Invest In Entertainment People Can Afford
Now that Pixar isn't traded any longer, and Marvel has been taken off the market (hmm, both by Disney ... there's a thought), I thought it was worth looking for some companies which are reliably called upon to entertain the masses regardless how employment was going or the trade deficit looked. (I didn't used to like Disney because I viewed it as dependent on people having enough extra cash to blow on a trip to Orlando where they know in advance they will be soaked with exorbitant fees. This is a capital-intensive business that depends on macro trends in transportation and employment to work. Yuck. And its films ... did anyone actually see the movie "Brother Bear"? There was a real drought there for a while. But with the addition of both Pixar and Marvel, it is definitely worth looking at whether the overall economics of DIS support purchase. And have you noticed how many Disney characters turn up in toys/dolls/plates/cups/costumes/shirts that depict princesses/pixies/magic? There is definitely mass-market opportunity in the Disney portfolio even outside Pixar and Marvel.)
(1) Hasboro. You played with Mr. Potato Head until your dog ate all the pieces. You bought Chutes and Ladders as your kids' first board game. And there is always another generation of kids about to learn about Dungeons and Dragons. Did you realize that Hasboro can turn
(2) Dreamworks Animation. I don't want to get into the argument with you about the social value of DWA's products. Next to Pixar's Monsters Inc. – full of important commentary on the value of friends, the reliability of character, and what it means to do the right thing, and capped with the lesson that monsters only have power so long as they are feared – DWA's Shrek was from opening scene (fart humor in a pond, as the male lead eats a fume-killed fish) straight through (short jokes, etc.) to the end (top-hits song licensing) designed to appeal not to our sophisticated tastes or our deep philosophical needs but to ... well, to the lowest common denominator. The films aren't sophisticated, they're base. And they make a ton of money. (They also command some star talent salaries, since the leads are celebrities; Pixar seems to have learned to cut its celebrity count from two (Toy Story's Tom Hanks and Tim Allen) to one (Monsters Inc. had Billy Crystal and Finding Nemo had Ellen Degeneres) to zero (WALL•E? Up?). But with hundreds of millions in assured revenues, DWA can afford to pad the Shrek franchise's expense column with the likes of Eddie Murphy, Cameron Diaz, Mike Meyers, John Lithgow, Justin Timberlake, Antonio Banderas, Eric Idle, John Cleese, Julie Andrews and whomever they think of next.) The Madagascar and Kung Fu Panda franchises will certainly continue to provide both small-screen and large-screen opportunities, and the company is clearly able to develop casts and worlds audiences like to visit. The money-making potential of the company will increase with its catalog, and the licensing opportunities will only get better and better. Dreamworks has matured beyond simply copying Pixar (Antz to A Bug's Life, Shrek to Monsters Inc., A Shark Tale to Finding Nemo ... notice the old pattern?) and has the power to attract scripts and fund top-quality projects. While it's unfortunate that DreamWorks is no longer in the business of making products like Galaxy Quest, it's making a consistent profit on a growing portfolio of characters with a real following. The share price pullback on disappointment following the #1-on-opening-weekend 3-D feature How To Train Your Dragon (rated 98% on Rotten Tomatoes) is a buy op; with ratings like that, there will be a long-tail following and a receptive audience for sequel material. (Unlike Pixar, Dreamworks makes some small-screen offerings to boost ongoing cash from its character portfolio.) If Dreamworks' idea of bad is the #1 box office opener, folks could do worse. Take advantage of the pullback in the full knowledge that Antonio Banderas will be back as Puss in Boots, Shrek will ride again, and content like How To Train Your Dragon will yield dividends for years. (Imagine what will happen to the value of 3D content when 3D TV becomes commonplace. Re-release, anyone? Films with 98% rating and fast-action flying sequences will enter every library.)
That's my suggestion on entertainment. But I forget ... when you consider trying films like Shreck II or Transformers at home, you're at least as likely to rent than to buy. My eloquent paragraph here was eaten by an apparent bug in Blogger's text input interface, but the gist is that entertainment for the masses is a thesis that also leads to Netflix (NFLX), and Netflix >> Blockbuster. Convenience rules: from the time I first streamed La Femme Nikita on a whim, I was sold. I was using a subscription I got as a promotion when I rolled money into an account at TD Ameritrade, and I never canceled. To see what I wanted, I didn't have to be healthy enough to go to a local Blockbuster, and I didn't have to be patient enough for the U. S. Postal Service. All I had to do was to tolerate a Silverlight plug-in. On the iPad I won't have to do even that. Just thinking about it, I have an inkling to stream La Femme Nikita (this link DVD) again. With unlimited free streaming, why shouldn't I? And if, halfway through, I find I jones for even older action, I can stream Akira Kurusawa's Seven Samurai. No extra charge.
So I give you:
(3) Netflix. I have a friend who canceled his cable subscription recently in favor of a Mac Mini-powered video setup that provides his HDTV with Netflix, Hulu, NBC, ABC, and all kinds of other content when he's not spinning a disc. (Okay, he encoded all the discs and "spins" them streaming on his LAN through his Mac Mini, which thinks each disc image is a mounted DVD, but it's all the same without the risk of scratches to his originals. The fact you get stuck with ads on free Hulu is different than paid cable in what way?) My friend did some math and realized he was ahead in terms of content (the shows he wants, when he wants them, and often ad-free; he's not a sports fan, so the need for live video is about nil) and ahead in monthly expense. As more and more people do this kind of math, Netflix' subscriptions will grow and with subscribers will grow its profit. Netflix is a near-term bet on videophiles and a long-term bet on the trend toward digital content delivery – a trend likely to accelerate as net infrastructure improves.
Of the three, DWA has the most risk because it is least diversified. DIS is similar (Okay, I've given three and a half) but has a larger pool of video properties. Now that DIS has – post Pixar purchase – learned how to make movies again (if you have kids, you need to own Bolt), I suppose I've really made four investment suggestions. Netflix is a bet on viewing trends. Hasboro is a bet on entertainment broadly, as it includes board games, movies, toys (I was at a 5-year-old's surprise party where tripod-mounted belt-fed Nerf guns raked the adults with harmless fire, you've got to see the stuff they make these days), but especially is a bet on the company's management's proven excellence in enhancing to global stature its portfolio brands. All are a bet on the tendency of people to pay for <$20 amusements even when things are tough. All these companies make a fortune on <$20 amusements – movie tickets, action figures, T-shirts, subscriptions – and the size of this market will grow with population regardless what happens to the population's income (short of a food shortage). All are seriously attractive, particularly in my view the one's I've numbered.
Today, I'm off to see How To Train Your Dragon with my youngest (she likes to be a little scared) and a friend and her oldest (who won't be scared). I happen to like dragons :-)