Content Is Not King, Says Analyst

Written by Ryan Lawler

Monday, July 7. 2008 at 05:45 PM EDT 2 comments

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Lehman Brothers analyst Anthony DiClemente issued a downright bearish and depressing report today saying that the advent of digital distribution could crush TV and movie companies.

DiClemente posits that "content may no longer be king," in the face of technological changes that are driving media distribution online. He writes that film and TV businesses are "on the verge of structural changes that appear destined to impact the core revenue and profits of Entertainment business models."

Due to these technological shifts, DiClemente lowered the sector rating to 3-Negative from 2-Neutral. At the same time, the analyst lowered ratings at Walt Disney Co. (NYSE: DIS), News Corp. (NYSE: NWS), Time Warner Inc. (NYSE: TWX), and CBS Corp. (NYSE: CBS), and lowered the price target of Viacom Inc. (NYSE: VIA).

DiClemente notes that so far, the effect of digital distribution has been relatively small, with DVD sales and rentals falling "only" about 5 percent year-over-year from 2007. But the analyst believes that in the coming years, an accelerated decline for DVD sales is "more likely than not."

What's more, the digital business is nascent enough that it is unlikely to make up for lost packaged media sales in the short term. DiClemente writes:

When we analyze the movie business, we simply have not seen enough evidence that suggests that monetization of digital media can be profitable enough quickly enough to outpace the speed of decline in revenue/profits from traditional forms of media delivery such as ad-supported TV/radio broadcasting and packaged media (i.e., DVD sales).

That's bad news for content owners, particularly large content owners. There's even worse news, though. DiClemente posits that audio and video content is becoming commoditized, and that the entertainment landscape may be flattening or "fragmenting."

As a result, DiClemente writes that "being a mainstream Entertainment content creator and producer may not be as profitable in the long term as it once was for the six largest players in the traditional Hollywood oligopoly."