A long time ago in a galaxy far, far away . . . stars made films. People flocked to cinemas to see them. The actors made money; the films made money; and often, so did investors. Some companies screwed more out of their biggest hits through merchandising, with parks, games and toys. Investors then made even more money.
That dynamic is no longer as strong. The changing media industry offers an interesting case study, one with useful lessons for investors.
When we launched our global funds around a decade ago, “media content” was one of our 10 themes. More recently the theme has morphed to “screen time” to reflect the industry’s changing landscape.
It’s not just the amount of media we consume that has changed, but how we absorb it. Research by Uswitch suggests that on average we spend 241 minutes watching TV each day, 109 minutes on social media, 286 minutes on the internet and 75 minutes listening to music. If my family are anything to go by, we may do all four at the same time.
In 2006 Tom Hanks made The Da Vinci Code. It pulled in $760mn gross at the box office. The sequel, Angels & Demons, made $485mn. The third in the series, Inferno, made a decade after the first, took $220mn. According to Ben Fritz, author of The Big Picture, Hanks was paid $20mn plus a share of 25 per cent of gross on the first two. For the third he received “just” $15.5mn but was offered 50 per cent of the profit. There wasn’t any.
Perhaps the films got steadily worse, but the key differential was technology.
Streaming has changed the economics of the industry. TVs have improved so much that the home cinema experience competes with going out. You don’t have to sit next to someone rattling a tub of popcorn and you can pause halfway through to go to the loo or make a brew.
The cinema still holds some magic, especially for dating teens, but its romance for the rest of us is perhaps exaggerated by the stars whose lawyers like to negotiate them a share of cinemas’ revenues.
Covid-19 changed the dynamics further still. It showed that people were willing to pay a premium for an early viewing at home of a new release, so why bother with the hassle of printing off reels and distributing them to thousands of cinemas?
Cinema ticket sales may have begun to recover in 2021 — to $21.3bn globally — but were still only half the level they were pre-Covid, according to the Motion Picture Association. Lockdowns skew that number and the delays caused to production and releases has undermined ticket sales this year.
Who knows whether cinema will recover fully? Tom Cruise’s Top Gun reprise — the equivalent of a 1980s rock band touring with its old album hits — should help. It took $124mn in its first three days. Cruise aside, the industry seems less driven by individual film stars now and more by franchises such as Marvel or Star Wars. These can still pull in the crowds and make huge profits when they work, but backing new ones is risky. Studios may prefer to tell a story over 10 episodes streamed on TV with a film spin-off if successful.
Streaming can deliver an audience of 1.3bn, according to the MPA — much bigger than that for western cinemas. This explains why the big film studios have tied themselves to streaming services, or launched their own; and why they are creating so much “content” for them.
In an environment where streaming has increased our appetite for such material, you might imagine producers should enjoy bumper profits. Pah! Owning Netflix — down 50 per cent in the past three months — has been our worst decision of the year. We only had a small holding; it is even smaller now. I am still optimistic about the company’s future, but not enough to double down and buy more yet.
This is a sector full of challenges. The obvious one is competition. This month Paramount Global (formerly trading as Viacom) launches its Paramount Plus service in the UK. It is up against Amazon Prime Video, Disney+, Sky/Now TV, Netflix, Apple TV and more. Each can throw so much money at winning subscribers that returns for shareholders are low until a winner emerges. The issues go deeper still.
Disney was always one of the best at maximising returns from a good movie. Pirates of the Caribbean was filmed because it made for a great ride at Disney’s parks. But as Disney builds its Disney+ streaming platform, it needs to reach beyond the young family audience at the heart of its culture. This explains its production of Pam & Tommy and Dopesick. Let’s just say neither is appropriate material for a family theme park experience. This may undermine Disney’s profitability.
Netflix is only just beginning to leverage off its successes with gaming and merchandise spin-offs. But it does not have the cultural tension of Disney. It has the data to know which shows its core subscribers watch and which are a waste of money. This should enable it to target investment more effectively and support profits, even if the platform loses more subscribers. There are further steps it can take to improve profitability — and not just by stopping the culture secretary and the rest of us from sharing passwords.
Time Warner has suffered from disastrous mismanagement but has now been merged with the Discovery channel to become Warner Bros Discovery, with its content distributed through the HBO Max platform. This will arrive in the UK in 2025, but how many of us will have the capacity for yet another service?
Apple and Amazon can imitate Netflix as programme makers, buyers and commissioners — but that does not make them media companies. It is certainly not the main reason for owning their shares (we do own Amazon, but it sits within our “Online Services” theme).
Though I see no screaming buys in this sector, screen time is one of our biggest themes, representing 12 per cent of our portfolios. Netflix may have hurt us, but other holdings, in telecom companies, have done well in the past three months. Singapore Telecom is up 3 per cent, KPN up 7 per cent, Nippon TT up 11 per cent and AT&T up 17 per cent.
In other words, where we have made money, it has been not from content providers but from the companies on which we all depend to access that content. The lessons? Disruptive sectors can be volatile and may yield disappointing profits despite their rapid growth. Strong competition compresses margins.
If you cannot see a way to prosper from investing in the glamorous players garnering the headlines, check out the companies they rely on. The money may be in the mundane.
Simon Edelsten is co-manager of the Mid Wynd International Investment Trust and the Artemis Global Select fund.