A new picture is coming into focus for Cinedigm Corp.
The firm is unspooling plans to become a leading force in distributing digital movies and TV shows for home viewing.
Last month, the Century City company announced the $51.5 million acquisition of home entertainment distributor Gaiam Vivendi Entertainment, giving Cinedigm rights to thousands of titles that it can sell at stores on DVD, Blu-ray and streaming services.
It’s a second run for Cinedigm, which had specialized in converting movie theaters so they could project digital movies. Chief Executive Chris McGurk said the Gaiam deal is a big step toward remaking the company.
“Gaiam was a very good fit with our growth plans for our content business,” McGurk said. “We’re at the point now where people know who we are and how we’re going to grow.”
The Gaiam deal gives Cinedigm distribution rights for about 8,000 new titles, some from National Geographic, Jim Henson Co., World Wrestling Entertainment and other known brands. Cinedigm will sell those titles on DVD and Blu-ray at big-box stores such as Wal-Marts and other retailers where Gaiam had deals.
Cinedigm already had rights to distribute about 24,000 other titles, but was primarily focused on selling them digitally on platforms such as iTunes, Netflix and Hulu. The company was making some DVD sales but it wasn’t a big part of the business.
A major DVD play would seem out of step for McGurk, a digital evangelist who has staked Cinedigm’s business on the paradigm shift. But he said that physical discs are still outselling digital movies.
Nationally, physical disc sales and rentals declined last year but still added up to about $13 billion, compared with about $5 billion that came from digital rentals and sales, according to L.A. trade group Digital Entertainment Group.
But more importantly, McGurk said building the physical side of Cinedigm’s business will actually feed into plans to make his company the premier distributor of digital content. Some of the movies and TV shows came with digital rights, and Cinedigm plans to obtain the remainder. With control of the physical disc products, he said he’ll have an easier time making deals for digital distribution with the rights-holders.
“Our goal is to have more digital rights than anybody else,” he said. “But you still have to be a strong physical distributor to garner digital rights.”
Cinedigm’s content grab is all done with the goal of building apps to stream content directly to consumers on TVs and connected devices.
Eric Wold, an analyst who follows Cinedigm at B. Riley & Co.’s San Francisco office, said the deal helps the company get into the right place for the continued transition of consumer money from physical to digital.
“They’re well positioned for both,” Wold said. “They’re sitting on both sides as that migration happens.”
Cinedigm was started in 2000 by A. Dale “Bud” Mayo, who had founded a New Jersey movie theater chain, to help theaters transition to digital projection. The company provided roughly $80,000 to $100,000 in financing per screen and contracted with digital projector manufacturers for installations.
The firm considers Century City its home but its filings list New York as the official headquarters. Most of its employees and operations are in Century City.
Cinedigm recoups money from studios when they release movies digitally. The transition allows savings for studios because they don’t have to send reels of 35 millimeter film to theaters anymore. Cinedigm will continue to get fees for the next 10 years or so.
Now that most U.S. cinemas have been converted to digital, the company is moving in its new direction, and relying primarily on acquisitions to get there. Mayo stepped down as chief executive in 2010; McGurk, a former executive at MGM, came in to guide the strategy.
Last year, Cinedigm acquired New Video of New York, a company that distributed independent films to on-demand platforms such as Apple Inc.’s iTunes, for $14 million. Cinedigm has used that deal to acquire independent films for simultaneous theatrical and on-demand release.
Cinedigm releases about 20 films theatrically a year, many of them geared toward art houses, such as “Invisible War,” a military documentary that became the company’s first Academy Award-nominated film last year, and “Short Term 12,” a drama about a twentysomething social worker, which is in theaters now.
Cinedigm acquires the movies at the finished stage, for example, at film festivals. With the Gaiam purchase, Cinedigm believes it can begin to make plays for more commercial fare.
-McGurk said he scoured the market for an acquisition and looked into just about every home entertainment distribution company around, until talks ramped up with Gaiam Inc. of Louisville, Co., earlier this year. Gaiam was looking to sell its entertainment unit to focus more on its fitness and lifestyle products, such as yoga mats, and Cinedigm won the competitive bidding process.
Cinedigm has about 150 employees. About a dozen employees from Gaiam and Cinedigm were laid off after the deal.
The deal was financed with a new credit facility and a stock offering. Cinedigm paid 3.3 times Gaiam Vivendi’s pretax earnings, which would mean the unit has an annual operating profit of $15.6 million. Cinedigm said the combined companies will generate $320 million in annual revenue from physical and digital content sales.
Cinedigm is hoping the acquisition will help it turn a corner. The company has never been profitable on an annual basis since going public a decade ago.
Last week, it announced a loss of $5.2 million on revenue of $20.4 million for the quarter ended Sept. 30, down 10 percent compared with the same period last year. Shares trade on the Nasdaq and climbed 23 percent after earnings were announced to close at $2.16 on Nov. 14.
B. Riley’s Wold said the recurring losses are due in part to the upfront millions needed to acquire and market films for theatrical release, compared with a long and deferred revenue stream that includes years of rentals and downloads.
He said building out the home entertainment business should bring in steady revenue less dependent on the hit-or-miss whims of the box office.
McGurk goes even further. He said acquiring content for digital home delivery provides all of the potential financial upside of releasing a blockbuster film without the production risk.
He compares Cinedigm to Santa Monica studio Lions Gate. But instead of producing blockbusters such as “The Hunger Games” movies, he’s hoping Cinedigm’s financial windfall will come from a hit streaming offering.
That strategy was introduced this year when the company launched a DocuRama channel on YouTube that charges viewers $2.99 a month. The channel will have its own standalone online portal by early next year.
“These channels have the potential to create, each one of them, a lot more value than any individual major studio film,” McGurk said.
After the Gaiam deal, Cinedigm expects to launch more channels that could potentially be branded with the names of WWE, or other known entities, with the support of marketing efforts from those brands.
Andrew D’Silva, an analyst who follows Cinedigm at Merriman Capital in San Francisco, said the company has improved its chances of launching a hit channel with the deal.
“Any one of these things could be really big for them,” he said. “It’s hard to say which is going to be the blockbuster, but if they play enough hands, they’re going to have the right movie on the right channel with the right content to become very popular.”
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