For Subscribers

Get the complete article now!

TWST: Rich, what distinguishes the approach that you take to entertainment?

Mr. MacDonald: We follow pretty much the same approach that Ed does. We follow a mix of mega entertainment companies. I think the wrinkle between his approach and our approach is, we tend to look for out-of-favor companies, where for whatever reason there’s a disconnect between fundamentally capable management and a disaffected investor base. I think the best example this year was Disney (NYSE:DIS), where we decided that the selling had been overdone, that there was too much skepticism, that there was an opportunity there. I think Ed also focuses on free cash flow, as we do. We look for early signs of a turn in free cash flow or rapid growth of free cash flow, because of either operational improvements or getting past a capital spending cycle.

TWST: Rich, what do the global trends suggest about spending on entertainment in Europe, Asia and Latin America, and to what extent are the mega entertainment companies — Disney, Time Warner and Viacom — beneficiaries of spending internationally?

Mr. MacDonald: As Jim pointed out, there are a great number of different categories. There are enormous cultural differences and differences in personal income and distribution of income as well. Having said that, there's been a trend in Europe since, oh, the mid-1980s, to forge a new landscape for European media which would introduce both private television networks and a broad, pan-European regulatory structure. Since the publication of Television Without Frontiers, two things have happened. First, pay television was born in Europe.

TWST: You raise the issue of digital television. Are all the networks developing programming that will be available on HDTV?

Mr. MacDonald: It's not ubiquitous at the moment, and it's not 24 hours, but CBS, HBO, ABC and some local TV stations are doing it. Yesterday, I was talking to somebody who said, “Well, you can get digital TV from Hartford or from a number of places around here. CBS and ABC are both broadcasting a number of programs in the HDTV format and it's beginning to happen.” I'd say it's a five-year process, but the fact is, you can buy an HDTV today and actually get HDTV programming on it.

TWST: Rich, will you look back over the past year and just review the performance of these stocks for us? Tell us, among those that you follow, which have performed in line with your expectations or have exceeded them.

Mr. MacDonald: Well, I think everybody has to be happy with the performance of Viacom this year. I think Disney performed, at least initially, better than people's expectations. Certainly in terms of financial performance, they have done significantly better than expectations. At the beginning of the year earnings per share estimates were somewhere close to being flat with last year, which was pretty much in line with company guidance, and now they're up to between $0.80 and $0.85 versus the high $0.60s. Time Warner either performed in line with expectations or slightly below. They didn't grow as fast as their peer group. They'll probably grow at the low end of their expected range (13%-15%), which they've been talking about for several years now.