New accounting rules, big dot-com write-offs, and a slowing ad sales market couldn't stop Viacom, Disney, and MGM from posting impressive financial results under what should be considered trying conditions.  The strength of the entertainment sector might well lead some to believe that these industries are indeed countercyclical -- fully capable of performing strongly when the overall economy is weakening--but the real secret of their success just might be the increasing revenue stream from video sales (and rentals).

 

Disney

Disney took a massive $1 billion dollar charge tied to its failed 'Go Network' internet venture and the closing of 70 Disney stores (see 'AOL de 'Bugs' Retailing'), and still managed to look pretty good by fashioning a 33% gain in net income which reached $391 million for the quarter ending March 31.  In spite of a mediocre performance at the box office by such Disney releases as Unbreakable, Dinosaur, and 102 Dalmatians, major video and DVD sales from titles like Remember the Titans, Lady and the Tramp II and Dinosaur helped the company's movie studio division fashion a strong performance with its operating income surging some 257%.  Disney's extensive library of films also affords the studio some protection against a prolonged strike by actors and writers.  Disney can put out new DVD editions of Disney animated classics and still keep its mammoth market share of the video business even after a strike has cut off the flow of new releases.

 

Viacom 

While Disney's performance was slowed down by the ABC television network, which has been affected by the declining ad market, Viacom actually benefited from the strong performance of CBS, which has gone from being a geriatric basket-case to front-runner thanks largely to its popular 'reality' program, Survivor.  Growth was slower for Viacom's numerous cable assets, but the Paramount studio reported a revenue rise of 17%, due to a combination of box office performance and video/DVD sales.  Publishing arm Simon & Schuster also posted a solid 8% gain, as did the huge Blockbuster chain of video stores which also reported an 8% gain in revenue.

 

MGM 

While Disney and Viacom are now giant media conglomerates that include theme parks, movie studios, publishing house, television networks, cable outlets, etc., MGM is pretty much just a simple movie studio.  New rules that force the studios to report all advertising and marketing costs as they occur, rather than to spread those costs out over the life of a film, caused MGM to report a loss for the quarter, but the studio, which has struggled mightily in recent years, actually did quite well.  Revenue was flat at about $344 million.  $44 million of this came from VHS and DVD revenue generated by the MGM film library.  Obviously enthused over this source of cash flow, MGM has plans to release more than 350 titles from its extensive (4,100 films) library this year. 

 

While Hollywood is clearly worried about the dangers of piracy that DVDs present, the studios also see a powerful revenue stream that can help them overcome tough times.  Last year total rental and sell-through revenues each amounted to over $10 billion (the domestic box office was just about 12 billion).  The studios' share of the $10 billion in rentals was about $2.7 billion, while their share of the roughly $10 billion in sell-through was over $8 billion.  This enormous revenue stream has fueled studio profits, and is one of the reasons that the Writers Guild and the Screen Actors Guild may go on strike, since writers and actors currently receive a smaller share of the video pie than they do of the box office take.