 8.1% to $7.8 billion, which was offset by growth of 5% in Blu-ray discs.
In the third quarter of 2014, home entertainment spending declined 1.2% from the third quarter of 2013 to $3.92 billion, in line with the fall in cumulative box office for films released in the home entertainment window, according to the DEG. Sales of packaged media declined 8.0% to $1.3
billion in the third quarter of 2014. The top sellers in 2014 included Frozen, The Hunger Games: Catching Fire, The LEGO Movie, Despicable Me 2, and The Hobbit: The Desolation of Smaug.
We expect packaged media to face more pressure over the next few years, but continued strong growth in Blu- ray should increasingly mitigate the decline. By the end of the third quarter of 2014, the US installed base of Blu-ray disc playback devices (including set-top box and game consoles) was around 80 million homes, according to the DEG. In addition, the DEG estimated HDTV penetration at more than 104 million US households by the third quarter of this year.
Electronic sell-through stays on growth trajectory Digital transactions are proving to be a bright spot for the home video market, with the electronic sell- through (EST) market reaching more than $1 billion in the first half of 2014. In the third quarter of 2014, according to the DEG, consumer spending on home entertainment through digital outlets was flat compared with the same quarter in 2013, reflecting stability in the market, while overall EST spending rose 26% compared with the same period a year ago. The growth was primarily driven by an 88% year-to-date rise in spending on EST for new theatrical releases.
B01: DOMESTIC THEATRICAL MOVIE HITS
DOMESTIC THEATRICAL MOVIE HITS — 2014 (Ranked by US box office, in millions of dollars)
BOX OFFICE (MIL.$)
MOVIE DISTRIBUTOR US WORLDWIDE
Guardians of the Galaxy Paramount 330.5 770.1 Captain America: The Winter Soldier Buena Vista 259.8 714.1 The LEGO Movie Buena Vista 257.8 468.1 Transformers: Age of Extinction Fox 245.4 1,087.4 Maleficent Buena Vista 241.4 757.7 X-Men: Days of Future Past Sony 233.9 746.0 Dawn of the Planet of the Apes Fox 208.5 707.9 The Amazing Spider-Man 2 Fox 202.9 709.0 Godzilla (2014) Warner Bros. 200.7 525.0 22 Jump Street Fox 191.7 330.7 Teenage Mutant Ninja Turtles (2014) Paramount 191.2 474.4 How to Train Your Dragon 2 Warner Bros. 176.9 618.8 Gone Girl Universal 152.6 318.8 Rio 2 Warner Bros. 131.5 498.8 Lucy Paramount 126.6 458.8 300: Rise of An Empire Warner Bros. 106.6 331.1 Noah Sony 101.2 362.6 Edge of Tomorrow Fox 100.2 369.2 The Maze Runner Paramount 100.1 330.1 Interstellar Fox 96.9 322.7 NOTE: Movies released in 2013; all receipts w ere not necessarily collected in the year that a movie w as released. *Data through October. Source: boxoff icemojo.com.
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In 2013, consumer spending on home entertainment through digital outlets jumped 23.9% to $6.5 billion, according to the DEG, reflecting 4.8% and 47.1% growth in VOD and EST outlets, respectively; digital subscription-based streaming services reported growth of 32.1% in 2013. Digital spending accounted for around 35% of the domestic home video market in 2013, up from 29% in 2012. Personalization and time shifting have spurred the advent of VOD services, as well as EST outlets such as Apple’s iTunes and Amazon.com. Although EST’s contribution to digital spending is less than half of the contribution from other platforms, its remarkable growth is propelling digital sales. Furthermore, based on the data from leading studios, EST margins are much higher than those of other digital platforms are.
As sell-through spending declined over the past few years, more consumers began shifting to relatively lower-priced rental services such as Netflix. Hence, the overall rental category has been in decline. In the third quarter of 2014, total US consumer spending on home entertainment rentals (excluding VOD) dropped 17.9%, to about $793.2 million, due to a 30.4% decline in brick-and-mortar outlets, an 11.5% decline in kiosks, and a 17.7% decline in subscription-based mail-order and streaming services. In 2013, total US consumer spending on home entertainment rentals (excluding VOD) declined 9.2%, to about $6.1 billion, as brick-and-mortar rentals fell 14.2%, subscription-based mail-order and streaming services declined 19.1%, and kiosks were down 1.0%. We expect disappearing brick-and-mortar stores to exert further pressure on home video rentals, against continued gains by Netflix and other online video platforms. (See the “Industry Trends” section of this Survey for further discussion on the growing impact of Netflix and other over-the-top video services.)
UltraViolet platform fosters ownership rights In late 2011, the Digital Entertainment Content Ecosystem (DECE)—a consortium of more than 70 major entertainment companies, including studios, consumer electronics manufacturers and retailers, and cable TV operators—launched UltraViolet (UV), a “locker service” that allows users to pay for the content once, store it online, and then download or stream it on multiple platforms.
The locker service has not been able to attract most consumers, nor has it been a threat to its counterpart, Apple’s iTunes Store. However, this could change. Amazon.com Inc. held talks with Warner Bros. Pictures, Sony Pictures, and Universal Pictures to join the UV consortium, according to an article published in the trade publication The Verge in October 2014. The deal could help expand Hollywood’s online movie business, which is worth more than $2 billion, making Amazon a bigger threat to industry leader Apple Inc.
Continued improvements in the user experience helped the UV service grow to more than 20 million accounts as of November 2014, with more than 100 million movies and TV shows in their UV libraries, according to data from the DEG.
After Wal-Mart Stores launched a campaign in 2012 to convert DVDs into digital formats for a nominal fee per movie, many other retailers are promoting the service to their own customers, a move they hope will also help them sell their own digital offerings. Nevertheless, the service is facing several issues. For instance, due to different formats for digital rights management (DRM), the service cannot be used on all devices, which is marketed as a key feature of the service. In addition, Disney and Apple are not yet supporting the service, mainly because they are operating their own services.
MUSIC BLUES CONTINUE ON DECLINING ALBUMS
Sales of digital music, which includes streaming outlets or “on-demand” services, such as Spotify, Rhapsody, and Google Play Music All Access, make up about 68% of total sales revenue for the recorded music industry. According to a New York Times article dated September 25, 2014, the US currently has 7.8 million people who have paid subscriptions to digital services, up from 6.1 million at the end of 2013.
However, based on data from the Recording Industry Association of America (RIAA), which collects sales figures from major record companies, this change in trend has not been enough to offset the dropping sales of CDs and downloads. The RIAA reported that the first half of 2014 saw a 4.9% decline in music sales from the same period in 2013, amounting to less than $3.2 billion. During this period, downloads and
INDUSTRY SURVEYS MOVIES & ENTERTAINMENT / DECEMBER 2014 5
streaming together remained flat at $2.2 billion compared with the same period last year, with downloads comprising only 60%.
As for music albums, sales declined in 2012 and 2013 after showing some encouraging trends in 2011, which marked the first gain for the music industry since 2004. According to market research firm Nielsen SoundScan, total album sales across all formats—both physical and digital (minus track-equivalent albums)—dropped about 8.0% in 2013, to 289.4 million units (on a 5.8% drop in current albums, and an 11.1% fall in catalogs). Leading the sales charts in 2014 are Frozen (various artists), Beyonce (Beyonce), Outsiders (Eric Church), Pure Heroine (Lorde), Ghost Stories (Coldplay), Now 49 (various artists), Crash My Party (Luke Bryan), Prism (Katy Perry), Now 50 (various artists), and GIRL (Pharrell Williams).
The decline continued into the first half of 2014, with digital albums down 11.6% from the first half of 2013, to 53.8 million units, and compact disk (CD) album sales falling 19.6% to 62.9 million units, according to Nielsen SoundScan. Pharrell Williams’ Happy was the top-selling digital song, with 5.6 million scans.
For the music industry, a continued erosion of CD sales triggered by secular headwinds (i.e., the transition from physical formats) had led to double-digit sales declines over the past several years. In 2013, CD album sales were down 14.0%…