Entertainment Industry Looking Good

Every year, Hollywood puts on its version of the Super Bowl, as the who’s who in the movie industry gathers in Los Angeles for the Oscars to honor the year’s best creative and cinematic achievements in the world of film. Just like the Super Bowl, the hype surrounding this event seems to get bigger and more intense with each passing year.

Fans and the media simply can’t get enough of the Oscars, and with box-office heavyweights such as Tom Hanks, Leonardo DeCaprio and Bradley Cooper all starring in nominated films this year, the show promises to attract another huge set of TV ratings and to clog social media feeds around the world.

Sure, taking home Best Picture or Best Actor might make you a part of film history, but commercially successful movie franchises build a financial empire, which in today’s environment is what movie producers and studio executives care about more than anything. The approach makes sense from a numbers standpoint. At its core, a franchise means a recurring and diversified platform of revenues that emerges from just one concept. From a business standpoint, who wouldn’t want to take one product and maximize revenues in as many ways possible from it?

Perhaps not surprisingly, that’s why most studios wouldn’t spend $200 million to make the next ‘Citizen Kane,’ which many critics believe is the best movie of all time. They do it in hopes of creating the next Mickey Mouse, who continues to generate millions upon millions of dollars in recurring revenue streams for Disney nearly 80 years after the character appeared on screen in ‘Steamboat Willy.’

Meanwhile, this focus on franchises within the movie industry comes as traditional providers of distribution and many broadcasters have also been looking for additional ways to create new revenue streams from original content.

Netflix, knowing that entertainment companies are growing leery of sharing their content with them, has started to produce its own original programming. And initially, at least, the results have been quite promising. As just one example, the critically acclaimed political drama ‘House of Cards’ has been nominated for multiple Emmy and Golden Globe awards and is the most streamed show on the web, according to the company.

At the same time, major television networks are beginning to challenge their industry’s business model, which for decades has meant that the vast majority of their revenues came from advertising dollars. Now, they are increasingly looking to add another layer of income by charging cable and satellite providers carriage fees for the right to transmit their programming. It’s an approach that ESPN and other cable networks have been using for years to widen their margins.

Ultimately, what this all means for the discerning investor looking at the entertainment industry is that content has truly become king. With streaming video giving everyone with a lap top, smartphone or tablet access to multiple distribution channels, creating and owning the rights to it has never been more important.

The following companies may be positioned to take advantage of this new media and entertainment landscape:

CBS – CBS clobbered Time Warner Cable in a carriage fee dispute last summer. The cable provider was no match for the highest rated TV network in America, which has the rights to the National Football League and top-rated shows such as ‘Big Bang Theory,’ ‘NCIS’ and ‘60 Minutes.’ Time Warner Cable took CBS off its airwaves for a month, and lost over 300,000 subscribers, demonstrating the power of great content in the marketplace, specifically the NFL. With CBS striking a deal to air Thursday night games next season, its leverage over the cable and satellite companies has never been greater.

Walt Disney– Disney produces must-have content across a range of genres over numerous company-owned network and cable channels, including ABC, ESPN and The Disney Channel – all of which have elaborate, user-friendly online, mobile and tablet-based offerings. ESPN is by far Disney’s most profitable business entity, having monthly carriage fees of more than $5 per subscriber, easily the highest in the industry. It’s probably only a matter of time before ABC begins to adopt a similar strategy. Importantly, it also owns the rights to the enormously valuable Marvel, Pixar and Lucasfilm titles.

Lions Gate Entertainment– In an industry that is famous for making large bets that don’t always pay off, Lions Gate has an incredible track record of producing high-quality, profitable movie and TV content, including, most recently, ‘The Hunger Games,’ ‘Twilight’ and ‘Mad Men.’ Lions Gate enjoys strong leadership at the top and truly understands the business model better than most, having successfully leveraged its movie, TV and streaming content into enormous profits at a time when many of its competitors have produced flops.

Awards shows are nice, but the entertainment industry has always been about money. That has never been truer than right now. While not every movie will have a Mickey Mouse nor will every TV show be like ‘Seinfeld,’ entertainment companies will continue their aggressive push to create such properties. The stakes are enormous and the payoff is simply too great.

Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki, an independent investment advisory and wealth management firm with approximately $200 million in assets under advisement. Clients and employees may own positions in various companies mentioned in the article, but readers shouldn’t buy anything without doing their own research.