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Stock Investing in the Entertainment Industry
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As we mentioned previously, companies that depend on one-time user fees often have some shortcomings, including cash flow volatility and low profit margins. In the film, television, and music industries, which largely revolve around creating and distributing feature films, television series, and musical recordings, there aren't many positives to offset these negative characteristics. We're generally not fans of companies that operate in this area of the media Industry

On the positive side, most of these businesses have large libraries of films, television series, and music recordings, "which are legally protected from du­plication. Revenue from these libraries tends to be lucrative because the costs of production "were recorded in the past. Also, the barriers to entry are high in most cases. It takes a significant amount of capital to develop television series on an ongoing basis and create multiple feature films.

Barriers to entry in distribution also have historically been high. Over the past few years, though, the Internet has weakened this barrier, especially in the music industry. Peer-to-peer distribution of recorded music has meant hundreds of millions of dollars in lost profits for the large record labels. As Some investors look to invest in a media company that is responsible for the current blockbuster movie, the latest triple-platinum album, or the hot new television drama. Don't! In all likelihood, the current hit is making up forthe flops that no one even heard about. The media conglomerates that bring these hits to market are big, complex enti­ties that need much more than one hit to spur long-term profit growth. Unless they are trading at deep discounts to their intrinsic value (which is not always easy to deter- mine because of volatile cash flows), we'd look elsewhere.

Few entertainment-oriented media firms have been able to create significant shareholder value over the long haul. For example, movie and entertainment firms within the S&P 500 returned only about 3 percent annually during the 1990s, whereas publishing and printing posted average annual gains that were many times higher. The reasons for the long-term underperfor- mance of entertainment firms is clear: The bulk of the industry's profits go to high-profile actors, directors, and executives, which leaves little for sharehold­ers. Moreover, this is at heart a hit-driven business, and consistently predicting consumer tastes is difficult to do over a long time period.

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