Apple, Netflix, Amazon, Comcast or Microsoft: Who's the Digital Movie Winner?

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 |  Includes: AAPL, AMZN, BBI, LGF, MSFT, MVGRQ, NFLX
by: David Jackson

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

Coming Soon to Your Screen

  • Summary: The major movie studios believe that online piracy safeguards are robust enough that they are finally able to embrace legal movie downloads. President of Fox Digital Media says "Our goal is to seek out as many [viable] retail outlets as we can, and put as many titles as we can on those sites". As a result, the number of websites offering movie downloads is set to soar. Amazon.com plans to launch its service next month. Apple plans to launch movie downloads on its iTunes site, and has the advantage of integration with video iPods. But Apple has had difficulty negotiating with the studios due to its insistance on a single price for all movies: it offered the studios $14 per movie, so it could sell them for $14.99. Microsoft will introduce a music/video player in Q4, but has delayed the launch of its movie store until early 2007. Wal-Mart and Comcast also plan to launch their own services, and Time Warner and AT&T are also talking to studios. Blockbuster has also shown an interest in launching an online service. File sharing service Bit Torrent is also planning to launch a legal movie download service later this year. Movielink LLC and CinemaNow Inc., the two existing online movie services, have failed to gain traction with consumers or establish strong brands. The studios do not expect significant revenue from online movie sales for a few years until users are able to save downloaded movies to DVD; currently, the studios are planning to allow only streaming downloads that cannot be saved. The proliferation of online movie services and the limited market size will likely lead to aggressive pricing, perhaps even below the cost charged to the distributing web sites by the studios. Web sites will also battle to win customers, assuming they will remain loyal for years once they are signed up with a particular service.
  • Comment on related stocks/ETFs: The only clear winners from the proliferation of competing online movie download sites are the movie studios themselves. The single remaining pure play is Lions Gate Entertainment (NYSE:LGF). Obvious losers are current movie rental firms Netflix Inc. (NASDAQ:NFLX), Blockbuster Inc. (BBI) and Movie Gallery (MOVI). Netflix CEO Reed Hasting's attempt to downplay the potential of movie downloads on his most recent conference call (full transcript here), in particular, looks ridiculous in the context of the information in this article. Investors expect Apple Computer Inc. (NASDAQ:AAPL) to be a major player in this market; the tougher competitive landscape pictured here is therefore incrementally negative for its stock. In contrast, there's considerable pessimism about Amazon's business; if it demonstrates any traction in digital distribution that would be a strong positive for its stock (NASDAQ:AMZN). The same is true for Microsoft Corp. (NASDAQ:MSFT). Related and important: Carl Howe's discussion of Google and Yahoo's testing of online cable TV.