'Digital good for media' says TW CEO Bewkes

Investors told piracy threat 'seems to be stabilized'

NEW YORK -- "Digital is good for media," if managed well, Time Warner chairman and CEO Jeff Bewkes said here Thursday in opening the conglomerates' first investor day in years.

Speaking at the Time Warner Center in midtown Manhattan, he also argued that the piracy threat in the film business "seems to be stabilized" thanks to global regulatory progress and new and attractive content offers. "It's a very different outlook than a few years ago," he concluded.

Overall, TW's businesses are not hurting badly from piracy, he assured Wall Street folks. "Film and TV and magazines aren't the music business," Bewkes told a crowded conference room full of investors and analysts.

The CEO once again reiterated that TW wants to marry creative and financial success by being "the leading global content company," while also delivering "superior" returns to stockholders.

Bewkes and CFO John Martin highlighted the strong double-digit returns on invested capital at TW's film and TV units last year, when excluding goodwill adjustments, calling them evidence that management is running its content businesses better than others in the industry.

TW's pure content focus is helping on the financial front as "content is going up" in the digital age, Bewkes argued.

Concerns that digital hurts the media and entertainment business usually revolve around media usage and economics, the TW boss highlighted before arguing neither should be an investor concern for his company.

"Usage is up in all our businesses," Bewkes said, citing growth in film transactions, as well as TV and magazine usage across various platforms.

TW's focus on hits and franchises helps in the digital age, which Bewkes said boosts hits further in what he called an "uber-watercooler effect."

In terms of economics, "digital is good," Bewkes said, citing more and better ways for people to consume content, greater flexibility for companies in pricing and windowing, "dramatically" lower distribution costs and the ability to build direct relationships with consumers.

So what are possible risks for TW in the digital age? Bewkes cited and debunked three.

First, TW could choose a bad business model. "We're not gonna do the first," Bewkes said.

Second, TW could be forced into a less profitable business model. With piracy stabilized and having a limited impact on TW, Bewkes once again said he feels in a good position.

Third, could another party, such as a digital distributor, force the company into a less profitable business model?

Bewkes argued against it.

Here some other early highlights from TW's investor day:

* The cover of the information folder handed out to attendees of TW's investor day featured photos of some of the conglomerate's key content brands -- from Conan O'Brien, who will launch his TBS late-night show in November, and George Lopez to "The Hangover," "Sex and The City 2," "Big Bang Theory," "The Pacific," "True Blood" and "Entourage."

* CFO John Martin said TW will spend more on content production this year -- more than $7 billion -- as it shifts capital from overhead to content.

* Martin highlighted TW's return on invested capital, showing off figures for 2009 that have not been shared with Wall Street before.

TW's overall ROIC came in at 6%, or 19% when excluding purchase price adjustments (PPA) that have been a drag on the company since the AOL merger.

TV networks ROIC amounted to 7%, or 29% excluding PPA, film ROIC to 6% or 19%, and magazine unit ROIC to 4%, or 6%.
Martin particularly highlighted the film number as evidence that while many see Hollywood as a hit-and-miss business, TW has run its studio with continuing success and increasing returns.

* Bewkes said decisions about digital businesses must focus on financial returns and not giving away valuable content for free.

Mentioning that TW didn't become part of online video joint venture Hulu, he said: "I'm glad we did not."

* Discussing possible acquisitions, Martin reiterated that TW plans no transformative deals, but is open to additions in key businesses, such as film, cable networks and video gaming. As the company has no strategic holes to fit, it can be "purely opportunistic," he said.

* Management said the TV eco-system (its networks and TV production unit) provide 80% of TW's profits.

* Turner chairman and CEO Phil Kent highlighted why original series, sports and news are all good business for the TW TV networks unit.

Originals garner double the ad rates of licensed series and boost ratings.

At TNT, that boost amounts to 45%, and at TBS to 31%, he said.

"Sports are key to our strategy," he said, citing their importance for both TV and digital offers.

News adjusted operating income amount to about $500 million in 2009, Kent told the audience. That means a compound annual growth rate of 23% for 2003-2009.

Total Turner adjusted operating income hit $2.3 billion in 2009, with compound annual growth of 12% for 2000-2009.

Kent addressed CNN's competition with Fox News, touting CNN's "unsurpassed" average monthly reach of 66.9 million, compared with Fox News' 57.7 million and MSNBC's 50.6 million, according to Nielsen Media Research.

CNN's viewers are also more affluent, and it gets more exclusive viewers, he said.

But Kent did acknowledge that CNN's 14 minutes average viewing time is below Fox News' 24 minutes and that the latter gets people to tune in more often.

-- HBO chairman and CEO Bill Nelson also highlighted the financial strength of his pay TV unit and its strong brand.

HBO made a profit of $1.2 billion in 2009, making for a 10% compound annual growth rate since 2000, according to Nelson.

He also showed a slide comparing HBO's 2009 profit to $400 million for CBS Corp.'s Showtime and $300 million for Liberty Media's Starz.

Nelson also highlighted that Cinemax is a strong number two to HBO in pay TV with the former having more subscribers than ever before.

Cinemax's 12 million subs combine with HBO's 29 million for a total of 41 million. That compares to Showtime's 18 million and Starz's 17 million, according to a slide that Nelson showed.

Nelson also addressed HBO's content revenue trends, predicting an upturn in the coming years after recent declines.

After $700 million in content revenue in 2007, buoyed by "Sopranos" and "Sex and the City," it fell to $600 million in 2008 and $500 million in 2009, one of his slides showed.

Nelson cited "True Blood," "Treme," "The Pacific," "Boardwalk Empire" and "Big Love" as key shows that should help an uptick in the coming years.

He also cited increases in original content hours from 45 in 2008 and 57 in 2009 to 75 this year and in original episodes from 54 to 85 and 96, respectively.



-- One theme that TW top executives kept mentioning all day was continued international expansion and diversification as a financial growth opportunity.

-- Meyer started his presentation Thursday afternoon with jokes about how critics have called the film, TV and DVD business a risky gamble. He showed pictures of a fortune teller, a roulette wheel and a pair of dice for a tongue-in-cheek moment before reiterating Bewkes' argument that Warner isn't gambling.

Or, as Meyer put it, it is not "just about dumb luck." If investors are still not convinced after his presentation, "I'll come back again in five years and try to prove again that we are not," he quipped. He later also said: "We make our own luck."

As proof, Meyer went on to highlight that Warner's $1.48 billion in 2009 adjusted operating income before depreciation and amortization gave it a steady 9% compound annual growth rate for 2000-2009 and made it the most profitable studio.

News Corp.'s film division reported $1.27 billion for 2009, Disney $548 million, Viacom's Paramount $337 million and Sony $325 million, according to his presentation.

Except for "an occasional blip," Warner Bros. has grown steadily and consistently thanks to planning and clear strategic plans, Meyer summarized, even though he joked that "we are not above dropping to our knees and praying for a hit," if it ever becomes necessary.

And as key new growth drivers for Warners, he highlighted: its event film strategy (citing SNL Kagan data showing that tentpole films tend to be more profitable than smaller ones), the digital transition, 3D, DC Entertainment, video games, "robust end markets for TV production" and international local TV production, as well as closing the licensing gap.

-- Meyer also touted that TV library titles produced by Warners were "the library that keeps on giving."

First case in point: "Seinfeld." The show made $598 million in off-network first cycle revenue, $984 million in the off-network second cycle and $703 million in the third. The cable first cycle brought in $180 million, followed by $113 million in the second and $86 million in the third. That made for a total of $2.67 billion revenue for the eight seasons and 180 episodes of the show, including $2.07 billion after the first cycle (or 346% of the first cycle.

Second case in point: "The Fresh Prince of Bel-Air." The show made $127 million in off-network first cycle revenue, $54 million in the second and $21 million in the third and $5 million in the fourth. On cable, the series made $24 million in the first cycle, $27 million in the second and $30 million in the third. The total haul: $288 million, including $161 million after the first cycle (or 127% of the first cycle).

Meyer also signaled that TW has no plans to sell its stake in the CW network, calling it "a strategic asset" even though it isn't profitable on its own.

-- Meyer also predicted that the shift to Blu-ray discs, 3D and digital distribution will boost home entertainment profits.

He showed a slide projecting $53 in U.S. home entertainment profits per $100 U.S. boxoffice for a new release in 2012, including $30 in physical and $23 in digital dollars. That compares to $37 plus $11 in 2009 (for a total of $48) and $45 plus $6 (total $51) in 2006.

Meyer said Warner wants to lead the industry on 3D in the home via Blu-ray, promising 3D re-issues of all "Potter" films and other key franchises.

Finally, Meyer touted Warner Bros.' growing video games revenue, which amounted to $510 million in 2009, up from $485 million in 2008 and $100 million in 2007.

-- Time Inc. chairman and CEO Ann Moore earlier in the day touted the stability and strength of her magazine unit despite widespread concerns about the future of print media. "Magazines are not newspapers," she told the audience and went through some trivia questions about magazine trends to prove her point.

-- In an end-of-the-day Q&A with the TW top executives who spoke during the investor day, Bewkes was asked whether the various units could work together more closely in the future. He argued that there is already more coordination and interaction than at most peers.

"Our networks buy more from Warner," and Warner sells more programming to them, he said.

And Turner and Time Inc. will shortly start collaborating more closely on sports, he added.

"There is a natural affinity there" that the two units are exploring more closely now, Meyer said about the relationship and opportunities to collaborate for Warner Bros. and Turner. "But in my opinion, we are only at the beginning." He cited the bad reputation that the former AOL TW had for being too siloed.

Meyer was also asked about plans to bring current release films directly to TV screens after a recent FCC decision that opened the door to such an offer.

"We don't know how big it can be," Meyer said, but called it "a good opportunity" due to expected consumer demand. "Everybody is looking at this quite carefully."

He highlighted that Warner is "very aware of all partners," including theater operators, which are wondering how the theatrical window would be affected. "We are very aware of that as a company and an industry," Meyer said.

He didn't commit to where the current releases-to-TV window would start. Highlighting that most theatrical revenue comes in within the first month, he said that no one is currently seriously thinking about interfering with that.
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