| || |
Financial Analysis of Warner Bros. Entertainment -
February 17th, 2011
Warner Bros. Entertainment, Inc., also known as Warner Bros. Pictures or simply Warner Bros. (the often-spoken Warner Brothers is not used by the company, despite the fact that "bros." is an abbreviation of "brothers") is an American producer of film and television entertainment.
One of the major film studios, it is a subsidiary of Time Warner, with its headquarters in Burbank, California and New York City. Warner Bros. has several subsidiary companies, including Warner Bros. Studios, Warner Bros. Pictures, Warner Bros. Interactive Entertainment, Warner Bros. Television, Warner Bros. Animation, Warner Home Video, New Line Cinema, TheWB.com, and DC Comics. Warner owns half of The CW Television Network.
Time Warner Inc. (NYSE: TWX) is one of the world’s largest media conglomerates. It operates Time Warner Cable, America Online, and TV programming and magazines such as Time Inc., Warner Brothers, and HBO. Its publishing and AOL business segments have been hard hit with falling advertising revenue. Since 2006, AOL has been trying to remain afloat by operating an ad based business model which has not demonstrated great results. Advertising revenue for AOL has fallen due to strong competition from search engines such as Google and Yahoo. Additionally, its publishing business continues to struggle as advertising revenues continue to shift to online sources. However, in December 2009, AOL was spun-off from Time Warner, making it an independent company again for the first time since the beginning of the 2000's. Experts at Barron's considered the spin-off to be a bargain, with AOL valued at around $2.4 billion, down from the expected $3 billion AOL's market capitalization was expected to be valued at by the spin-off date.
Although its filmed entertainment business produces successful block buster movies like “The Dark Knight” and franchises like “Harry Potter” and “Ocean’s”, a continuing trend of falling movie theater attendance is troublesome for the company; this decrease can be attributed to high priced movie tickets along with poor economic conditions, and as HDTV’s become more inexpensive and home theater systems more affordable, consumers will switch to the latter option.
1 Company Overview
1.1 Business and Financial Metrics
1.2 Business Segments
1.2.1 AOL (8.8% of revenue)
1.2.2 Time Warner Cable (36.6% of revenue)
1.2.3 Filmed Entertainment (24.2% of revenue)
1.2.4 Television Networks (23.7% of revenue)
1.2.5 Magazine Publishing (9.8% of revenue)
2 Trends and Forces
2.1 International Expansion, especially into India
2.2 Ability of Film Division to Find New Film Franchises
2.3 Decline in cinema viewership and maturation of DVD market
2.4 Integration of Divisions Within the Company
2.5 Broadband Adoption Rates
2.6 Decline of Traditional Media
For Q3 2010, Time Warner reported an increase in revenue of 5.2% from the year before, up to $4.73 billion. Its net income rose 34% to a profit of $1 a share, up from 76 cents a share a year earlier. Although numbers increased, Time Warner lost overall subscribers during the quarter, continuing the trend from its second quarter, which marked the first time when the total number of U.S. pay-television subscribers fell.
Business and Financial Metrics
First Quarter 2010 Results
Time Warner's revenues grew 5% from the first quarter of 2009 to $6.3 billion, reflecting increases at the Networks and Filmed Entertainment segments. Adjusted operating income rose 37% to $1.4 billion. Operating income increased 43% to $1.5 billion. The company posted adjusted diluted income per common share of $0.61 versus $0.38 in last year’s first quarter. During the quarter, Warner Bros. benefited from the popularity of The Blind Side and Sherlock Holmes. In April 2010, Turner joined with CBS in a 14-year pact for the exclusive U.S. television, Internet and wireless rights to the NCAA’s Division I men’s basketball tournament, starting in 2011. Turner also signed Conan O’Brien to host a late-night talk show on TBS. In the quarter, HBO expanded its international footprint by acquiring full ownership of HBO Central Europe and increasing its majority stake in the HBO Latin America Group. In addition, Warner Bros. reached a series of agreements to establish a 28-day window for new home video releases before they become available through kiosk and subscription distributors.
In 2009, Time Warner Inc.’s revenue grew 1 percent, to $46.9 billion, over 2008. The increase was driven by the company’s Cable and Networks segments, which were the only ones to report an increase in revenues. Net income, for the second consecutive year, decreased. The large loss was due to $25 billion in write-downs, about $15 billion relating to cable assets and the rest reflecting the tumbling values of its publishing and AOL businesses. Some of the write-downs also included declining values of its AOL and magazine businesses. Poor economic conditions have slowed down consumer spending and subscriber sign-ups as fewer consumers are moving due to the housing-market collapse. The lack of growth is attributed to the challenging economic environment.
Time Warner Inc. Segment's Revenue 
Time Warner operates five business segments: AOL, Time Warner Cable, Filmed Entertainment, Television Networks, and Magazine Publishing
AOL (8.8% of revenue)
AOL’s primary product is dial-up Internet access. As broadband penetration has increased in the US, there has been an increasing move away from dial up service to broadband providers, including Time Warner Cable. From 2002 through 2005, AOL saw its subscriber base fall by 30%. Not surprisingly, its revenue has followed a similar pattern. In fiscal 2008, AOL’s revenue fell 19.6 percent to $4.1 billion. Beginning in 2006, AOL's business model shifted from subscription based to ad based, meaning it now provides free webmail service to users and charges other companies for the privilege of advertising to its user base. The move has severely cut AOL's subscription revenue, but the hope is that advertising revenue will increase with more users using AOL mail. Another aspect of web browsing that generates revenue is the ad revenue from search queries. Time Warner’ searching network, primarily AOL, has been falling off in recent years with users favoring search engines like Google or Yahoo!.
In 2009, AOL announced its plans to spin-off from Time Warner, a process that will take place in the end of fiscal 2009 and into the first half of 2010.
Time Warner Cable (36.6% of revenue)
Time Warner Cable is the second largest cable operator in the US. It offers video and high-speed data and voice services through its broadband cable system. Time Warner Inc. owns 84 percent of Time Warner Cable’s common stock.
Filmed Entertainment (24.2% of revenue)
Time Warner, under Warner Bros. Entertainment Group and New Line Cinema Corporation, produces and distributes theatrical motion pictures, television shows, and license rights to the its films and television shows.
Television Networks (23.7% of revenue)
This business segment offers pay television programming services such as HBO and Cinemax and operates domestic and international networks. Revenue consists of subscriber fees paid by cable system operators and satellite distribution services, and of advertisings. Time Warner is planning to expand into the online TV market as well, showing some of its popular shows to paid subscribers, following in the suit of Comcast.
Magazine Publishing (9.8% of revenue)
Time Inc., a subsidiary of Time Warner, is the largest magazine publisher in the U.S. publishing over 120 magazines worldwide. Aside from publishing magazines such as People, Sports Illustrated, Time, among others, it operates over 40 websites worldwide. In September 2009, it was announced that Time Warner plans to eventually sell the Time Inc. magazine unit and buy holdings in its core entertainment category.
Trends and Forces
International Expansion, especially into India
In December of 2009, Time Warner acquired NDTV Imagine, an indirect subsidiary of NDTV Limited that owns a leading Hindi general entertainment channel and other entertainment assets in India. This acquisition highlights Time Warners increasing focus on developing its business internationally, especially in fast-growing markets like India.
Ability of Film Division to Find New Film Franchises
Time Warner's film division has been very successful due to franchises such as Harry Potter, The Lord of The Rings, Rush Hour, and Ocean's. The film industry tends to be extremely variable, in that it is often very difficult to predict hits with any sort of regularity. Franchises play an important role in that they provide a certain measure of stability given that they are based on an already proven concept. Time Warner's success in identifying successful franchises that has led to an industry leading 21.3% market share that has come primarily from these franchises.
Decline in cinema viewership and maturation of DVD market
MPAA, Total Moviegoers & Admissions,Admissions per Person & per Moviegoer
Most movies, even block buster movies are break even at best. As the costs per movie continues to rise and cinema viewership continues to decline, theatres are increasingly dependent on revenues from DVD sales in order to maintain profitability. DVD sales grew very quickly during the beginning of this decade, but are now starting to slow as the market for DVD players becomes saturated. This limits the growth potential for filmed entertainment.
Integration of Divisions Within the Company
As a media conglomerate with outlets for almost any type of media, there has been very little crossover within Time Warner, with each division effectively acting as a separate entity. For example, Time Warner could have offered AOL customers incentives to upgrade to Time Warner Cable's faster broadband service but did not. Time Warner could have also combined the distribution of their film, TV, and publishing assets on the Internet, but so far have not done so. As the Internet becomes a more and more integral part of people's everyday lives, Time Warner will have to incorporate their departments better and deploy their resources more strategically. If they are able to do that, profits that have been down since the AOL merger could begin to rise again.
Broadband Adoption Rates
Pew/Internet, 55% of US Adults Have Home Broadband, but 10% Use Only Dialup
Over the last decade the US has seen a dramatic shift away from dial up access to broadband access. In addition to increasing the number of applications that are practical on the internet, the shift to broadband has had liberalizing affect on the web. Previously subscription based internet access providers had a stranglehold on the web. Companies like AOL provided not only access to the internet but content and search as well. Now that companies like Comcast and in indeed Time Warner Cable are offering broadband there has been a continuous decline in AOL subscribers as users opt for higher speed connections and broader content choices. About 79 percent of Americans have a high-speed connection at home compared to the 15 percent which use dialup.
Decline of Traditional Media
Increased US internet penetration rates and the accompanying explosion of digital media has led to declining readership for publications across the print industry. Single-copy sales, as opposed to subscription, for magazines at the newsstand fell 11 percent the second half of 2008, from July to December. The economic downturn has led consumers to cut back on nonessential spending, and as readers decline so does advertising revenue.
Company Revenue (USD million) Net Income 1yr Revenue Growth
Time Warner 46,482 145 6.39%
*Walt Disney Company (DIS) 34,285 5,477 7%
*News Corp 25,327 4,405 6%
Viacom 13,423 1,838.1 17.06%
Both Walt Disney Company (DIS) and News Corporation (NWS) have not releases a 10-K as of March 19th, 2008.
As a conglomerate with a hand in five different aspects of media, Time Warner faces competition from a lot of different angles. AOL faces a lot of competition for Internet revenue, as shown in an above table, Time Warner Cable faces competition from a number of companies as well, shown on the Time Warner Cable page. While certain sectors struggle for market share, Time Warner subsidiaries are firmly entrenched as the leader in the film industry, with Paramount Films leading the way in 2007.
Company Box Office Revenue (USD million) % Market Share
Paramount 1,494.1 15.5$
Time Warner 1,420.00 14.70%
Buena Vista 1,359.90 14.10%
Sony Pictures 1,242.8 12.90%
Universal 1,098.7 11.40%
FOX 1,012.2 10.50%
New Line Cinema 488.4 5.10%
Lions Gate 368.1 3.80%
MGM 363.1 3.80%
Other 2,306.66 23.88%
Studio Market Share
The following chart shows 2008 domestic studio market share by gross revenue. Total gross revenue in that year was ~$9.7B for the industry as a whole
Studio Market Share (2008)
Rank Company Market Share (2008)
1 Warner Bros 18.4%
2 Paramount 16.4%
3 Sony/Columbia 13.2%
4 Universal 11.0%
5 20th Century Fox 10.5%
6 Buena Vista 10.5%
7 Lion Gate 4.5%
8 Summit Entertainment 2.4%
9 Fox Searchlight 2.2%
10 MGM/UA 1.7%
11 Focus Features 1.4%
12 Overture Films 1.1
Last edited by netrashetty; February 17th, 2011 at 11:18 AM..