State of DISK (Analysis)
Well, now that I've listened to the conf call and had some time to cool down after reading that press release, I'll try to post a more complete analysis of where I think DISK is today.
DISK really should be considered four different types of business: (1) independent studio, (2) distributor, (3) fulfillment house, and (4) e-tailer through kencranes.com. If you looked at DISK a year or two ago, there were considerable opportunities in all of these areas. I think at this point in time, we can probably get a more realistic viewpoint of where DISK might be a year from now, given how they have executed their game plan.
(1) Independent Studio: Not a big surprise in this area. DVD is taking off as many of us expected, and the studios will not be issuing exclusive licensing for most of their titles. DISK will have to be content with snapping up the rights to a variety of peripheral programming.
However, I continue to feel that DISK sales of exclusive programming should rise considerably given that their exclusive titles will probably be the *last* ones to get bought by new DVD owners. For example, if I'm starting a DVD collection, my first selection probably won't be Kiss but Sling Blade/etc. As the rental places increase their inventory, though, DISK should make inroads.
Verdict: Exclusive title growth should parallel or exceed DVD growth and this composes the high margin part of the business.
2) Distributor - The studios are selling direct to all the big e-tailers now that those companies compose a large % of DVD sales. Luckily, studios are slow (for now... don't expect them to stay that way) and DISK is seeing an increase in their catalog business. But this is a cut-throat business and Valley Media (and others) will be very thirsty for business now that the studios are bypassing them for big clients.
Verdict: Good for now but expect increased competition for clients. Low margins regardless.
3) Fulfillment house. Somewhat puzzling picture here. Las Vegas still not operating at optimal efficiency despite very long development period. Image still not fulfilling for kencranes. Conf call indicated this was due to having to implement over a dozen EDI maps (?) instead of the usual 5-6 for typical customer. This doesn't make sense to me since Image can just treat kencranes.com as a typical customer for now. And if kencranes.com isn't hooked in, nobody else probably is. So much for my dream of having Image be the back-end fulfillment house for e-tailers. Instead, those e-tailers are establishing their own warehouses, buying from studios direct, and (perhaps) will use Image for other orders if Valley Media and others don't get there first.
Verdict: Developmental mishaps hamper this possibility. Wait and see if anything happens here.
4) E-tailer: Marty claims kencranes.com doing great. I think they are dropping the ball. EW article gives kencranes.com an A- compared to Reel.com A+. It's stupid to think Reel.com will just sit on their laurels while DVDPlanet is developed. It's stupid to dismiss DVDExpress. You guys make a comparison:
reel.com
amazon.com
dvd.com
kencranes.com
How much of kencranes.com revenue was from the RCA deal? I agree that having names of RCA DVD buyers is great, but who knows when DVDPlanet.com is ready? Target is now mid-February.. anyone want to guess end of March? And in that period, I'm sure the other e-tailers will not improve at all <right>.
Overall, DISK will grow revenue rapidly as DVD penetrates the video market. Their independent studio business will continue to improve. Unfortunately, they have not inspired any confidence in their retailing and electronic fulfillment aspects. They will have to *prove* to me that they can execute in those areas since they have repeatedly missed deadlines.
Possible downside: Profits in independent studio/DVD distribution side gets eaten by bad game plan on internet e-tailing side.
Possible upside: They actually get their infrastructure working and have a competitive DVDPlanet.com.
At this point, it's wait and see on the internet side. Given their track record, I'm prone to think they will not be more than a small e-tailing player with DVDPlanet. Lots of big competition that have had better track records.
Conclusion: DISK should go up from here based on DVD penetration into households. Most of its value is as an independent DVD studio. While most of the hype centers on the internet retailing aspects, I think it will only matter if IPO can milk money from market. Without IPO, e-tailer will provide additional revenue but not be a big player. |
