Analyst: 'Stop Worrying About DVD' Sluggishness

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Susquehanna's Vasily Karasyov says what really drives studios' profits are costs and risk, and he likes the consistency of Time Warner's and News Corp.'s film units.

NEW YORK - Susquehanna Financial Group analyst Vasily Karasyov on Tuesday had some contrarian advice for entertainment industry investors.

"Stop Worrying About DVD: It Doesn't Drive Studios' Profits; Costs and Risk Do," he said in the title of a report detailing the continued decline in home video trends in the fourth quarter.
His conclusion: "Our analysis shows that the importance of DVD sales for film studios’ profitability is often overestimated."

Karasyov estimated that aggregate operating cash flows for Hollywood conglomerates' major film studios "increased slightly in the last five years, even as the U.S. home entertainment market declined by $3.6 billion since the DVD business peaked in 2006."

He suggested that this is due to the "relatively high costs associated with the DVD revenue stream, a factor often overlooked." Controlling the downside risk of a film release slate is "the single most important driver of consistent profitability at a film studio," he argued.

As a result, Karasyov suggested that investors favor studios with more consistent earnings.

News Corp.'s 20th Century Fox and Time Warner's Warner Bros. are "the most consistently profitable studios over the past decade in our universe," the analyst highlighted.

Meanwhile, Walt Disney has the biggest downside risk to his operating profit estimate for its studio, he suggested. "In addition to a large bet on John Carter (reported $250 million production cost), unlike News Corp. and Time Warner, Disney does not have a large-scale TV production operation, which would generate an annuity-like revenue stream," Karasyov said.


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