3 Stocks for the Coming Content War

What a week for Hollywood. First, Netflix (Nasdaq: NFLX  ) and Amazon.com (Nasdaq: AMZN  ) announce new content deals with DreamWorks Animation (Nasdaq: DWA  ) and News Corp.'s (Nasdaq: NWS  ) Twentieth Century Fox. Then, Amazon unveils its Kindle Fire tablet at a New York press conference. All signs point to a rush to satisfy our cravings for digital content.

How to play this as an investor? You could certainly bet on the distributors. I've made a real-money bet on Netflix, after all, while others have made strong arguments in favor of Amazon.

Yet the thing about wars -- content or otherwise -- is that it's usually the arms dealers that get rich. Here, the "arms" equal content and the "dealers" are the studios. Now may be the time to bet on the big three: CBS (NYSE: CBS  ) , Time Warner (NYSE: TWX  ) , and Walt Disney (NYSE: DIS  ) . Here's why.

We interrupt this program for a brief word from Hollywood's sponsor
Before we get to the details, it may be worth looking at how the studios/networks compare at the highest level. The following table shows combined revenues for the segments that cover network and premium TV as well as box-office films.

Studio

2010 Revenue

2009 Revenue

2008 Revenue

CBS $8,865.8 million $8,323.9 million $8,143.3 million
Time Warner $24,102 million $22,319 million $22,456 million
Walt Disney $23,863 million $22,345 million $23,205 million

Source: Capital IQ, a division of Standard & Poor's.To be fair, these figures aren't 100% representative of Hollywood's content machine. Independent studios such as Legendary Pictures aren't included, yet Legendary owns substantial rights to the Batman films that have enriched Time Warner.

And that's just one studio. Most content has multiple owners with varying rights, making licensing a chore for distributors and a joy for contract attorneys. There's plenty of work for them to do. Here's a closer look at the assets each studio possesses.

CBS: catching a wave
The fastest grower, CBS has a small but very successful stable of hits produced through its TV studios (including Showtime). Both the CSI and NCIS franchises were born at CBS Television Studios, while the emerging drama The Good Wife has opened a niche in primetime political drama. CBS also owns rights to 90210, the campy teen series first created by the late Aaron Spelling in the early 1990s.

Any of these properties could command premium dollars for digital distribution. Some already are. Take The Good Wife. Though not yet available for Netflix streaming, all three seasons are available on iTunes, while Amazon's pay instant video carries seasons 2 and 3. Prices vary between services, which suggests that CBS is negotiating for the best deals it can get.

Disney: mighty mouse
Chances are you already know what Disney owns. Home to Pixar and Buena Vista Pictures, Disney has both the clout of a major movie studio and a distribution network via its own channel for kids. Hannah Montana, The Wizards of Waverly Place, and more are Disney productions.

The House of Mouse also controls ABC and ESPN, and its ABC Television Studios is behind the primetime romantic dramas Desperate Housewives and Grey's Anatomy.

Time Warner: obscured by the blackest night
Finally, there's Warner Bros. Studios, home to the summer flop Green Lantern and the now-completed Harry Potter franchise. Warner is also home to a wide range of popular television franchises through HBO. Its partnership with CBS includes owned hits The Big Bang Theory (BBT) and Two and a Half Men and a whole range of animated programs and films.

It's taken some time, but the studio is starting to explore digital distribution for some shows. BBT's fourth and fifth seasons recently became available on iTunes, while Amazon completed rights to sell all but the Season 3 content. (Which, again, would be odd if not for the complexity involved with the way rights are assigned and managed in Hollywood.)

A Foolish final thought: Own 'em all
I already own shares of Disney and Time Warner. In each case, I believe a rich library of content offered at good terms should lead to outsized profits, especially now that new means of distribution make getting content easier. Rising volume should lead to rising royalty rates, while networks enjoy ever-higher ad rates for shows that take a large share of streaming volume. But this also holds true for CBS, the fastest grower in terms of monetizing TV and film content.

All three also pay a dividend. There may come a point when one studio's content is so superior that it generates materially higher royalty or ad rates. Until that day, I'm prepared to own all three stocks. They're the ones Netflix, Amazon, and others will keep calling on -- wallets in hand.

Do you agree? Disagree? Please weigh in using the comments box below. You can also keep track of Hollywood by tracking these stocks using our My Watchlist tool:

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Netflix, Time Warner, and Walt Disney at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

Motley Fool newsletter services have recommended buying shares of Netflix, Amazon.com, DreamWorks Animation SKG, and Walt Disney. Motley Fool newsletter services have recommended creating a bear put spread position in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1562061, ~/Articles/ArticleHandler.aspx, 12/19/2014 1:25:36 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement