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After Falling for Years, Spending on Home Video Is Finally Stabilizing

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Good content has always been good business. This remains the case in home video now that fallout from the popped DVD bubble has stabilized.

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Somewhat lost in all the talk about over-the-top content, TV Everywhere, cord cutting, and the health of the scatter market for advertising, home video spending stabilized in 2012. After falling precipitously for several years, The Digital Entertainment Group reported that spending on home video was unchanged in 2012 after a slight fall of 1.5% in the fourth quarter. With annual spending of $18 billion, this is a material improvement for entertainment companies who produce the content that is sold and rented in the home video market.

Two things appear to be happening. First, digital revenue is growing strongly, up in the mid-20% range. Second, rental spending continues to grow, up mid-single digits. Together, these factors offset a mid-single digit decline for sell-through. Also helping sell-through limit its decline is the double-digit growth in Blu-ray. To the extent consumers are buying DVDs, Blu-ray finally seems to have caught on.

Content suppliers still face challenges as lower margin rental is an overall share gainer relative to higher margin sell-through. However, even here there is good news: Within sell-through, higher margin areas like Blu-ray, electronic sell-through, and VOD are gaining share.

Sunday night's Golden Globes were a reminder that 2012 was a great year for film and TV. Box office set records, the Globes telecast set a recent ratings record, and a variety of popular TV shows across broadcast, cable, and pay TV networks were nominated. Consumers are voting with their eyeballs and consuming more theatrical releases, buying more pay TV networks, and sustaining a very high level of TV viewing in the home -- and all of this despite increasing entertainment options including watching movies and TV shows online via services like Netflix (NASDAQ:NFLX) and Amazon Prime (NASDAQ:AMZN).

Many critics have noted that TV is in a renaissance period with production of high quality shows across cable, broadcast, and pay TV networks at an all-time high. At the same time, domestic box office has set new records in two of the last three years, while international box office has grown steadily to new records every year. Monetizing this has been a little tricky in the home video market over the last few years as the sell-through boom peaked and crashed.

Flat growth is nothing to get too excited about. However, if the 2012 content success is sustained in 2013 and home video is again around the flat line, a stiff headwind for the entertainment companies will have softened. For the big film and TV studios at Time Warner (NYSE:TWX), News Corporation (NASDAQ:NWSA), Disney (NYSE:DIS), CBS (NYSE:CBS), Comcast (NASDAQ:CMCSA)/NBC Universal, and Lions Gate Entertainment (NYSE:LGF), the improvement is meaningful and can provide a boost to financial results via better comparisons.

The stabilization of home video is not getting anywhere near the attention from Wall Street and the mainstream media that the collapse of sell-through received. Nevertheless, it is a nice positive for the industry and should continue to provide a small but real boost to the stocks of the studio owners.

CBS is widely held by clients of Northlake Capital Management, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Filings can be found at www.sec.gov. CBS, Comcast, Lions Gate Entertainment, and News Corporation are net long positions in the Entermedia Funds. Steve is the portfolio manager of the Entermedia Funds, owns a majority stake in the Funds investment management company, and has personal monies invested in the Funds.

This column was previously published by SNL Kagan on www.snl.com.
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No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

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