According to Bear Stearns (BSC), the entertainment sector of the U.S. market will decline from a market weight to an underweight, and the underlying fundamentals are set to deteriorate in 2008.
Stearns said that so far in 2007, the sector has declined by 4.4 percent, far under the 5.4 percent increase of the S&P 500.
"In our opinion, 2008 will represent a tipping point for incumbent entertainment firms," analyst Spencer Wang said in a note. "More specifically, we expect that the digitization of media, ''long tail'' economics and growing competition for consumers'' time from broadband Internet, largely a theoretical risk to date, will start to more directly slow growth for entertainment firms."
I was surprised to see them choose Viacom (VIA-B) and Timer Warner (TWX) as their top picks in the category to outperform the market. Their secondary picks of News Corp. (NWS-A) and Walt Disney (DIS) would have been my first two picks. That may be because I know them much better than the former two. But I also think of them as being much better positioned for the digital age and challenges.
It may be because they've invested a lot more money in new strategies, and their debt could be a short term problem, especially with News Corp.
Another factor Wang identified in the overall industry, is the beginning of the decline of the DVD, which I do agree with him on, as my research has shown it's starting to drop in sales for the first time in years, and there's little chance it's an anomaly, rather than a trend.
With the DVD being the chief generator of profits in their film divisions, it makes it difficult for them to find something to replace it with to coincide with the decline.
For Disney, the dropping value of the dollar has an important impact also. First, it'll hurt the domestic visitors to their theme parks, as people stay at home because of the dollars loss of value. At the same time, foreign visitors will greatly increase for the same reason, their currency's strength against the dollar makes coming to the United States a rare, inexpensive trip and vacation. The question will be how the two will balance out.
Either way, media companies are in for a rough ride ahead. That's why it's ignorant and puzzling as to why the writers decided to strike at this time. The timing is all wrong, and they won't get much sympathy from trying to get more money at a time of industry upheaval and weakness; specifically when they make so much more a year than the average American does.
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