The packaged media landscape

FEBRUARY 5, 2010
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This week’s news really started last week with the announcement that Thomson, darling of French new media at the start of the millennium, is in future to be known as Technicolor, a business that dates back to 1915. It didn’t set the markets on fire.

Thomson had filed a restructuring plan in early December, which was approved by shareholders only on Jan. 27, and so good news was more than overdue. When it came, the company’s share price on the Paris Bourse climbed by more than 8% but it drifted downwards later in the week.

Technicolor was acquired in 2001 when Thomson paid British media company Carlton Communications $2.1 billion for what was then perceived as a declining business. (Another of this week’s headliners, a certain David Cameron, was Carlton’s Head of Corporate Communications at the time.) Technicolor-Thomson became a hyphenated hydra under its Paris-based management and struggled to generate profits ever since.

The change of name, coupled with the disposal of unrelated businesses and the subsequent consolidation of the remaining divisions, marks a shift from old-school thinking in France to the rejuvenated realms of “old Hollywood”. The name Technicolor might forever be associated with classic films such as “A Star is Born” and “The Wizard of Oz”, but today it is the world’s largest replicator of DVD titles and the biggest Blu-ray manufacturer after Sony DADC.

Technicolor’s activities beyond the cinema, however, are a mystery to many consumers although under Franco-American Chairman and CEO Frederic Rose the re-branded conglomerate has concentrated on the Communication, Media and Entertainment sector. The name will be prominent in the high street from now on and the message “Powered by Technicolor” is expected to appear on web video and CE devices later this year.

Futuresource Consulting Managing Director of Corporate Development Jim Bottoms says, “Under the leadership of Rose, the company is investing heavily in digital distribution. Technicolor is a pioneer in digital technology, and partnerships they are putting in place with leading media companies will prove invaluable in the future.”

While the name Technicolor is known to anyone who has ever been to the cinema, public awareness of Cinram is probably zero despite the fact that many of the DVD and Blu-ray Discs they own are likely to have been made by Cinram. The Toronto-based company has been a major replicator and distributor of DVDs since the format’s launch. More recently, Cinram has invested heavily in Blu-ray, buoyed by the security of an exclusive contract with Warner Home Video, which contributed 28% of the company’s revenue last year.

In 2003, when Time Warner was looking for a buyer for its WEA manufacturing operation, Cinram stepped in with a $1 billion-plus bid on the understanding that optical disc production and distribution for Warner Home Video would be part of the deal. Six years later, the agreement is near its end but it was still a major blow this week when Cinram learned that all Warner Home Video work would go to Technicolor from August onwards.

Several competitors reportedly were involved in the bidding process with one said to be: “Gutted not to win the business”. But it is at Cinram that the disappointment will be most keenly felt.

Jim Bottoms says that Cinram fought long and hard to keep the Warner work. “They put up a very strong team and maybe they would have retained the contract if the team had been in place longer or, given the announcement that Warner and Technicolor are to form a technology partnership, had established their mark in digital distribution as well as disc replication,” Bottoms says.

“The news came out of the blue, like an ice-cold shower,” said a union representative at one of the larger Cinram sites in Europe, near Rouen in France. The company employs 17,000 at plants in North America, Mexico, Spain, Germany, France and the UK and the decision will have a significant impact on the prospects of the work force.

A Warner representative said, “We’ve had a long affiliation with Cinram and thank them for their years of service to our company. As part of our standard practices, we are constantly looking at the systems we have in place and evolving them to meet our changing needs. The decision to change our video replication and distribution vendor, while difficult to make, is the right one for us at this time.”

Screen Digest Chief Analyst Ben Keen says the transformation of Technicolor under Rose is at the heart of the Warner decision. “This hugely valuable contract is a vindication of Frederic Rose's strategy to build Technicolor into a broad-based media services company, a proposition that competitors obviously struggled to match,” Keen says. “It’s no coincidence that this deal announcement – under negotiation for at least 12 months – was timed just after Technicolor was able to confirm its debt restructuring. Warner clearly wanted comfort over their new partner's long-term financial stability.”

Time Warner issued its fourth-quarter numbers on Wednesday, revealing that operating income for Warner Bros. was up $165 million in Q4 compared to 2008, bringing the year’s total to $1,084 million, a 32% increase. Tucked away in the Appendix, the company posted figures for home video and electronic delivery of theatrical content, which showed that revenues for 2009 declined year-on-year by 15% to $2.82 billion. Revenues from delivery of television content fell by almost 5% from $814 million in 2008 to $777 million last year.

So even with electronic delivery factored in, Warner’s home entertainment revenues declined substantially in 2009. Faced with the need to recover from this situation in 2010, perhaps the switch to a supplier with a stronger track record in digital delivery is no surprise.

Time Warner Chairman and CEO, Jeff Bewkes hinted as much in his commentary on the annual report. “We’ll build on this foundation in 2010 by continuing to leverage our brands and scale to make the most compelling content, improve our efficiency, expand internationally and accelerate the digital transition in our businesses,” he wrote. “To help evolve new business models that enhance our profitability and extend our brands, we’re leading such industry-wide initiatives as ‘TV Everywhere’ and a digital storefront to provide magazine and other content for portable digital devices.”

When James Cameron’s 3D opus “Avatar” reaches retail shelves later this year, it is Cinram that will supply Twentieth Century Fox with the packaged media needed to break home video records as the $2 billion grossing film did at the box office. Aside from Fox, Cinram has long term contracts with Universal, Lionsgate Entertainment and MGM that will ensure that its DVD and Blu-ray wheels keep turning for a while longer. Cinram will survive, for now, but without a convincing digital delivery strategy in place, further defections could be on the cards.