Warning shots fired from movie heavyweights on future of industry

DreamWorks Animation (DWA) CEO Jeffery Katzenberg fired out a warning to the movie industry during his talk at the Milliken Global Conference in Beverly Hills last week.

“Movies are not a growth business,” exclaimed the exec who cut his teeth on the medium.

Katzenberg sees a future where movies play for a short period of three weeks at theaters for $15.00 - followed by a run on TV at $4.99 and smartphones at $1.99. The forecast doesn't bode well for theater operators and associated businesses.

DreamWorks plans increasing its focus on shortform (digital and TV) in response.

Liberty Media (LMCA) CEO Greg Maffei also cautioned at the conference of a seismic change in the media industry as "clutter" from video games and social media crowds out traditional entertainment channels.

Movie studio stocks: DIS, LGF, SNE, VIAB, TWX, FOXA, VIA, CMCSA

Movie exhibitor/equipment stocks: CKEC, CNK, RGC, MCS, RDI, AMC, IMAX, DCIN

Related ETF: PBS

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Comments (23)
  • 13586892
    , contributor
    Comments (14) | Send Message
    My question is,
    Why can't DIS buy DWA? They are only worth 2.1 billions.
    I would really like see spin-off's of some of DWA movie characters!
    4 May 2014, 10:21 AM Reply Like
  • 1 of 4
    , contributor
    Comments (125) | Send Message
    Why would DIS buy DWA when they've already got PIXAR and Disney Animation Studios?
    4 May 2014, 11:50 AM Reply Like
  • LYogi
    , contributor
    Comments (3161) | Send Message
    I think Katzenberg is spot on in his analysis.
    4 May 2014, 10:23 AM Reply Like
  • SoldHigh
    , contributor
    Comments (991) | Send Message
    Many wait for the movie release on DVD/Bluray. Rent it for a night (or stream), give it back, perfect.
    4 May 2014, 11:18 AM Reply Like
  • synchrogeddon
    , contributor
    Comments (392) | Send Message
    Even more wait for torrent release.
    4 May 2014, 11:21 AM Reply Like
  • Stock Market Mike
    , contributor
    Comments (3652) | Send Message
    Torrents usually show up before the actual air date. That leads me to suspect the studios are making the best of a bad situation. There are people that simply will not pay for anything - they would happily go without rather than give these studios a dime. But the stragglers coming in later and downloading BD Rips are likely not part of that group, and may be convertible to Netflix/Streaming/Renting with sufficient pressure. As for the ones that simply won't pay a dime - you leak the show at crappy quality. If it's a good show, they won't care, and they'll be converted into word of mouth advertisers.


    It's a fact that the most pirated movies and TV shows have the most profitable launches and the most viewers... studies suggest a pirated view could be worth upwards of $0.10 due to word of mouth advertising that results in someone paying for it.


    These are big companies, and they look at the data from many angles and crunch the numbers. Don't believe me? Just examine Microsoft, a company very open about how they look at piracy in China... they'd rather have a $0 sale than lose a slot to Linux or some other software, so even though less than 5% of their software is properly licensed in that country, they're making the best of a bad situation.


    Of course, that won't stop the studios from suing you if you break the law. That's another avenue of monetization, and falls under the category of 'exerting pressure to encourage paid viewings'. ;)


    4 May 2014, 01:49 PM Reply Like
  • OPie415
    , contributor
    Comments (183) | Send Message
    Torrents aren't hurting the industry. The movie industry looks there to make excuses for a crappy overall product with shady bookkeeping
    4 May 2014, 03:28 PM Reply Like
  • blah64
    , contributor
    Comments (83) | Send Message
    Its about time somebody in the business spoke the truth. I for one am glad the theaters are going bust. Costs are too high I.e admission, snacks and scripts or stories are uninspiring.
    4 May 2014, 11:22 AM Reply Like
  • wigit5
    , contributor
    Comments (4365) | Send Message
    the theater industry is broken, and consumers are less and less willing to put up with it...


    the only theater I really feel like I get my money's worth is the CineBistro I used to go to in Richmond,VA. You can drink, get dinner/lunch (food is amazing and not overpriced), and the entire place is high end, plush seating, clean everything...
    4 May 2014, 11:31 AM Reply Like
  • zorrow
    , contributor
    Comments (2649) | Send Message
    Why should premium content be discounted to schlock prices? seems to me like Disney and LionsGate and companies that control sports and quality content could raise prices--while "reality" shows and other social media crap can be marketed at a dime an episode. Of course, nmy thesis depends on rigorous enforcement of copyrights.
    4 May 2014, 11:49 AM Reply Like
  • 1 of 4
    , contributor
    Comments (125) | Send Message
    In the aggregrate, the domestic theatrical release is a loss leader. Having financed or looked at the financing of slates of pictures for every major studio, I've seen the numbers. JK is correct in that 95% of theatrical revenue is realized in the first 3 weeks. The theatrical release is nothing more than an advertising vehicle for the subsequent revenue windows. Where JK is wrong is that the theatrical releasing costs are so high that in the future, only the largest budget, high concept, films will receive a theatrical release. We're already seeing that with the studios focusing on so-called tentpole films based on characters with known awareness value. The real future is for the guy who can figure out how to achieve the same level of revenues (as a theatrical release) in subsequent distribution windows for all the non-tentpole type films. Someone who can consistently cook up viral internet campaigns that drive successful streaming releases will make an awful lot of money. Disclosure: used to be an entertainment industry banker, but no longer as I saw the no growth in the industry and risks it posed to prospective financings going across my desk.
    4 May 2014, 12:00 PM Reply Like
  • Stock Market Mike
    , contributor
    Comments (3652) | Send Message
    The movie industry will be dead as soon as a scientist creates a device that can generate images and audio based on what you are thinking. (AKA a mind reading device.) Then any teenager with nothing to do after school will be able to generate a movie like Avatar, with expenses totalling a bag of burritos. I suspect this will flood the internet with utter garbage, but will empower certain authors, writers, and visionary young people (less than 1%? ;) ) to create incredible works of art and entertainment, far beyond what we currently enjoy.


    Since the cost of a movie will be measured in the hundreds of dollars, I am not sure what this will do to the industry and to advertising in general. I do however suspect that many highly paid people will be out of work.


    There will always be flesh and blood theatre, though! Back to the roots, as big industry crumbles under pressure from disruptive innovation. I'm sure they'll fight it as hard as the icebox/celler guys fought refrigeration. But technology always moves forward - you can only fight it so long - and eventually it'll lead to job destruction. (AKA 100 people doing the work that took 10,000 before - we've observed it a hundred times across different industries... if you don't think it'll happen again, you're deluding yourself.)


    All this has nothing to do with whether they are good investments/trades today - but they're definitely not something to put away in your IRA for the next 40 years.


    4 May 2014, 02:04 PM Reply Like
  • User 6316741
    , contributor
    Comment (1) | Send Message
    Movies are doing just fine, Jeffrey. Maybe your studio should strive to put out some decent ones that audiences will pay to see. Now theater stocks are a different story.
    4 May 2014, 12:01 PM Reply Like
  • ODJennings
    , contributor
    Comments (27) | Send Message
    Is that bad news for the studios or the theater chains? Parents will still let their kids watch Frozen 16, it just won't happen at an AMC theater.


    If anything, once the $8 a box popcorn bandits are out of the picture, the Disneys and Dreamworks will have more control over their distribution and be able to keep a larger percentage of the revenue. Even if the revenue is smaller, they should still do OK.
    4 May 2014, 12:01 PM Reply Like
  • Brice Mckalip
    , contributor
    Comments (197) | Send Message
    $4.99 for the home version? How about $50 but I get it the same night as the theatrical release? Then I can get it with all the non-$8 popcorn and beer I want, at the time I want, and can hit pause if the kids want help with their homework. It'd be worth every penny, and then some if the convenience convinces my wife to join me for the next Bond movie.
    4 May 2014, 05:20 PM Reply Like
  • getreal10000
    , contributor
    Comments (250) | Send Message
    So cuts costs to make movies, beginning with superstars' mega salaries. They should have no problem with this, seeing as they regularly advocate for the rest of us to sacrifice financially for the greater good. Our president, who most of them support, said "at a certain point you've made enough money."
    4 May 2014, 12:45 PM Reply Like
  • Lord Baltimore
    , contributor
    Comments (187) | Send Message
    I think it is interesting that the two CEOs questioning the film business are (1) relatively small in terms of # of releases (DWA) and (2) in the distribution business (LMCA). To add some balance here is what Jeff Bewkes had to say about Katzenberg's comment about movies not being a growth business:


    "Well, maybe it's for him. He doesn't make very many movies. We've been doing fine in movies. And let's just put some context on. So 2013 for Warner Bros was a record year domestically. We had a very strong slate. We were number one in the box office. I think 2014 was off to a strong start, it's up about 7% in the first quarter.


    And we also see continued growth overseas, which has become a bigger driver of our business. International demand on theatrical side is particularly strong for the kinds of the best films that we produce." (excerpt from SeekingAlpha's TWX Q1 transcript)


    International remains a growth driver for the film business, especially China & Latam (Russia was too but we'll see if that changes post-Crimea/Ukraine). Home entertainment has been down the past five years but is finally in a position to turn up as digital demand is now big enough and growing fast enough to eclipse the declines in physical DVD. I do agree with "1 of 4"s comments above and Maffei is correct that really great content (whether it be video games or films or whatever) competes with each other for consumer's time and money, but that isn't terribly new and there is often synergy between vid games and film (video game revenues are often a downstream source of revenue for a major film) and social media is often a promotional vehicle for film (whether virally or through paid social campaigns).


    I think DWA's situation is quite different from Warners (or Disneys) and extrapolating one CEO's comments to the entire industry is bad analysis. If DWA bails on film production that is probably a positive for TWX and DIS as there will be two or three less animated films each year to compete with theatrically (and in all the downstream channels). I am Long TWX and LGF.
    4 May 2014, 01:09 PM Reply Like
  • ECapo
    , contributor
    Comments (735) | Send Message
    This guy is right about the future. There is too much mass media and access now and the newer generations are too busy. Jeffreys warning shots are right on the spot.
    4 May 2014, 03:53 PM Reply Like
  • SafisKusai
    , contributor
    Comments (255) | Send Message
    I manage at a small town independent movie theater. I can honestly tell you, that Katzenberg is lost in this opinion of his. For one thing Dreamworks animation puts out usually 2 movie releases a year if that. Second Dreamworks doesn't distribute any of its own movies. 40% of sales go to theater operators and then on top of that Katzenberg has to split the 60 with a rival production company. He is nuts if he thinks the way he is doing it could ever be a growth industry. The other major distributors have been doing fantastic the past few years, and the last 5 years have been amazing for the industry as a whole. We have seen new players join the fray as well like Open Road (joint venture that AMC is a part of), Summit Entertainment joined the fray in 1997 with film financing and became a player in the past few years and was bought by Lionsgate, and Relativity Media has shown that it can compete with the majors when it was founded in 2004.


    At a small movie theater three weeks is all that matters. While larger chains will keep movies for longer because they can, that doesnt necessarily mean its the most profitable thing. Most contracts for movies with theater operators only last 3 to 4 weeks and for most movies a movie will only last for 1-2 before the attendance numbers are barren.


    Problems with torrents are largely a distributor and marketing problem. For example there are camera versions of the new film Neighbors that is supposed to release next week that are already all over the internet. It seems suspect to me that a movie that isnt even released anywhere yet would already have a camera version out, the only screenings have been premiers and critic screenings which seems like there is a lack of internal controls. Not to mention staggered worldwide openings begs for piracy.


    As for theater chain owners, I think most of business depends on what value you can offer to the customer and the customer service you can give, which is largely a location to location issue as well as dependent on your cost controls. Even with huge home theater systems lots of people want to get out of the house and feel like they are treating themselves to large formats and the theater experience.
    4 May 2014, 11:29 PM Reply Like
  • 1 of 4
    , contributor
    Comments (125) | Send Message
    I passed on the original debt financing for DreamWorks SKG, because nowhere in their business plan did they show themselves building a distribution system. Other than a film library and a vehicle for some rich boys to make content, they were building nothing. The Sr. Lenders got repaid, so I was wrong there, but DreamWorks SKG did not survive. I later financed Paramount's acquisition of the DreamWorks Film library, but that was known assets with a fairly estimatable future cash flow.


    BTW the Studios typical net 45% to 47% from theatrical distribution. The real pain in theatrical distribution is the Print & Adverstising (P&A) cost and the fact that each film is essentially a new capital investment in something with unknown market appeal. It's why studios release a slate of films each year. 2 out of 10 carry the rest.


    I spent 15 years and deployed close to $5 billion of Sr. Debt financing many of the films you'd see every weekend. The business has a constant need for capital, which is good if your a financier. The negative comes when your financing structures start relying on revenues 7 to 10 years out from markets that may or may not be there. Just ask TPG about their investment in MGM.
    6 May 2014, 12:03 AM Reply Like
  • 1 of 4
    , contributor
    Comments (125) | Send Message
    BTW the hedge fund Elliott Capital Management invested a reported $1.1 billion with Relativity Media which was releasing its pictures through Universal. My sources indicate Relativity lost close to $700 million for Elliott which sold it's equity stake to Ron Burkle's Yucaipa. Apparently, Ron Burkle is Ryan Kavanaugh's next sucker.
    13 May 2014, 12:34 AM Reply Like
  • jrpan2
    , contributor
    Comments (54) | Send Message
    I heard some Drive-in-Theaters are coming back so the middle class folks can take their kids to movies at a reasonable price...I hope it happens! I had such fun as a kid going to a Drive-in. Good investing!
    4 May 2014, 11:59 PM Reply Like
  • DavidHart
    , contributor
    Comments (41) | Send Message
    It's always fun reading comments from a movie studio head that puts out very few movies and isn't even close to being in the thick of things. If they want to produce animated shorts for Netflix and/or Microsoft then more power to them. However, I personally don't believe that he has the vision or understanding to predict where the industry is going.


    It's possible that, in 10 years time, movies will no longer be a growth industry. However, as portable devices get better, wireless becomes cheaper, and connectivity increases between various devices I believe that we will see even more content distribution, increasing movie revenues.


    As for the traditional movie theater, I believe that it will survive. But, as most people have mentioned, the experience may change from pure sit down entertainment to more of an event, with dining and other services thrown in.
    6 May 2014, 04:54 PM Reply Like
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