Lions Gate Entertainment Corp. (NYSE: LGF) is an independent film and television producer and distributor. The studio releases about 15 motion pictures every year and has about 12,000 motion picture and television titles in its library, which it distributes on home video/DVD, video-on-demand and pay-per-view, and network and cable television. Its first big success was American Psycho, and the company has since built a reputation for backing films that major studios find too controversial (Fahrenheit 9/11, Requiem for a Dream, Crash, etc.). Notable TV shows produced by LGF include Weeds on Showtime and Mad Men on the AMC network. In fiscal 2010, Lionsgate released 10 motion pictures theatrically and 75 hours of television programming, primarily prime time television series for the cable and broadcast networks.
As an independent studio, Lions Gate is one of two pure plays in the entertainment segment. While many of its major studio competitors are part of large conglomerates with varied sources of income, LGF earns substantially all of its revenue from the production and distribution of motion pictures, making the firm’s business particularly vulnerable to the unpredictability of box office performance. The studio also has to contend with declining movie attendance and digital piracy, both of which have plagued the movie industry over the last decade. Also, the DVD market has matured in the past few years and sales have declined, a trend that adversely impacts studios like LGF. However, there is potential for future growth as next-generation DVD formatting and other digital platforms expand sales opportunities.
Lionsgate's recent box office productions include Tyler Perry's Madea Goes to Jail, My Bloody Valentine 3D, Saw V, Religulous, Forbidden Kingdom, Rambo, and The Bank Job. Lions Gate also produces the television shows Mad Men, Weeds, and Crash, House of Payne, Family Feud and South Park.
Lions Gate holds market share of nearly 7% and boasts the industry's leading box office-to-DVD conversion rate in home entertainment.
The unpredictable nature of the film and TV industry is apparent in LGF’s volatile earnings stream. While revenue has increased fairly steadily over the past few years, net income varies widely.
Fiscal 2010 Results
During fiscal 2010, which ended on March 31, 2010, Lionsgate reported revenue of $1.584 billion and net loss attributable to Lionsgate shareholders of $19.5 million. Revenue increased 8% from the prior year due primarily to increases in television production revenue and new revenue of $113.6 million from the acquisition of TV Guide Network and TVGuide.com which offset declines in the motion picture business driven by fewer theatrical releases.
The company reported record adjusted EBITDA of $128.5 million for fiscal year 2010 compared to adjusted EBITDA of negative $122.9 million for the prior year, a positive swing of more than $250 million. The company also reported EBITDA of $80.1 million for fiscal year 2010 compared to EBITDA of negative $133.6 million in the prior year.
The company's strong performance during the quarter was attributable to gains in its television division, a record library performance, new revenue from TV Guide Network and TV Guide.com and a decline in theatrical and home entertainment marketing and distribution costs.
The motion picture industry is generally comprised of two major business segments: production and distribution. Production consists of the “greenlighting” and financing of motion pictures, as well as the development of the screenplay and the actual filming activities and post-filming editing/post-production process. Lionsgate has historically produced motion pictures with production budgets of $35 million or less, compared to the major studio average of $70.8 million. Films intended for theatrical release are generally budgeted between $5 million and $35 million, and films intended for release directly to video or cable television are generally budgeted between $1 million and $5 million.
LGF often develops films in targeted niche markets where the firm tries to achieve a sustainable competitive advantage; the success of its Saw franchise in the horror genre is a good example.
Successful motion pictures may continue to play in theaters for more than three months following their initial release. Concurrent with their release in the United States, motion pictures are generally released in Canada and may also be released in one or more other foreign markets. After the initial theatrical release, distributors seek to maximize revenues by releasing movies in sequential release date windows, which are generally exclusive against other non-theatrical distribution channels:
|Release Period||Months After Initial Release||Approximate Release Period|
|Theatrical Release||0||0-3 months|
|Home entertainment/DVD/Blu-ray/digital||3-6 months||1-3 months|
|Video on demand||4-8 months||3-4 months|
|Pay television||9-12 months||18 months|
|Network (free and basic)||27-30 months||48-72 months|
In 2010, LGF produced 75 hours of domestic television programming for a variety of networks, including USA, Showtime, AMC, Spike, and ABC Family. The episodes included one-hour and half-hour dramas, mini-series, animated series and reality and non-fiction programming.
In 2008, Lions Gate announced a joint venture called EPIX with Paramount Pictures and MGM to create a premium television channel and video-on-demand service . EPIX has concluded carriage agreements with six distributors, including with Verizon FiOS, Cox Communications, Charter Communications, Inc., Mediacom Communications, the National Cable and Telecommunications Cooperative, and most recently, DISH Network L.L.C., and is now available to consumers in over 30 million homes.
The market for television programming is comprised primarily of the broadcast television networks (such as ABC, CBS, CW, Fox and NBC), pay and basic cable networks (such as AMC, HBO, MTV, Showtime, Starz, TV Guide Network, VH1 and USA Network) and syndicators of first-run programming (such as Sony Pictures Television, CBS Paramount Distribution and ABC Studios) which license programs on a station-by-station basis. Continued growth in the cable and satellite television markets has driven increased demand for nearly all genres of television programming. Key drivers of this increased demand are the success of the cable industry’s bundled services, increased average revenue per user, reduced number of participants discontinuing services and accelerated ad spend growth. Increased capacity for channels on upgraded digital cable systems and satellite television has led to the launch of new networks seeking programming to compete with traditional broadcast networks as well as other existing networks.
DVD and Blu-ray
Home entertainment distribution involves the marketing, promotion and sale and/or lease of DVDs and Blu-ray discs to wholesalers and retailers who then sell or rent the DVDs and Blu-ray discs to consumers for private viewing and through various digital media platforms. The calendar year 2009 marked a year of declined consumer spend for home entertainment. According to the Digital Entertainment Group (the “DEG”), home entertainment spend, including on-demand, declined by about 5% in 2009 to about $20 billion. Generally, weakness in the overall economy has been cited as a primary reason for this decline in spend.
According to a June 2009 FutureSource Consulting report, in 2010, Blu-ray (which has been growing steadily and significantly over the last three years), is projected to achieve replacement value for falling DVD revenue. Additionally, according to the DEG, the number of Blu-ray playback devices in homes increased to 17 million in 2009, up 76% compared to year-end 2008. The continued increase in digital delivery of content is also expected to foster long-term growth of the overall home entertainment business.
For the year ended March 31, 2010, Blu-ray represented over 10% of new theatrical DVD release revenue from new theatrical releases, with some titles representing more than 20%. In fiscal 2010, Lionsgate held an approximately 5% market share of the Blu-ray theatrical feature film market based on revenue, and for 2009, Lionsgate attained a box-office to Blu-ray conversion rate that was nearly 16% higher than the average rate of the major studios.
Lionsgate directly distributes to the rental market through Blockbuster (BBI), Netflix (NFLX), and Rentrak (RENT). In August 2009, Lionsgate also entered in a multi-year distribution agreement with Redbox Automated Retail, LLC, to make certain of titles available at the more than 22,000 Redbox DVD rental locations nationwide. Lionsgate also distributes or sells directly to mass merchandisers, such as Wal-Mart (WMT), K-Mart , Best Buy (BBY), Target (TGT), and Costco Wholesale Corporation. Sales to Wal-Mart (WMT) accounted for approximately 35% of Lionsgate's net home entertainment revenue in fiscal 2010.
Lionsgate also delivers content through a broad spectrum of digital media platforms. The company has digital delivery arrangements for first run theatrical films, television series, its movie library, third party product and product not available on DVD. Distribution outlets include, Apple iTunes, Amazon.com (AMZN), Microsoft Zune/X-BOX, Sony Playstation Network, Netflix, Roxio, Best Buy/CinemaNow, Hulu LLC, YouTube, mSpot, Inc. and Wal-Mart/Vudu. Lionsgate has distributed over 800 films and television episodes through these digital channels. Lionsgate also operates FEARnet, a branded multiplatform programming and content service provider of horror genre films, in connection with partners Comcast (CMCSA) and Sony.
Pay and Free Television Distribution
Lionsgate has over 600 titles in active distribution in the domestic cable, free and pay television markets. Pay television rights include rights granted to cable, direct broadcast satellite and other services paid for by subscribers. Lionsgate sells its library titles and new product to major cable channels such as Showtime, USA Network, FX, Turner Networks, Starz Entertainment, Family Channel, Disney Channel, Cartoon Network and IFC.
Lionsgate also directly distributes to pay-per-view and video-on-demand to cable, satellite and internet providers such as Comcast, Time Warner Inc., Cox Communications, Inc. thru iN Demand L.L.C., Charter Communications, Inc., AT&T Uverse and Verizon FIOS thru Avail-TVN, Cablevision Systems Corp., DirecTV, Inc. and DISH Network L.L.C.
Lionsgate distributes television programming through its subsidiary, Debmar-Mercury.
The DVD market has reached maturation in the last few years, with sales peaking in 2004 and declining every year since. However, Lions Gate benefits from the rise of next-generation DVD formatting, Blu-ray. LGF is part of the Blu-ray consortium and has held a 7% market share of Blu-ray revenue. The studio’s release of 3:10 to Yuma was the second best selling Blu-ray title in that same period. Other technological advances include digital and video-on-demand platforms that provide the potential for endless shelf space and eliminate manufacturing and distribution costs. These new media forms provide further avenues of growth for film studios.
The rising incidence of online piracy poses a growing worry for the movie industry. As more consumers switch to broadband and compression technology continues to shorten movie downloading time, the rate of film piracy looks set to increase. The negative impact on studios is two-fold, as pirated films hurt DVD sales and drive down movie attendance. The Motion Picture Association of America estimates that the industry lost $6.1 billion to piracy).
As an independent studio, Lions Gate is one of two pure plays in the entertainment segment. While many of its major studio competitors are part of large conglomerates with varied sources of income, LGF earns substantially all of its revenue from one source, the release of motion pictures. The success of film releases is very difficult to project, and a movie’s box office performance is often directly related to its performance in ancillary markets such as home video. Lions Gate tries to mitigate these risks by negotiating co-production agreements that provide for cost sharing between it and third-party production companies. The studio also pre-sells certain international distribution rights and offers actors the chance to participate in the financial success of a movie in exchange for reducing up-front payments. Furthermore, Lions Gate has historically produced movies with production budgets of $35M or less, compared to the major studio average of $70.8M. Most of the studio's productions have budgets of $20M or less.
Lions Gate, being a pure play in entertainment, and because of the nature of the business is based more on creative performance greatly more than operational performance, portfolios that incorporate this security often disregard its beta and correlation. There are no comparisons to which to form an accurate beta. For this reason, portfolios that are is not using entertainment strategically will buy this security to add risk, which, if a portfolio finds itself on the lower left side of the frontier line or not on the frontier line of efficiency, which might be more profitable without increasing risk. This point is the intersection of the capital market line and the portfolios efficiency frontier line.
As more and more people turn to alternatives like DVDs, television and online video, movie attendance has stagnated. Memorial Day is traditionally one of the busiest times of the year for movie attendance, but 2010 saw a 17 year low for movie attendance over Memorial Day weekend. Overall revenues for the top-50 films during the four-day holiday weekend came in at $192 million, the lowest since 2001. Factoring in higher admission prices, about 24.2 million tickets were sold, the least since a 22.5 million head count in 1993. According to Paul Dergarabedian, box-office analyst, "When you have a Memorial Day weekend down this much, it just tells me the movies in the marketplace are just not grabbing people the way they have in past years." Domestic revenues over Memorial Day weekend last year came in at $221.3 million for the top-50 films, with movie attendance at 30.1 million. Memorial Day weekend attendance reached a modern peak of 39.6 million in 2004, when "Shrek 2" was in theaters.
Lions Gate competes with both major studios (Paramount, Sony Entertainment, Warner Bros, Universal) and smaller studios like Dreamworks Animation SKG (DWA) and the Weinstein Company. Along with DreamWorks, LGF is one of two pure plays in the entertainment segment. While many of the other major studios are part of large conglomerates with varied sources of income, LGF earns substantially all of its revenue from the release of motion pictures.
|Company||Revenue (millions USD)||Operating Income (millions USD)||Net Income (millions USD)||Home Entertainment Sales (millions USD)||Box Office Sales (millions USD)|
|DreamWorks Animation SKG (DWA)||$767||$291||$218|
|20th Century Fox||$6,734||$1,225|
|Walt Disney Pictures||$7,491||$1,201|
Many major studio competitors are part of conglomerates that do not report as many segment metrics
The following chart shows domestic studio market share by gross revenue. Total gross revenue in that year was ~$9.7B for the industry as a whole.
|6||20th Century Fox||10.5%|