The Mouse That Roared, Again

11/21/2011 7:30 am EST


Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Wealth Network

For sheer momentum and breadth of success in a highly competitive sector, it’s hard to find a better pick than the home of Mickey and friends, writes Paul Goodwin of Cabot Wealth Advisory.

When I look at the media gusher of cable TV, DVDs, radio, MP3s, video games, CDs, and online entertainment of all kinds that makes its way into my living room and office (and some of which even sneaks into my six-year-old pickup truck), I’m absolutely blown away.

I grew up with three channels on my family TV (PBS didn’t come along until 1970), and only AM on my radio. (I know what you’re thinking, and no, the dinosaurs were all dead by the time I was born.)

But of all the communication and broadcasting innovations that have come along during my lifetime, I think the most revolutionary was (drum roll) the videocassette recorder, or VCR.

It’s hard to remember that the VCR was an enormously controversial technology, and that both Hollywood and the television industry fought against it in both the law courts and the court of public opinion. The argument was that their products (movies and TV shows) were copyrighted material, and that duplicating them on videotape amounted to theft.

VCR manufacturers were successful in selling US courts on the idea that consumers wouldn’t really "steal" the programs that they taped, they would just "time shift" them to watch at a more convenient time. Yeah, right.

Within a couple of years of getting our first VCR, my family had a row of tapes about four feet long, and we still have most of them! I have friends with an entire wall of tapes with an average of three movies per tape.

The big open secret here is that, although DVDs are clearer, crisper and include access to all kinds of supplementary materials, dazzling freeze frames, and instant navigation, watching a movie on a VHS tape is still a fine experience.

But my real point in writing this isn’t just a nostalgic walk down Memory Lane (or Memorex Lane, either). Rather, it’s to point out that maximizing revenue (on the owner’s side) and maximizing access (on the user’s side) is a constant battle between competing interests.

Years ago, Stuart Brand, the visionary behind the Whole Earth Catalog (which was the equivalent of the Internet as an information source for the back-to-the-earth contingent of the Hippie movement) spoke at the first Hacker’s Conference in 1984 (the 26th one happened earlier this month).

He said that "Information wants to be free. Information also wants to be expensive. Information wants to be free because it has become so cheap to distribute, copy, and recombine—too cheap to meter. It wants to be expensive because it can be immeasurably valuable to the recipient. That tension will not go away."

Well, he certainly got that right. We fought that battle in the music-sharing Napster wars (which The Industry won) and we’re fighting it now on Hulu and YouTube.

You can find out where the front lines are by searching for the Stop Online Piracy Act (SOPA) and the PROTECT-IP Act, two bills now before Congress that are intended to give copyright holders a bigger hammer with which to bludgeon those who post their content without permission.

So, bit-by-bit, those who control the content can afford better lawyers and longer litigation, and are generally coming out on top.

The music and movie industries would undoubtedly like to move toward a subscriber model that will give them a continuing source of revenue á la Netflix (NFLX). The negotiations now are about how much (or how little) they will have to offer to get you to authorize the continuing monthly credit-card charge.

My monthly cable/Internet/phone bill is already atrociously high, and includes dozens of channels that I never watch, and likely never will, while the few I would really like to have (Turner Classic Movies, for instance) are "optional at extra charge." The "bundle" of services they offer perpetuates itself because if I "unbundled" it, the separate parts would cost even more.

It’s like a farmstand that tells you that you can’t buy the bag of apples you want unless you take a trunkful of manure with it.

Henry Ford once said, "A man who will use his skill and constructive imagination to see how much he can give for a dollar, instead of how little he can give for a dollar, is bound to succeed." The people who own the content these days seem to be aiming at the second idea rather than the first.

I know it’s in the DNA of corporations to try to maximize revenue, and I can hardly complain when I have so many entertainment choices that were unthinkable even a decade ago. But I still grumble every time I sort through that trunkload of crap.

My stock pick today is Walt Disney Company (DIS), a media giant that has its fingers in every corner of the entertainment business. Disney owns ABC-TV, ESPN, A&E, theme parks and resorts, produces movies through its Disney Studios and Pixar divisions, owns comic-book giant Marvel, and licenses its products for toys, clothing, and every other product that can have a picture of a princess affixed to it.

Disney is a formidable presence in the media business, generally growing revenue in the single digits (revenue growth was positive in eight of the last nine years) and paying a small dividend (trailing annual dividend yield was 1.1%).

The company manages its vault of classic animated films with canny precision, offering them for sale on DVD only for a limited time and reviving them for theatrical runs as new generations grow into them.

DIS is a generally solid stock that mostly avoids big volatility, holding its value and providing a little income. Right now, the stock is favorably priced, with a P/E ratio of just 14, as the stock is only partially recovered from a five-month correction that included an uncharacteristic over-the-falls decline in late July and early August, when it was dragged down by a powerful market dip.

DIS can be pushed around a bit by quarterly earnings that reflect the success (or occasional failure) of a tent-pole animated feature. But the sheer scale of this diversified company (market cap is nearly $67 billion) reduces the danger substantially.

The rally that has lifted DIS from $28 in early October may need some time to consolidate in the $35 region. If you have a hankering for a bite of The Mouse, you should be able to get in near $34.

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