The Entertainment Industry in 2015

Fellow Fool Rick Munarriz gazed in his crystal ball earlier this year, reporting on what some of his favorite companies might look like in 2010. I'm taking the prognostication another five years into the future, and zooming out to cover the entertainment industry as a whole. Here are the guiding principles on which I base my own investment decisions in the sector. Investing in tomorrow's giants today will surely enrich my portfolio -- and yours.

TV
The television of tomorrow will be familiar in many ways, but fundamentally different nonetheless. Most of the content will still be produced by major studios and pushed out to consumers through monolithic service providers. Gone is the concept of "TV stations" and hour-by-hour program schedules. Video on demand rules the roost, giving consumers the power to see what they want, when they want to, on any of a plethora of video-capable devices.

DVRs flourished for a short time, until the studios finally saw the light and changed their licensing policies. It started with Walt Disney (NYSE: DIS  ) , now ruled by former Pixar executives. With every show, movie, and event now available on VOD, there simply wasn't any need to record stuff anymore. TiVo (Nasdaq: TIVO  ) morphed into a user interface specialist, then merged with distribution expert Netflix (Nasdaq: NFLX  ) when the DVR became obsolete.

The living room TV is still one of the most popular viewing choices, and new technologies have made the screens and surround sound systems bigger, cheaper, and better in every conceivable way. But mobile watching became a serious contender; G4/G5 networks and WiMax version 2 provide enough bandwidth for high-definition wireless video streams.

The iPhones and BlackBerries of 2008 now look as clunky and primitive as a 2001-era phone did then. Now firmly embedded in the supply chain for entertainment content, the average mobile phone has either a large roll-up screen or a low-power digital video projector. Every cable company now is at least part-owner of a mobile data service, just as the phone companies have found ways to sell in-home video services to every one of their customers.

Movies
The distinction between full-length movies and, say, a TV series with high production values has blurred. The on-demand revolution of 2012 was contemporary with the switch from traditional, phased-out theatrical release windows to day-and-date DVD and Blu-ray releases. From there, it was a short step toward letting Comcast (Nasdaq: CMCSA  ) and Verizon (NYSE: VZ  ) show Toy Story 4 on demand for $4.99 on premiere night.

Nearly every theater relies on digital distribution and projection now, pushing celluloid into vintage dollar theaters and high-end boutique venues where "analog" has become a selling point. In order to stay relevant in competition with same-night releases on every viewing platform available, cinema chains have shown an innovative streak. Soulless multiplexes gave way to larger-than-life experiences, sit-down dinner services in the theaters, and liquor licenses to go along with the new "R-18" rating.

Music
While the video-production bigwigs remain mainly the same, there's been a major shakeup in the music business. New artists don't sign record deals anymore, but instead distribute their music directly to fans through their own Facebook sites, Apple's (Nasdaq: AAPL  ) iTunes, and a profusion of smaller channels. Note that I said "distribute," not "sell."

Free access to music and short video clips has become deeply ingrained in the culture, and nobody really expects to get paid for selling songs anymore. Instead, artists pay the bills the old-fashioned way: by touring, selling T-shirts, and hawking premium editions of their albums directly to their fans. Margins are high since we took out the record-company middlemen, and with the assurance that most of the money goes straight into the pockets of musicians and songwriters, many fans don't mind paying up for these luxury items. Talent and hard work once again matter more than promotional backing.

The Foolish bottom line
The scenarios above hinge on two assumptions: First, that content producers of all kinds will eventually realize that the only way to beat piracy is to treat it as legitimate competition. Second, that convenience and service quality dictate where we go to fritter away our hours.

Taken together, it seems obvious that restrictive content licenses hinder distribution more than they protect the content's value. Entertainment will be available anywhere and everywhere; it will be personalized and interactive; subscription fees and highly targeted advertising take the place of buying CDs and DVDs. The consumer eventually gets what the consumer wants. As an investor, you just have to keep these guiding principles in mind, and then figure out which companies are making the right moves.

Invest today, and reap the rewards in less than a decade. The returns should be absolutely stunning.

Further futuristic Foolishness, courtesy of Rick:


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