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Can Social Gaming Save The Media Industry?

Posted on Friday, Jul 31st 2009

Media companies are in for an expected bad run. Advertising spending is down as much as 11% in the US alone, and is not expected to recover to pre-recession levels when the economy improves. Additionally, the market for content services and DVDs continues to be depressed, with consumer spending falling 4% during the quarter. I believe it is time more media players focused their energies on one segment that is booming – social gaming.

Viacom’s (NASDAQ:VIA) Q2 revenues of $3.3 billion fell 14% over the year compared to the market’s expected $3.5 billion. EPS of $0.49 was a cent higher than the market’s expected $0.48 but declined 23% over the year despite cost-cutting measures, which are expected to save the company nearly $200 million a year.

By segment, Media revenues fell 8% over the year to $2 billion with domestic revenues falling 3% and international revenues falling 32%. Within Media, domestic advertising revenues fell 6% over the year and international advertising revenues declined 27%. Ancillary revenues declined 41% over the year, primarily driven by lower Rock Band and consumer product sales.

Worldwide Home Entertainment revenues fell 29%, an indicator of the depressed DVD market, and the Filmed Entertainment division’s revenues fell 22% to $1.4 billion as Viacom’s new releases during the quarter were not as successful as the previous year’s releases.

But the picture was not all gloomy. Viacom announced a distribution agreement with Verizon for the former’s new pay TV movie channel, Epix. Epix is a multi-platform channel positioned to compete with Time Warner’s HBO and CBS’ Showtime. Though the financials of the deal were not announced, come October, Verizon will be allowed to carry Epix on their FiOS service and offer the channel on different platforms, including mobile phones. FiOS is one of the fastest-growing distribution platforms in the US which allows users to access anywhere, any time.

Viacom is also continuing to take the right steps with their online business. They streamed more than 1 billion videos in the US in the quarter and are now coming up with better ways to monetize content through more effective advertising formats while ensuring the viewer experience can compete with other, traditional platforms.

According to a recent study, the average viewer spent 37% more time viewing videos online in the first six months of the year than in the same period last year. Another study said that the average American watched about 153 hours of television per month at home during the first quarter, up 1.2% over the same quarter last year – a clear indicator of the potential of online video.

In addition to online content, Viacom is also focusing on online games. During the coming quarters, they plan to make their games division more efficient in order to drive greater profitability, and will work to prepare and execute the right marketing and distribution strategy for the worldwide launch of The Beatles Rock Band, a music video game.

Meanwhile, the company’s focus on content continued to ensure the success of their channels in various regions and genres. For instance, Colors, the Hindi-language entertainment channel, was the leading general entertainment channel in India for May and June. Viacom recently acquired the Emmy-winning sitcom “30 Rock” for Comedy Central. Hopefully, they will soon look at vertical-specific acquisitions as well.

The stock is trading at $25.05, taking its market capitalization to $14.3 billion.

Time Warner’s (NASDAQ:TWX) quarterly performance was largely a reflection of market conditions. Revenues fell 9% to $6.81 billion and missed the market’s expected $6.97 billion. EPS of $0.45, however, managed to beat the Street’s expected $0.37.

Networks sales grew 5% over the year to $3 billion as higher subscription revenues offset the 3% fall in ad sales. Filmed Entertainment revenues fell 9% to $2.3 billion, driven by slow DVD sales. The publishing segment and AOL revenues were the worst hit, with revenues falling 22% and 24% respectively.

During the quarter, AOL’s advertising revenues fell 21% over the year and remained under pressure across display, page search, and third-party networks. Display and page search revenue fell 19% and page search revenues from Google fell 17%, primarily due to lower query volumes and lower click-through rates. Subscription revenues continued to fall, with AOL losing 0.5 million subscribers in the quarter.

The weak results seem to have driven home the point that Warner needs to spin off AOL – a move I have been championing for some time. None of its multiple management changes has helped AOL regain its lost pride.

As of now, Time Warner is hoping that the spin-off will make AOL more operationally and strategically flexible. They have already repurchased Google’s 5% stake in AOL for $283 million in order to simplify the spin-off process. Earlier this week, they filed a registration statement with the SEC and are looking to complete the transaction by the end of this year. Hopefully, Time Warner will also add Time Inc. to the kitty so that their high-quality content can be leveraged by AOL to build strong verticals. However, we have no indication so far that it would be the case.

Another priority for the year is to develop new business models which capitalize on “changes in technology and consumption”. Warner foresees ”TV Everywhere” as the next big thing, in addition to video on broadband.

With HBO’s video-on-demand popularity on the rise, Time Warner has found that consumers want to watch “shows when they want to watch [them], and they want to be able to select what they watch when, and they want to determine where they want to watch the shows, and on which device.” ”TV Everywhere” grants on-demand subscribers free access to programming from multiple platforms, including the Internet.

Time Warner expects that in addition to satisfying consumer demands, ”TV Everywhere” will help the industry build a dual-revenue stream business model for cable programmers, ensure investment in high-quality programs and allow every kind of television network to succeed financially. They have already announced an agreement with Comcast that establishes principles fundamental for the service and are in talks with other distributors. Some public interest groups, however, are skeptical about the benefits of “TV Everywhere” to consumers, claiming that it will stifle competition among program distributors.

The stock is currently trading at $26.81 with a market capitalization of $32 billion.

Disney (NASDAQ:DIS) is also skeptical about “TV Everywhere’s” willingness to provide free access to consumers. Disney’s studies have shown that people are willing to pay for quality, choice and convenience, a point I agree with. Disney is thus developing services that will meet these criteria and will be available to consumers at a charge.

However, Disney fared no better than media peers, with Q3 revenues falling 7% to $8.6 billion, lower than the Street’s expected $8.83 billion. EPS of $0.51 fell 26% over the year but managed to meet the market’s expected earnings for the quarter.

The disappointment was felt across all segments, with Studio Entertainment revenues falling 12% to $1.26 billion, Media Networks revenues falling 2% to $3.96 billion and Theme Parks revenues falling 9% to $2.75 billion. Consumer Products revenues also fell 10% to $0.50 billion. Overall, Disney was hurt by a 26% drop in ad revenues at their ABC affiliates and a continuous decline in DVD sales.

Disney continues to grow content across all genres. For instance, they are expanding ESPN to include local coverage to serve sports fans in several major American cities. ESPN’s growth outside the US is also expected to continue as the company purchased the rights to English and Scottish Premiere League football matches. They are also working with Sky in the UK as a distribution partner to be able to leverage the British company’s brand, distribution network and consumer relationships.

Disney’s Pixar animation studio also met with success. After “Wall-E” won an Oscar for Best Animated Feature Film last quarter, the studio’s latest release, “Up”, has been a worldwide box office hit and was selected as the opening-night entry for this year’s Cannes festival. Disney has learned that staggered releases bring more traffic to their movies. They plan releases such that dates coincide with local holidays.

Recently, Disney announced its collaboration with Asus, the Taiwanese computer maker, to launch a kid-friendly netbook, Netpal. Netpal will be targeted at users aged 6 to 12 and will be based on software designed specifically for children with a focus on security, warding off undesirable Internet content through the application of parental restrictions.

During the quarter, Disney’s Interactive Media group, which deals with online revenues, did not do very well with revenues falling 20% over the year to $0.11 billion. This was despite the group’s efforts to strengthen the segment through their equity partnership in Hulu, sale of content on iTunes and the subscription charges they levy for their Club Penguin site. Disney attributed the fall in the segment’s revenues to reduced sales of online games.

The stock fell 3% to $25.40 in the after-hours session. Its market capitalization is $48 billion.

I believe that if these media companies want to recover, they need to focus more on the virtual economy, which has proven to be far more resilient to the current economic slump. Within the segment, the online games market alone is expected to boom to $4.4 billion by 2010 from $1.1 billion last year, a figure which includes various segments such as publishers, distribution services, casual Web-based services, and derivative revenues such as advertising and commodity exchange.

It is estimated that of the 18–20 hours per week a PC gamer devotes to games, nearly 70% are spent on gaming in an online multiplayer mode. With social gaming gaining momentum, this number is bound to increase as more games work seamlessly with Facebook, the iPhone, MySpace, Android, Symbian and other platforms besides being played on desktops and classic mobile phones – which still make up 80% of the world’s phones. Surely, this is a market that media players ignore at their peril.

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