So, what's the tastiest, most nourishing meal for a lion? Would you believe . a library?
You would if the lion in question is Lions Gate Entertainment (NYSE:LGF). The studio announced last week an acquisition of 300-plus film properties from Modern Entertainment, which itself is a subsidiary of Modern Times Group, a European company in the television industry. The release indicates that a vast majority of the titles purchased in this deal come with valuable rights, such as a license for video-on-demand broadcasts.
Although it's difficult to fully evaluate this deal, considering that financial details were not disclosed, it's even harder to pose any sort of argument against the agreement. After all, libraries are important (see this piece by Lawrence Meyers) to a company such as Lions Gate Entertainment, which already has more than 8,000 titles under its financial aegis. They are sources for perennial sales revenues that can provide a cushion of income to hedge against the times when current movie slates offer soft performance.
Going through some of the films that make up this latest trade, I couldn't help smiling with glee at some of my old friends. I mean, come on -- Halloween II and Halloween III? The Bogeyman was back in the second one, and the third one went in a totally different direction, with haunted masks manufactured by a sinister warlock -- what's not to love? But wait, there's more. Conan the Barbarian showed a future governor in training, Amityville II reminded me of The Exorcist, and Earth Girls Are Easy featured a sexy comedienne from MTV. These may seem like second-grade flicks and may bring back memories of HBO in its earlier days, but believe me, when correctly marketed to the right audience, they will bring in the cash. According to the release, a million DVDs of Dirty Dancing move every year. That's a telling statistic.
On the other hand, though, DVDs aren't so popular these days. As I mentioned recently in an article on Disney (NYSE:DIS), both Pixar (NASDAQ:PIXR) and DreamWorks Animation (NYSE:DWA) have a had a problem with overestimating demand for their videos (see this piece on DreamWorks Animation and this piece on Pixar for reference). I read a Reuters report that mentioned this same issue in relation to Lions Gate Entertainment's reliance on its portfolio to generate a good chunk (more than 20%) of its revenue base.
Sure, companies must learn better management techniques for efficient extraction of value from their DVD libraries, but this concern by itself does not warrant a ban on accumulating film properties. Whether you're talking Lions Gate Entertainment or Time Warner (NYSE:TWX), libraries are important assets. Plus, they make Lions Gate an attractive future prospect for a buyout -- think MGM and Sony.
I'm sure this won't be the last film portfolio that the lion consumes. After all, in the world of movie studios, the library is king.
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Fool contributor Steven Mallas owns shares of Disney. He's still waiting for a Halloween film with Michael Meyers in outer space. The Fool has a disclosure policy.
