Valuation of the entertainment industry

Weekly Corporate Growth Report, May 12, 1997

The Entertainment Industry has a distinct advantage over most other industries in that it tends to do well under most economic conditions. Consumers who don't want to spend money on healthcare or oil field services will still stand in line for hours on end to see the latest blockbusters.

Entertainment is also an industry in which the United States is the key player. In fact, the industry is the nation's largest net exporter. It contains a broad range of different companies with different focuses and various strategies. For the sake of direction, entertainment product will constitute any type of performance or artistic creation that can be electronically stored and displayed to vast amounts of people.

An Industry for Everybody

The Entertainment Industry has so many things going in its favor. While the costs of movie tickets and compact discs may seem high these days, they are still much cheaper than other leisurely pursuits, like a cruise, recreation, or an evening in Vegas.

Television is now considered a necessity whereas generations ago, people were forced to rely on an incredibly cheap, though dull, form of entertainment called Their Imagination. Cable is also as vital as running tap water. These factors have caused overall entertainment consumption to grow in a steady fashion under most economic situations.

The US Entertainment Industry also has the advantage of American culture on its side. Having introduced the rest of the world to American national treasures like Rambo and Beavis & Butt-head, it's no wonder that other countries have imposed various restrictions to protect their domestic artists and producers from the bombardment of US-produced entertainment.

A Wave of Integration

Due to the cost structure of the Entertainment Industry and the everchanging technology responsible for such cinematic technology responsible for such cinematic masterpieces as Twister and Volcano, there has been a great deal of bothh horizontal and vertical integration within the industry. While there are relatively high fixed costs in producing a given product, there are minimal variable costs.

Another factor is distribution. Even though it costs a great deal to set up a distribution system, once it is in place, the entertainment that flows through it is a relatively cheap commodity. Similarly, emerging technologies allow the same product to be viewed in movie theaters, on videocassette, as pay-per-view, on cable and finally as Movie-of-the weeks on network TV. This does not include the tie-ins like soundtrack CD's, actionfigures and Happy Meals.

For these reasons, companies feel that they need to establish economies of scale and to control several modes of distribution. However, even though integration and consolidation can have beneficial aspects, they also add cost in the form of layers of excess management.