Analyst Forecasts Continued Home Entertainment Revenue Declines

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Nomura’s Michael Nathanson expects a drop at a compound annual rate of 5.4 percent over the next three years. ?

NEW YORK – Nomura analyst Michael Nathanson on Friday predicted that U.S. home entertainment revenue will drop at a compound annual rate of 5.4 percent over the next three years despite recent data that suggests a slowing decline. ?

In 2011, according to the trade group Digital Entertainment Group U.S. consumer spending on home entertainment products fell by only 2.1 percent. Commented Nathanson: “On the surface, the home entertainment industry looks better.” After all, the 2011 figure is “a nice improvement from the 5 percent decline in 2010 and a sign that consumer spending may be close to turning positive after seven consecutive years of decline,” he wrote.

He also cited some positive industry initiatives. Studios have tried to strengthen home entertainment trends via premium VOD, early electronic sell-through ahead of the physical sell-through dates and later rental windows along with the promotion of UltraViolet, the analyst highlighted.

“That said, our analysis of the DEG numbers, unfortunately, paints a picture of a world that is still in structural decline,” Nathanson said. “A major contributor to home entertainment industry growth in 2011 was “subscription streaming” revenues from the likes of Netflix and Hulu which, we think, increased by almost 500 percent as Netflix created, with much negative fanfare, a stand-alone streaming subscription model.”

Most of this content is sourced via syndication deals with broadcasters, cable networks and some film studios though, and the method of payment is a monthly subscription, he pointed out. “Thus, to us, we do not think that streaming revenues should be totaled up with traditional home entertainment dollars as the dollars flow in as syndication money from corporate clients,” Nathanson argued.?

Taking the streaming revenue out of the DEG numbers, 2011 home entertainment revenue fell 6.6 percent to $17.05 billion, he highlighted. Added Nathanson: “There is little evidence that the emergence of higher margin Electronic and Blu-ray sell through products has stemmed the drop in the dollar value per home video transaction.”

For the overall industry, he forecasts a 4.3 percent home entertainment revenue decline excluding streaming in 2012, followed by a 4.8 percent drop in 2013 and a 5.6 percent decrease in 2014 to $14.65 billion.

At the companies he covers, home entertainment revenue exposure ranges from the low double digits at Time Warner to the mid to high single digits at Disney, Viacom and News Corp. Nathanson’s conclusion: “We continue to believe investors should be cautious in modeling future growth for studio’s film divisions – especially against strong content cycles.”


Twitter: @georgszalai