INDUSTRY SEGMENT PERFORMANCE
All three categories registered increases in 1999, led by box-office expenditures, which rose 7.2% to a high of $7.4 billion. Home video expenditures rose 4.4% to $19.3 billion, while television programming spending gained 4.9% to $14.0 billion.
Controversial digital technologies, such as MP3 and Napster, which allow consumers to bypass retail outlets and download music over the Internet for free, are shaking up the music industry. The introduction of these technologies sparked a major backlash from the traditional music industry in 1999, but Veronis Suhler believes, "the floodgates are now open for direct-to-consumer distribution of recorded music."
Though it remains dwarfed by filmed entertainment and recorded music, interactive entertainment's 1999 growth was the highest of the three segments. Gains were fueled largely by the introduction last year of Sega's Dreamcast system, which offered superior graphics and speed to earlier hardware models; the Internet, which has allowed for the preponderance of popular multiplayer games; and a healthy economy.
Filmed entertainment, which includes box-office, home video, and television programming spending, grew by 8.5 percent in 1998, spurred by healthy increases in all three areas. Box-office spending was up 9.2 percent, while home video and television expenditures rose by 8.5 percent and 8.3 percent, respectively.
Spending will grow at a 7.1 percent compound annual rate over the upcoming five years, somewhat faster than the 6.7 percent annual increase posted over the last five years. We project that by 2003 total expenditures on filmed entertainment will be $55.6 billion, $16 billion higher than the $39.5 billion of 1998.
Spending in the recorded music industry will grow at a 5.5 percent compound annual rate over the forecast period, a bit lower than the 6.4 percent annual increase of 1993-1998.
We expect that spending on interactive entertainment will increase to $7.2 billion in 2003 from $4.1 billion in 1998, climbing at an 11.8 percent annual rate. Over the last five years, interactive entertainment expenditures averaged 9.1 percent compound annual growth.
The television programming industry also had mixed results in 1997. On the plus side, UPN and WB increased their program hours and demand for programming in 1997, cable networks upped their use of original programs, and returning hit shows on the networks commanded higher license fees. On the minus side, self-produced newsmagazine programs reduced the networks' reliance on programming provided by third parties.
Operating costs rose faster than revenues for the second straight year, reflecting higher production and marketing costs for theatrical features, rising television programming production costs, and increased spending on video manufacturing and duplication. The operating income margin slipped two-tenths of a point to 9.0% in 1997, while the operating cash flow margin fell a half point to 12.0%.
High returns, declining club and mail order sales, weaknesses in foreign markets and low overseas exchange rates were partially offset by strong retail spending spurred by the emergence of new artists.
Rising technology costs continued to depress operating income margins, but the 1997 decline was modest compared with a sharp drop in 1996, and operating cash flow margins edged up in 1997.
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