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INDUSTRY SURVEYS,Movies&HomeEntertainment,MAY 10,2001/MOVIES&HOME ENTERTAINMENT,THIS ISSUE REPLACES THE ONE DATED NOVEMBER 16,2000.,THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR NOVEMBER 2001.,C URRENT E NVIRONMENT.1,I NDUSTRY P ROFILE.7,Industry Trends.9How the Industry Operates.15Key Industry Ratios and Statistics.20How to Analyze an Entertainment Company.21,I NDUSTRY R EFERENCES.26,C OMPARATIVE C OMPANY A NALYSIS.29,Tom Graves,CFA,Movies&Home Entertainment Analyst,Editor:Eileen M.Bossong-MartinesCopy Editor:Carol A.Wood,Production Coordinators:Li Wah Lai,Debby Lee,Susanna Lee,Rose YungStatistician:Sally Kathryn NuttallAssistant to Editor:Paulette Dixon,Subscriber relations:1-800-852-1641Copyright 2001 by Standard&PoorsAll rights reserved.ISSN 0196-4666,USPS No.517-780,Visit the Standard&Poors web site:http:/,STANDARD Frank D.Penglase,Senior Vice President,Treasury Operations.Periodicals postage paid at New York,NY 10004 and additional mailing offices.POSTMASTER:Send address changes to INDUSTRY SURVEYS,attention Mail Prep,Standard&Poors,55 Water Street,New York,NY 10041.Information has been obtainedby INDUSTRY SURVEYS from sources believed to be reliable.However,because of thepossibility of human or mechanical error by our sources,INDUSTRY SURVEYS,or others,INDUSTRY SURVEYS does not guarantee the accuracy,adequacy,or completeness of anyinformation and is not responsible for any errors or omissions or for the results obtainedfrom the use of such information.,VOLUME 169,NO.19,SECTION 1,THIS ISSUE OF INDUSTRY SURVEYS INCLUDES 3 SECTIONS.,MAY10,2001/MOVIES&HOMEENTERTAINMENTINDUSTRYSURVEY,CURRENT ENVIRONMENTLabor issues and new technologyat forefront,In anticipation of possible strikes by creativetalent,Hollywood studios have acceleratedtheir production schedules for movies andsome television shows.The Writers Guild ofAmerica(WGA)contract for work onmovies and TV shows,covering about11,000 movie and TV writers,is due to ex-pire at midnight May 1,2001.Additionally,a contract covering an estimated 135,000 ac-tors represented by the Screen Actors Guild(SAG)and the American Federation ofTelevision and Radio Artists(AFTRA)willexpire on June 30,2001.In both cases,con-tract negotiations are to be conducted withthe Alliance of Motion Picture and TelevisionProducers(AMPTP),which represents morethan 300 production companies and studios.Turmoil in Tinseltown?If the contracts expire before they arerenegotiated,and if the unions go on strike,Standard&Poors does not expect that ei-ther the industry or consumers will notice amajor effect as long as the conflict can be re-solved within a few weeks.However,alonger-term work stoppage could significant-ly disrupt prime-time TV programming inthe new broadcast season that begins inSeptember 2001.It may also alter the choicesat movie theaters in early 2002.Uncertaintyabout what shows will be available for thefall television schedules may create addition-al difficulty for broadcasters trying to sell fu-ture advertising time,on top of what willprobably be a soft sales environment.A lengthy work stoppage would also like-ly contribute to a growing amount of“reali-ty”programming on the air.This genre,typically featuring nonactors in situationswhose outcome is unscripted,has already be-come popular with the success of such showsas Survivor,Who Wants to be a Millionaire,and Weakest Link.In our view,among thevarious outlets for TV programming,the ma-,jor broadcast networks ABC,CBS,NBC,and FOX generally have more to losefrom a strike than the cable networks do,since they tend to air more first-run scriptedcomedies and dramas featuring Guild-repre-sented actors.If new prime-time episodes ofsuch shows are scarce,it increases the likeli-hood that viewers will sample some of themany other viewing choices.Among the major broadcast networks,wesee ABCs prime-time line-up as the best pro-tected against a prolonged strike.We expectthat network to be able to continue runningat least four new hour-long episodes per weekof the Millionaire quiz show,which accountsfor close to 20%of ABCs prime-time sched-ule.For all of the networks,some shows maybe exempted from a walkout by a laborgroup,such as the Screen Actors Guild,grant-ing a waiver to certain producers,in returnfor these producers agreement to accept fu-ture contract terms.Sticking pointsFinancial compensation is likely to be akey component of labor negotiations withHollywood creative talent.Although mini-mum compensations(sometimes called“scale”)for working on projects will be atissue,residual payments,or fees that actorsand writers receive from the sale or licens-ing of movies and television shows beyondtheir initial airing,are likely to receivegreater attention.In early March 2001,the WGA said thatearly negotiations with companies represent-ed by AMPTP had been suspended withoutreaching agreement on a new contract.“Over the last decades,the companies askedartists to accept significantly reduced or bar-gain-basement residuals to help them buildnew markets in home video,DVDs,off-net-work reruns on basic cable,reruns on for-eign TV,made-for-basic cable,made-for-payTV,and the FOX network,”said WGA West,1,MAY10,2001/MOVIES&HOMEENTERTAINMENTINDUSTRYSURVEY,216.3,101.3,93.8,83.9,80.2,75.3,90.5,DOMESTIC THEATRICAL MOVIE HITS:19982000(Ranked by box office,in millions of dollars),1998,BOX,1999,BOX,2000-01*,BOX,MOVIE(DISTRIBUTOR),OFFICE,MOVIE(DISTRIBUTOR),OFFICE,MOVIE(DISTRIBUTOR),OFFICE,Saving Private Ryan(DreamWorks),Star Wars-Phantom Menace(Fox),431.10 Dr.Seuss How the Grinch StoleChristmas(Universal),260.0,Armageddon(Disney)Theres Something About Mary(Fox)A Bugs Life(Disney),201.6176.4162.8,The Sixth Sense(Disney)Toy Story 2(Disney)Austin Powers:The Spy Who Shagged Me,293.40*Cast Away(Fox)245.60 Mission Impossible 2(Paramount)Gladiator(DreamWorks),228.1215.4186.7,(New Line),206.00,The Waterboy(Disney)Dr.Doolittle(Fox)Rush Hour(New Line)Deep Impact(Paramount)Godzilla(Sony)Patch Adams(Universal)Lethal Weapon 4(Warner)The Truman Show(Paramount)Mulan(Disney)Youve Got Mail(Warner)Enemy of the State(Disney),161.5144.2141.2140.5136.3135.0130.4125.6120.6115.8111.5,The Matrix(Warner)Tarzan(Disney)Big Daddy(Sony)The Mummy(Universal)The Runaway Bride(Paramount)The Blair Witch Project(Artisan)Stuart Little(Sony)The Green Mile(Warner)American Beauty(DreamWorks)The World Is Not Enough(MGM)Double Jeopardy(Paramount),171.40 The Perfect Storm(Warner Bros.)170.50*What Women Want(Paramount)163.40*Meet the Parents(Universal)155.20*Hannibal(MGM)152.30 The X-Men(Fox)140.50 Scary Movie(Miramax)140.00 What Lies Beneath(DreamWorks)136.70 Dinosaur(Disney)130.10 Erin Brockovich(Universal)126.80 Charlies Angels(Sony)116.70 The Klumps(Universal),182.6180.7166.2158.2157.3157.0155.4137.7125.6125.3123.3,The Prince of Egypt(DreamWorks),Notting Hill(Universal),116.10 Big Mommas House(Fox/New Regency)117.6,The Rugrats Movie(Paramount)Shakespeare in Love(Miramax)The Mask of Zorro(Sony)Stepmom(Sony)Antz(DreamWorks)The X-Files(Fox),100.4100.291.090.7,Wild Wild West(Warner)Analyze This(Warner)The Generals Daughter(Paramount)American Pie(Universal)Sleepy Hollow(Paramount)Inspector Gadget(Disney),113.80 Remember the Titans(Disney)106.60 The Patriot(Sony)102.70 Chicken Run(DreamWorks)101.80*Miss Congeniality(Warner Bros.)101.00*Traffic(USA Films)97.30*Crouching Tiger,Hidden Dragon,115.6113.3106.8105.1103.7,(Sony Classics),101.6,The Wedding Singer(New Line),The Haunting(DreamWorks),90.20 Gone in 60 Seconds(Disney),101.6,City of Angels(Warner)The Horse Whisperer(Disney)Total,78.93,115.4,Entrapment(Fox)Pokemon:The First Movie(Warner)Total,87.60*Unbreakable(Disney)85.60 Me,Myself&Irene(Fox)3,782.4 Space Cowboys(Warner Bros.),94.890.5,Total,3,700.6,Note:Box office results are for the U.S.and Canada as of late March 2001.Movies are grouped based on the year in which they first appeared in theaters;all re-ceipts were not necessarily collected in the year that a movie was released.Also,some box office totals may not be exact.*Still in theaters as of March 2001.Table compiled from various sources,including Variety and Hollywood Reporter.,2,president John Wells in March 2001.“Writers did so with the understanding thattalent would eventually receive a fair shareas those markets matured.”Residuals related to home video are an ex-ample of the economic issues in Hollywoodnegotiations.“Writers currently receive fourcents for each video cassette or digital videodisk.Our last offer asked for an increase ofone cent,and the companies said No,”Mr.Wells said.Also,the WGA negotiations involve“re-spect”issues,such as the forms in whichcredit for a movie should be given,and therole of writers in the production process.Forexample,the WGA seems to believe that di-rectors sometimes receive too much credit forthe creation of movies.However,according,to the AMPTP,some of the WGAs proposalsare at odds with provisions in the DirectorsGuild contract,seek to alter long-establishedindustry practices,or seek changes that couldinterfere with the production process.TheAMPTP says that the studios have requestedthat the Directors Guild and the WritersGuild work out a mutually acceptable solu-tion of some of these issues,without impos-ing mandates through collective bargainingagreements.In mid-April,talks between theWGA and the AMPTP resumed.Taming technologyTo fend off unauthorized Internet down-loading,industry associations,representinglarge music and movie companies,filed law-,MAY10,2001/MOVIES&HOMEENTERTAINMENTINDUSTRYSURVEY,suits against alleged offenders in 2000.Twoprincipal targets were privately ownedNapster Inc.,whose software enabled fans toswap files of recorded music on the Internet,and publicly owned MP Inc.,whichprovided a music downloading service calledMy.MP.(The term“MP3”refers to acompression technology that permits digi-tized music to be transferred from one com-puter to another and stored on files on theInternet and elsewhere.)Initial court decisions were generally fa-vorable to the music industry.However,evenif various types of downloading are ultimate-ly prohibited,enforcement could be difficult,given the technological sophistication of en-tertainment fans.For the Internet to become a mainstreamchannel of distribution,more consumers willneed access to personal computers(PCs)orother appliances with greater capability tostore and play downloaded products.We ex-pect such capability to eventually becomemore widespread,with negative conse-quences for traditional music retailers.Atthe same time,we also expect that retailerswill find new revenue opportunities throughthe technology,such as customizing disksand tapes for customers that could be down-loaded at store kiosks.Over the long term,we look for digitaldownloading via the Internet to lower distri-bution costs for entertainment companiesand to boost the number of titles readilyavailable to consumers,since electronic cata-logs can house many more titles than storeshelves can.Also,we expect that Internet of-ferings will increasingly include custom com-pilations(such as albums that combine songsby various artists)and sales of subscriptionservices(e.g.,customized access to portionsof a companys music library).The software that almost atethe music business!Napster software gained its popularityby offering fans an essentially free way toacquire recorded music that they otherwisemight have had to buy.Napster allowscomputer users to locate MP3 music filesstored on the computers of other userswho are online,which they can downloadto their own computers at that moment.However,their ability to swap copyrightedmaterial,without compensating music,companies and artists,has been challengedin court.In March 2001,a preliminary injunctionissued by the San Francisco District Courtordered Napster to work together with therecording industry and music publishers tofilter,or exclude,specific copyrighted musi-cal works from Napsters file-sharing service.Copyright holders are required to provideNapster with artist and title names and atleast one file name indicating that the musi-cal work controlled by the copyright holderis available on the Napster index.On March 27,2001,Napster said that itwas aggressively complying with the courtsinjunction.According to the company,in thethree weeks since the injunction was issued,Napster had blocked access to more than275,000 songs and more than 1.6 million filenames.Also,Napster said that the totalnumber of files available through its index atany one time had dropped by 57%,from370 million to 160 million,and that the av-erage number of files available for sharing byusers had dropped by almost two-thirds,from 198 to 74.One of the issues related to the injunctionseems to be whether copyright owners andNapster are making reasonable efforts toidentify the songs that should be excludedfrom Napsters file-sharing service.This in-cludes identifying varied spellings of artistsand songs.Napster,Bertelsmann reach agreementUnder pressure from litigation,Napsterhas indicated its willingness to compensatemusic companies and artists for the use ofsongs that are downloaded using its technol-ogy.In February 2001,the company saidthat it had proposed a way to guarantee rev-enue of$1 billion to music labels,songwrit-ers,and artists over the next five years.Napster said that major music labels wouldreceive$150 million per year for a nonexclu-sive license,and that$50 million per yearwould be set aside for independent labelsand artists.Napster has proposed initiating a paid ser-vice to which membership would be availablein two forms.One would entitle users to alimited number file transfers for a cost of$2.95 to$4.95 per month.A premium mem-bership,costing between$5.95 and$9.95 permonth,would offer unlimited file transfers.,3,MAY10,2001/MOVIES&HOMEENTERTAINMENTINDUSTRYSURVEY,4,Major music companies have not been es-pecially receptive to Napsters proposal.Itmay be that music companies are reluctantto encourage proposals from Napster at atime when that companys“free”file-swap-ping service is being challenged in court.They may also be displeased with the dollaramounts suggested,or be looking to reduceNapsters role in a pay service using theircopyrighted content.Nonetheless,in October 2000,a strategicalliance was announced between Napster andone of the worlds five largest recorded musiccompanies Bertelsmann AG.The two com-panies said that they were planning a securemembership-based service that would provideNapster users with high-quality file sharing,while also providing payments to rights hold-ers,including recording artists,songwriters,recording companies,and music publishers.Napster and Bertelsmann said that they wouldseek support from others in the music indus-try to encourage widespread acceptance of theservice,and would invite other industry par-ticipants involvement.If Napster successfully implements the newmembership-based service,Bertels-mann hasagreed to withdraw its lawsuit and to makeits music catalog available.BertelsmannseCommerce Group would also loan Napsterfunds