Rentals of physical discs have dropped by -11% in the US in 2011, and the leading provider of rentals is the ubiquitous Redbox vending machine from Coinstar Inc. (NASDAQ: CSTR). The Redbox’s share of rentals rose to 37% in 2011, up from 25% in 2010. Netflix’s disc rentals remained stable at 30%. Blockbuster stores, now owned by Dish Network Corp. (NASDAQ: DISH), saw disc rentals fall by -6% to 17% of the total.

An NPD executive noted a “sea change” in viewing habits:

The movie-rental market is clearly undergoing a sea change, as consumers become better equipped to access on-demand and streamed movies and are more comfortable with available delivery options. Even so renting physical discs from now-ubiquitous kiosks in grocery stores and other venues has taken the lead as the most popular movie-rental method in the U.S.

Shares in Netflix are up more than 5% at $103.33 in a 52-week range of $62.37-$304.79. Coinstar shares are up nearly 2% at $47.61 in a 52-week range of $37.43-$60.71.

Paul Ausick

Verizon Wireless, the joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone Group plc (NASDAQ: VOD), did not just sit on its hands while AT&T tried to push through the T-Mobile deal. The company paid $3.6 billion for unused spectrum owned by SpectrumCo, a consortium of Comcast Corp. (NASDAQ: CMCSA), Time Warner Cable Inc. (NYSE: TWC), and Bright House Networks.

Other potential AT&T acquisitions include MetroPCS Communications Inc. (NYSE: PCS), Leap Wireless International Inc. (NASDAQ: LEAP), and even Sprint Nextel Corp. (NYSE: S). But none would be as good as a deal for Dish.

AT&T’s main problem is that it would have to pay a premium price for Dish — perhaps as much as $50/share, or about 70% above today’s share price. That would value Dish at around $22 billion, a steep price given that AT&T just paid out $4 billion to T-Mobile in break-up fees. Even Ma Bell can’t afford to pay that kind of money too often for nothing in return, and it’s a sure bet that Dish would want a substantial break-up fee as part of any deal.

A report at Bloomberg News notes that Verizon Wireless owns 56 percent more 4G spectrum than AT&T in the top 10 markets and 46 percent more in the top 100. Verizon Wireless also claims 107.7 million subscribers compared with AT&T’s 100.7 million. Had AT&T been able to acquire T-Mobile, it would have increased its spectrum by 62%, leveling the playing field.

Dish recently acquired wireless spectrum from two bankrupt satellite television companies for about $2.8 billion in a deal that is still awaiting FCC approval. Verizon’s deal with SpectrumCo also needs regulatory approval, and so far there is no indication that either approval is in trouble.

But what does AT&T want with a satellite TV business? Of course it could hive it off once the deal is done, but it might make more sense to go after MetroPCS or Leap, both of which are simply wireless carriers. Or AT&T might be able to get Dish to sell just the spectrum. That would not be the best deal for Dish shareholders, but the company’s management would certainly be able to retire following such a transaction.

Dish shares are trading up more than 2% today at $29.34 in a 52-week range of $20.85-$32.56. Shares of AT&T are up almost 1% at $30.30 in a 52-week range of $27.20-$31.94.

One issue to consider… Dish would have every right in the world to demand another massive deal break-up fee in case the telecom giant could not convince regulators that this is good for consumers.

Paul Ausick

Netflix also faces competition from the BBC and the UK’s Channel 4, both of which offer free streaming video. Lovefilm, in a counter-move, today began offering unlimited streaming for about $7.50/month in the UK. Other competitors include Virgin Media Inc. (NASDAQ: VMED) and British Sky Broadcasting.

Netflix has already said that it will lose money in the first quarter because profits in the US will not cover the investments the company is making internationally.

The company’s early success with DVD rentals has caused the media providers more demand higher royalties, putting Netflix in a squeeze that forced the company to try to raise US subscription fees by 60%. The company’s ill-fated Qwikster launch in the US drained 800,000 customers from Netflix’s US subscriber base and caused the company’s share price to fall by more than -50%.

Whether or not Netflix can enjoy the same level of success in Europe that it once held in the US remains to be seen. Fierce competition in the US and internationally coupled with rising prices for content present strong headwinds to Netflix, which depends on subscriber fees for revenues and profits. Amazon, for example, essentially offers its streaming video service free to Amazon Prime members who pay an annual fee of $79 and also get free 2-day shipping on all merchandise orders.

Netflix shares are up about 4.5% this morning, at $90.11 in a 52-week range of $62.37-$304.79.

Paul Ausick

Because Yahoo just appointed a new CEO today and it seems pretty unlikely that the company would decide to buy Netflix without at least checking with the new guy. The rationale for the Netflix buy is that Yahoo needs the content in order to compete with the likes of Amazon.com (NASDAQ: AMZN), Google Inc. (NASDAQ: GOOG), and Apple Inc. (NASDAQ: AAPL). The truth is that Yahoo needs a lot more than content to get back in the game with those giants.

Also favoring an acquisition is Netflix’s low market cap, currently around $4 billion. Even Yahoo with its $19 billion market cap could afford to snap up Netflix. But that assumes that the bidding wouldn’t rise substantially and quickly once Netflix is put in play.

The other, more likely reason, for Netflix’s share price jump today is the company’s report that its 20 million subscribers watched more than 2 billion hours of streaming video in the fourth quarter. Now that’s an impressive number, but it needs a little context, which is missing from Netflix’s announcement. The company only noted that 2 billion hours is the highest number the company has ever recorded.

The Netflix report implies that each subscriber spent one hour every day in the fourth quarter watching a Netflix stream. That’s about 20% of the time that an average American spends in front of a TV set. That is not a small number — and it will only get larger.

This report from Nielsen on TV viewing habits at the end of 2010 put the Netflix number in perspective. Americans spent an average of 15 minutes a day watching DVDs and nearly half an hour watching digitally-recorded programs. Both of those disappear when streaming content becomes more pervasive. And the more than four hours spent with live TV will end up getting chopped as well.  If you were still wondering why the cable and broadcast networks and the movie studios are fighting Netflix so hard, here’s some evidence of what the networks and studios have to look forward to.

The numbers seem to vindicate Netflix and CEO Reed Hastings, who made the right bet but handled the switch to streaming badly and cost the company billions in valuation and 800,000 customers.

Netflix shares are up nearly 7.5% at $77.67 in a 52-week range of $62.37-$304.79. Netflix may never make it back to $300/share, but it won’t be because the company made the wrong bet.

Paul Ausick

The US Department of Justice is investigating the spectrum deal to determine whether or not it is anti-competitive and could jeopardize competition in the telecommunications industry. AT&T Inc. (NYSE: T), Deutsche Telekom AG (OTC: DTEGY), and Sprint Nextel Corp. (NYSE: S) will be watching this very closely.

The Washington Post reports that the DoJ has confirmed the investigation, and an unidentified official has said that the department is most concerned about the cross-marketing aspects of the deal. In the press release announcing the deal, Verizon Wireless had this to say about the cross-marketing arrangement:

The companies also announced that they have entered into several agreements, providing for the sale of various products and services. Through these agreements, the cable companies, on the one hand, and Verizon Wireless, on the other, will become agents to sell one another’s products and, over time, the cable companies will have the option of selling Verizon Wireless’ service on a wholesale basis. Additionally, the cable companies and Verizon Wireless have formed an innovation technology joint venture for the development of technology to better integrate wireline and wireless products and services.

The DoJ does not want Verizon to give up on its fibre optic network, called FiOS, and focus entirely on the wireless market. The cross-marketing agreements also gives former competitors little reason to keep competing. Verizon gets to continue building out its 4G LTE network and to add value by getting access to Comcast and Time Warner content. The cable companies get to expand into wireless services without having to build a costly physical network. The spectrum licenses held by SpectrumCo were sold with the intention that they would spur competition, not kill it.

A month ago we could have said that it is unlikely that the DoJ will kill this deal. But now that the AT&T/T-Mobile USA merger is dead due to the mere threat of anti-trust litigation, it’s not out of the question that the DoJ will at least force some changes to the Verizon-SpectrumCo deal.

Paul Ausick

The James Bond franchise has more than 20 movies already and is getting a new film in 2012.  Then there is the extremely successful Twilight series, which grossed about $1.8 billion in sales in its first three films alone. The two-part Breaking Dawn installments, to be released in November 2011 and in November 2012, will push the franchise’s value even higher and it could easily move into the top ten. Similarly, the three Ice Age films have grossed about $1.92 billion. The fourth installment, coming in July 2012, could make it another worthy contender for the top-grossing franchises.

Mission: Impossible – Ghost Protocol, the fourth in the MI franchise, will hit theaters in December 2011. So far, the three previous movies have grossed about $1.4 billion. Men in Black and Ghostbusters were large film franchises and each has a third film coming in 2012, although neither seems likely to be a serious challenger to the top ten of all-time.

Star Trek’s franchise is so far eleven films, with $1.3 billion in box office sales, is currently far from contention as a top ten movie franchise. The success of the “reboot,” along with a new sequel in the summer of 2012, could propel the franchise up in the ranking if they keep making new films. Similarly, the Iron Man series, which grossed so far $1.2 billion with the first two films, could be propelled much higher with the upcoming Avengers and Iron Man films. James Cameron’s Titanic from 1997 has grossed $1.843 billion in global ticket sales, but the film is about to get new life with a 3-D release in 2012 even if most viewers know the fate of the ship and the characters.

Some blockbuster movie franchises like The Matrix, Jurassic Park, Toy Story, Indiana Jones, X-Men, and a dozen or so others are currently just honorable mentions.  The current threshold to be a top-ten movie franchise is effectively about $2.5 billion in global box office ticket sales. That does not even count DVD sales, rental fees, comics, books, toys, memorabilia, and other movie merchandise. The coming waves of new sequels and prequels will raise that threshold much higher. Almost all sales data came from Box Office Mojo and some international sales data on older films came from IMDB.

Here are 24/7 Wall St.’s top ten movie franchises of all-time:

Given the commodification of the TV business, Sony had better hope so. New research from NPD Group Inc. reports that half the TVs sold in the US now come from two Korean makers — Samsung Electronics (OTC: SSNLF), with 37% of the market, and LG Electronics, with 13%. Sony and Panasonic (NYSE: PC) each claim 9% and Toshiba Corp. (OTC: TOSBF) gets 7%.

Samsung and LG captured 36% of the flat-screen TV market, and 71% of the 3D TV market. Sony, which had 28% of the 3D TV market in the first quarter of 2011, posted market share of just 12% in the third quarter.

Reuters reports that Sony is considering scrapping its LCD TV joint venture with Samsung as the Japanese company seeks to lower its production costs as it tries to keep pace with rapidly declining sales. The two companies cut $555 million in investment in the joint venture last April, as Samsung decided to focus on newer technology and Sony tried to cut its losses in the TV business.

If the acquisition of Ericsson’s share of the smartphone joint venture is the final piece of Sony’s strategic plan, where does that leave the company’s TV business? Unless Sony can establish some kind of technology leadership (remember Trinitron?) that uniquely combines a TV monitor with the company’s other mobile and handheld devices — and if Sony can’t reduce its costs of making TVs — then what’s the point of the company continuing to flounder in the TV market as well as the smartphone and handheld markets?

There is little reason to believe that Sony’s management has a clue about how to capture a decent piece of the smartphone market. The company has piddled away its technology and brand leadership by trailing far behind its competitors in nearly every market it plays in. The company’s game devices have needed a tune-up for a long time, the introduction of a tablet device was a disaster, and there’s every likelihood that Sony Pictures will have to be sold to help the company boost its share price. At this point, Sony’s lagging position in TV sales only indicates that the company is in worse shape than ever.

Sony’s shares are trading down more than -5% in the first hour of trading this morning, at $21.21, in a 52-week range of $18.10-$36.97.

Paul Ausick

Some of the media and publishing companies which will benefit are Gannett Co. (NYSE: GCI), The E. W. Scripps Company (NYSE: SSP), Journal Communications Inc. (NYSE: JRN), Gray Television Inc. (NYSE: GTN), Sinclair Broadcast Group Inc. (NASDAQ: SBGI), and Belo Corp. (NYSE: BLC).  It turns out that Gabelli is not alone as the consensus price targets from Thomson Reuters have much higher price targets even if some have muted ratings.

What Gabelli sees is a climate of greatly increased ad spending in 2012 but the bump is expected to start in August 2011 with the Ames Straw Poll on the campus of Iowa State University.  The report does not try to pick candidate winners, but local television station companies that will broadcast “vast amounts of political advertising” are singled out as the winners.  The gains in the business seem to be well into the double-digits in percentages.  The other drivers will be healthcare and drug advertising, as well as labor groups and corporate spending.

We would have been a bit skeptical on this notion had it not been for the Supreme Court mandate that now allows corporations and special interest groups to spend unlimited funds exercising “free speech” via advertising.  This will be the first presidential election where that is the case and it could bring serious gains to old world media.

Gannett Co. (NYSE: GCI), a Warren Buffett stock holding, should see the most political advertising of about $100 million or more.  Outside of USA Today, its stations in Washington, D.C., Florida, Ohio, Missouri and North Carolina “position it well to capitalize on expected close races in those states.”  Gannet does actually have a dividend, but only about 1.2% in yield.  At $13.40, its 52-week range is $11.65 to $18.93.  Its market cap is $3.2 billion and Thomson Reuters has a consensus price target above $18.50.  Gannett was well above $50 for much of the last decade before the great recession.

The E. W. Scripps Company (NYSE: SSP) was one noted by Gabelli which “should do quite well with its two stations in Florida” along with a boost from healthcare issues in advertising.  At $8.22, its market cap is $486 million and its 52-week range is $6.71 to $10.56.  Analysts have a $10.50 consensus target according to Thomson Reuters.

Even the old Journal Communications Inc. (NYSE: JRN) is listed as a winner which “appears to be in the right places.”  Cited are Wisconsin issues mostly, but other markets are there too.  At $4.84, the market cap is now only $274 million and its 52-week range is $3.45 to $6.18.  Analysts have a $6.50 target and this was above $10.00 as recently as 2007.

Gray Television Inc. (NYSE: GTN) was called one which “always does a good job capturing a disproportionate share of political advertising…”  At $2.14, its 52-week range is $1.44 to $3.10 and this one was above $10.00 as recently as 2007.  The market cap is just under $125 million, making it among the smaller winners.

Sinclair Broadcast Group Inc. (NASDAQ: SBGI) is one that Gabelli anticipates “will generate record levels of political advertising.”  The report does note that company is somewhat handicapped by its large number of Fox, CW and My Network stations which carry less news programming than competitors and cater to a younger demographic.  AT $9.83, its 52-week range is $5.25 to $13.07.  Thomson Reuters has a price target consensus of $14.17 and this one peaked at $30.00 back in the 1990s. It also sports close to a 5% dividend.

Belo Corp. (NYSE: BLC) is noted as one with “relatively low leverage, attractive large market stations and recently announced dividend” all culminating to make it attractive.  At $6.93, its 52-week trading range is $5.04 to $9.27.  This was above $10 as recently as 2008 and Thomson Reuters has a consensus price target of $9.50.  Its market cap is above $720 million.

What is almost funny is that when you screen media companies these now appear in many different searches.  They are turnaround companies for sure, but they also screen as value stocks in many cases due to low earnings multiples or due to asset values.

JON C. OGG

It would be easy to say that Microsoft is too late to the smart-TV market as it was too late to the multimedia player business with its Zune or to the smartphone market with Windows 7′s mobile OS.

Microsoft has many advantages that make it probable it will be a formidable opponent in an American family room that cannot physically accommodate all the consumer electronics devices that wired households can buy and use.

Microsoft’s success with the Xbox line of video game consoles shows what expensive R&D, a nearly unlimited marketing budget, and the tenacity of Microsoft management, which has often been wasted on failed efforts, can do in the electronics industry. It had no business competing with market leader Sony (NASDAQ: SNE) or the devices sold by Nintendo. Microsoft came into an industry with established leaders and engineered and advertised its way to the top.

Microsoft has shown equal tenacity in the search engine business, another example of its resolve to enter and attack markets against high odds.

Microsoft’s other advantage in the family room is that it is already there in many cases. The PC  is still the most widely used electronics utility in the home along with the TV. Americans have already begun to tether the two together. Microsoft may be the company that finally helps strengthen the link between the two machines. That has been the Holy Grail of the consumer electronics field for more than a decade. Tens of billions of dollars have been spent by companies that want to own the PC/TV nexus. There are many more losers than winners by far in that race.

Microsoft’s size and brand often work to its disadvantage. Those things and its ubiquity in the home may be what allows Redmond to win a war is has tried to win for years.

Douglas A. McIntyre

First, a reality check — anyone who invests in media stocks solely because of a broadcast network is nuts. The floundering NBC television network is too small to make much of an impact on GE and on Comcast Corp. (NASDAQ: CMCSA) once the acquisition of NBC Universal is completed. Broadcast TV, including “American Idol’s” home Fox Television Network, produced a tiny operating profit of $40 million for News Corp. (NYSE:  NWS) in the first quarter. The numbers are similarly puny for the Disney business that includes ABC ($123 million) and CBS Inc.’s (NYSE: CBS)  Entertainment Division ($134.5 million), which includes the CBS television network.

So the question becomes if the business is so bad, why bother. The answer is simple — there is plenty of upside. In this age of fractured audiences, broadcast television is still the easiest way to reach a mass audience in the desirable 18-49 demographic. Here are some recent ratings for top shows: “American Idol”-8.8 million viewers; “Lost”: The finale-7.67 million viewers;”The Big Bang Theory” 7.25 million viewers and “Grey’s Anatomy” -7.14 million.  Cable hits such as “WWE Raw” and “SpongeBob Squarepants” have viewership of about 5 million and 4 million.  The audience for cable news shows is even smaller.  Number 1 rated Fox News Channel is seen daily by about 1.3 million people  every day.

Then there’s YouTube and Hulu.  The wildly popular Google video site will need to strike deals with content providers if it ever hopes to make a profit. That will mean charging users at some point.  Hulu, which is owned by News Corp., NBC Universal and the Walt Disney Co., generated more than $100 million in revenue from advertising, according to the Los Angeles Times. Keep in mind that Hulu has not begun charging users though that’s only a matter of time.

Although network television advertising spending fell 9.9 percent in the fourth quarter, there are signs that it is rebounding in 2010 as the economy rebounds.   Of course, cable is doing better and many challenges remain.  Nonetheless, the business is far from being ready for the scrap heap.  Broadcast networks will survive, in one form or another, for years to come.

Jonathan Berr

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