Wall Street blinded by the Hollywood sun
WAY BACK IN THE FALL OF 1974, after eight years on Wall Street as a portfolio manager and investment analyst of several industries, entertainment prominently among them, I was hired by Warner Communications to represent the company to Wall Street: the so-called investor relations function.
From that time on, I have often been a full-time player in — and never less than a full-time observer of — the tug of war between Wall Street and Hollywood.
Having been on the Wall Street side, the major studio corporate side, the indie side and the struggling entrepreneur side, I feel I am particularly well suited, as Tom Pollock famously said of showbiz lawyers, to resolve conflicts of interest.
What conflicts of interest, you say? It is my strongly held view that the entertainment industry and the financial community have been carrying on a Lukewarm War for decades.
One side, the Industry, is seeking approval and respect, even love. The other side, the Street, is seeking vindication of its deepest suspicions of the other’s bona fides. The resulting relationship — dysfunctional at best, openly hostile at worst — has kept both sides from getting the most of what each is seeking from the other: money.
The management of entertainment companies almost universally believe they deserve far more respect, to say nothing of higher price/earnings ratios, than a suspicious analytic fraternity has tended to afford them.
The financial types, in turn, have regarded the CEOs of many entertainment companies as first cousins to shell-game operators.
Nothing the poor industry has done in the way of dramatic and even consistent growth in revenues and profits has managed to impress the Street.
IT IS THE RARE ANALYST OR PORTFOLIO MANAGER on Wall Street who has made a fundamental, long-term case for the industry. (Gordon Crawford and Mario Gabelli are the exceptions that prove this rule.) Yet, looking backward, it is clear that such a case could have and should have been made.
The revenue side of show business, whether as reflected in box office grosses, radio and TV advertising, pay cable subscribers, broadcast and cable network purchasing of entertainment programming or even recorded music sales, has grown dramatically in North America over the past decade or so, and simply phenomenally abroad. Phenomenally, but not unpredictably.
Financial analysts are paid high-six-figure salaries — and their portfolio manager clients often seven-figure salaries — to make just such predictions.
Yet an examination of Wall Street’s written research on nearly every segment of the industry, with the exception of cable TV, yields virtually no reports that insist investors commit a significant percentage of assets to entertainment — and hold the stocks for the very long term, as they typically say about Coca Cola or Merck.
Individual stocks, Disney chief among them, may be recommended as long-term investments at various times, but usually because the analyst considers the company an atypical showbiz stock. In other words, you can date them, but for God’s sake, don’t marry ’em.
Wall Street first warned investors that homevideo would destroy theatrical exhibition. In the early ’80s Hal Vogel made the immortal “cents per fanny” calculation, seeking to prove that videocassette rentals would surely replace box office dollars with mere pennies.
Don’t feel bad, Hal — Lew Wasserman sued Sony to prevent the VCR from destroying the movie business. Fortunately for him and the industry, the courts disagreed.
By the mid-’80s, when VCR penetration had reached 30% of U.S. homes, a chorus of analysts predicted homevideo growth to be a thing of the past. When that penetration hit 75%, video was bringing in the bulk of greatly expanded movie profits.
If Wall Street has learned anything from this history, it is not apparent. I have yet to read an analyst’s report noting the technological and marketing breakthrough DVD represents.
I expressed my views to several analysts regarding what I saw as their long-range myopia. They countered that, by and large, entertainment industry stocks had earned this distrust by consistently underperforming the general market, and that the management of entertainment firms has somehow found a way to spend those large revenue gains, snatching profit defeat from the jaws of revenue victory. I decided to test this hypothesis.
Using 15 years as a measuring period, I tried to see how 20 or so leading entertainment companies had in fact performed. Comparing prices at the beginning of September 1984 to today, these were the startling results.
FOUR OF THOSE LARGEST COMPANIES — Disney, Comcast, Cablevision and TCI (acquired by AT&T earlier this year) — were up more than 20-fold. Time Warner and News Corp. had each risen more than 10-fold, the latter more than sevenfold just since 1991.
In the merely good category, Viacom and Chris-Craft had seen their stock prices increase more than seven times over that 15-year period.
Now for the laggards: GC Cos. (the old General Cinema) and CBS, each of which only quadrupled over this 15-year stretch. (The CBS performance is before the announcement of the Viacom deal.)
Perhaps more interestingly, nearly half of those 20 biggest entertainment stocks back in 1984 had disappeared via merger somewhere between 1989 and 1996. Capital Cities/ABC, Warner Communications, Paramount (Gulf+Western), MCA, Columbia Pictures and Lin Broadcasting were all acquired at prices ranging from three to 10 times their 1984 levels.
Turner Broadcasting was priced by the market at less than $400 million in 1986, when analysts were certain that Ted’s “gross overpayment” for the MGM library would bankrupt the company. Ten years later, Time Warner execs realized that buying Turner for $7.6 billion in TW stock was a smart move — and they were right.
KingWorld, about to disappear into the merged CBS/Viacom, has rewarded those who bought it when it went public back in 1985 with a 22-fold gain.
But my analyst friends still did not cry uncle.
“What about all those crash-and-burn film companies of the ’80s?” one asked. I conceded that he had a point. Suppose a hapless investor back in late 1986 had been unlucky enough to put $10,000 each in Orion Pictures, Carolco, Vestron, Cineplex Odeon, DeLaurentiis Entertainment and — just for good measure — New Line, which had recently debuted as a public company.
For his total investment of $60,000, what would our disastrous stock picker have today? About $575 worth of Loews Cineplex; $8 in Carolco stock; a pile of correspondence from numerous bankruptcy courts; and $169,000 in Time Warner stock, thanks to New Line.
Faint murmurs of “uncle” began to be heard. Still, one diehard pointed out that there has been a roaring bull market these past 15 years, with the Dow Jones Industrials up about eightfold.
So the entertainment stocks haven’t performed so badly, he admitted, but they haven’t been way out ahead of the pack, either. Precisely my point, I responded.
MOST OF THE ENTERTAINMENT INDUSTRY’S SUPERIOR PERFORMANCE has come despite Wall Street, not because of it.
Most of these stocks were undervalued, leading other industry companies to realize their value at acquisition prices far above the levels the Street thought appropriate.
The market evaluated TCI, America’s second-largest cable company, at $6 billion just two years before AT&T decided that paying $48 billion for it represented good value.
Right now, the market is taking its usual wait-and-see attitude toward Seagram’s giant bet on music and smaller bet on films via its purchases of Polygram and Universal. But I’ll bet the shareholders of Seagram will eventually enjoy an extended, if deferred, Happy Hour.
Sensing victory, I then went from the fairly solid ground of statistics to the rather shaky terrain of my subjective post-Freudian views as to why Wall Street doesn’t like Hollywood. Brushing lightly over the few good reasons for this distaste — somewhat opaque accounting, management instability and a tendency by entertainment execs to tell the Street what they think it wants to hear — I whispered my belief as to the real reason: jealousy.
First, people who run the entertainment industry make almost as much money as do perhaps dozens of partners at each of hundreds of brokerage firms, investment banks, hedge funds, etc. This offends Wall Street’s sense of the natural order of things.
But far worse, people in most, if not all, aspects of showbiz commit the cardinal sin of having fun. However much the biz may focus on money, at the end of the day there is a real product — a movie, a TV series, a record album — in which one can often have an actual measure of pride and which just might give pleasure to a lot of people.
Those hedge-fund partners are left with the rather less satisfying realization that they have made a small number of very rich people still richer, not to mention themselves. It’s nice, but it’s not as much fun.
(Roger Smith, Variety and Daily Variety’s financial columnist, was formerly VP, corporate affairs, of Warner Communications and exec VP of Carolco Pictures. He now heads the Gotham-based consulting firm of Roger Smith & Co.)