Primedia Limited Annual Report 2005 Annual Report 2005
Annual Report 2005

 Content

divisional results | overview | Ster-kinekor Films | Primedia Unlimited Content | information systems | industry forums prospects

THE SOUTH AFRICAN CINEMA EXHIBITION INDUSTRY CAN SIGNIFICANTLY INCREASE ITS ATTENDANCE LEVELS BY PENETRATING THE BLACK CONSUMER MARKET


DIVISIONAL RESULTS

 20052004%
R'mR'mchange
Revenue933,8899,53,8
EBITDA95,893,42,6
PBIT71,470,02,1
Excludes the results of Primedia Unlimited Content.

OVERVIEW

During the period under review, Primedia announced that it had taken a strategic decision to ramp up and diversify its content business and, post year end, established a broader content division referred to as Primedia Content. This division currently comprises cinema exhibition, film distribution, video and DVD, and electronic games distribution. New acquisitions in the Primedia Content division include Airgames (mobile content) and Book4Golf (online commercialisation of golf) which will augment DVD City (home entertainment outlets in townships).

Revenue for the filmed entertainment division was up 3,8% to R933,8 million (2004: R899,5 million). PBIT was up 2,1% to R71,4 million (2004: R70,0 million) with PBIT margins decreasing fractionally from 7,8% to 7,6%. Ster-Kinekor Theatres together with Ster-Kinekor Product Distribution recorded a 36,5% decline in PBIT to R31,3 million (2004: R49,3 million) on the back of a 7,5% decline in revenue to R462,8 million (2004: R500,2 million). This decline was mainly attributable to lower than expected attendances. Ster-Kinekor Home Entertainment fared very well, with PBIT increasing by 64,1% to R48,0 million (2004: R29,3 million) on the back of revenue increasing by 16,7% to R471,0 million (2004: R403,7 million). The video, DVD and electronic games distribution businesses had a very good year whilst Primedia Unlimited Content, which is still in a start-up phase, contributed revenue of R1,7 million and a PBIT loss of R1,1 million.

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STER-KINEKOR FILMS


Ster-Kinekor Films

*Before central costs.

Ster-Kinekor Theatres

Ster-Kinekor Theatres operates 8 Classic, 32 Junction and 5 Cinema Nouveau cinemas in South Africa as well as cinemas in Namibia, Zimbabwe and Zambia.

The continuation of last year's trend, which saw the release of a large number of titles, but significantly fewer blockbusters, negatively affected Ster-Kinekor Theatres during the year under review. Evidence of this global trend is reflected in an overall decline in attendances in all major territories across the world, with even traditionally strong territories like the US and UK showing year-on-year declines in box office and attendances.

Based on research, the vast majority of Ster-Kinekor's customer base has traditionally been drawn from the white consumer base. With the rapid development of a new middle-class black consumer base in South Africa, we believe that the South African cinema exhibition industry can significantly increase its attendance levels by penetrating this segment of the market. Accordingly, our long-term strategy has been focused around this opportunity and covers three key elements:

  • Access to cinema: Our focus has been to target black consumers within a fixed radius of our cinemas. In addition, we are exploring suitable opportunities to operate cinemas within new entertainment and shopping malls in township areas;
  • Awareness: Increasing our marketing efforts to ensure that the target market is made aware of movies being released each week; and
  • Affordability: We consider that pricing will be key to unlocking this market.

As part of our efforts to address the affordability issue, and based on research and the results of our loyalty programmes which show that even traditional cinema consumers are sensitive to pricing, Ster-Kinekor rolled out one of its key strategies in March 2005, with the splitting of Ster-Kinekor Theatres into the following distinct offerings:

  • Ster-Kinekor Classic – offering customers the ultimate experience in cinema going;
  • Ster-Kinekor Junction – focused on making movies affordable for all South Africans; and
  • Cinema Nouveau – remaining the exclusive art cinema offering.

Our customers initially responded positively to the initiative, but we were unable to agree film hire terms with Nu-Metro Film Distribution, a major film distributor that acts on behalf of two major studios (20th Century Fox and Warners), at the significantly reduced pricing levels introduced at the Ster-Kinekor Junction sites. This meant that films released by Nu-Metro Film Distribution shortly after the introduction of the new pricing strategy have not been shown at our Junction sites. Consequently this has impacted on our strategy. We remain committed to penetrating the black consumer market and to finding a win-win solution with Nu-Metro Film Distribution, to the benefit of the cinema exhibition industry as a whole.

Ster-Kinekor Product Distribution

The Ster-Kinekor Product Distribution division represents two major Hollywood studios, Sony Pictures Releasing Internationally (previously Columbia Tri-Star), and Buena Vista International/Disney and distributes product to all exhibitors nationally. It also acquires independent product at the film markets such as Cannes and Los Angeles.

During the year, the product distribution division continued its active support of local content. Close co-operation with the National Film and Video Foundation ("NFVF"), the government appointed body for development of local content, as well as the ongoing relationship with DV8, an independent production company, enabled the product distribution division to distribute an unprecedented number of local movies.

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Ster-Kinekor Home Entertainment


Ster-Kinekor Home Entertainment

*Before central costs.

Ster-Kinekor Home Entertainment, up until recently, comprised two businesses:

  • Video and DVD distribution which has the exclusive video and DVD distribution rights for two major studios, being Columbia and Universal, as well as a number of independent studios; and
  • Electronic games distribution, which has the exclusive agency for Sony PlayStation consoles and games as well as a number of PC games publishers.

In order to recognise and fully exploit the opportunities in the fast growing electronic games industry, the electronic games business has been split out of Ster-Kinekor Home Entertainment into a separate division, called Ster-Kinekor Games. Ster-Kinekor Home Entertainment will therefore be focused on video and DVD distribution in future.

For the year under review, the results of Ster-Kinekor Home Entertainment still include the results of the electronic games distribution business.

Video and DVD distribution

The rapid move in the market from video to DVD continued during the year. This is clearly reflected in the growth in retail DVD sales compared to a steady decline in video sales. The strong content from our studios, together with the overall growth in the home entertainment market, drove sales during the year. With the drop in prices of home entertainment systems, we expect the growth in retail DVD sales to continue, as more and more South Africans start building up their own collection of movies at home.

Electronic games distribution

Ster-Kinekor Games remains the market leader in electronic games distribution, through its exclusive representation of Sony PlayStation in South Africa.

Sony PlayStation had an exceptional year, with excellent growth in sales of consoles, software, games and peripherals. With the strengthening of the Rand, pricing opened up new markets for PlayStation 2. The launch of the handheld PSP and PlayStation 3 were both delayed to the 2006 financial year and it is expected that these products will further drive demand for electronic games.

During the year, we were successful in winning PC gaming rights from a number of studios that publish games for PlayStation and the PC. Entering the PC games market will enable Ster-Kinekor Games to strategically leverage the distribution rights of key PlayStation and PC games studios, and effectively positions the division as a key player in this sector in future.

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PRIMEDIA UNLIMITED CONTENT

DVD City

DVD City, the rental store chain started by Ster-Kinekor to drive home entertainment in the black consumer market, traded as expected, but the lack of suitable shopping centres in targeted areas is hampering the roll-out of this exciting initiative. In order to achieve critical mass, we need to secure more shops in suitable retail developments in order to ensure that this initiative is commercially viable.

Book4Golf

After the year end, the division made its first acquisition, Book4Golf, a business that facilitates, through highly sophisticated and exclusive software, the seamless booking of golfing times (golf is the content) and other activities over the web or via a call centre. This venture has exciting prospects given the growth in the sport in South Africa, as well as the desire by many foreign visitors to play golf in South Africa.

Airgames

Primedia Unlimited Content is in the process of concluding a transaction with a new, fast growing mobile entertainment company, Airgames, which will allow Primedia to participate in the fast growing mobile content business.

INFORMATION SYSTEMS

Operating a world-class ERP system has become a critical tool in the effective management of the content businesses. An upgrade of our core financial and ERP systems is underway and the business blueprint for a new system is being formulated for the cinema exhibition business, with implementation expected to begin in the last quarter of the new financial year. The systems upgrade will further enhance Ster-Kinekor's operating efficiencies, with a specific focus on cost containment and sales.

INDUSTRY FORUMS

The filmed entertainment industry is still waging a battle against piracy. Ster-Kinekor, together with Nu-Metro, UIP and a revitalised South African Federation Against Copyright Theft ("SAFACT"), has made excellent progress in the fight against these criminals. A new SAFACT chief executive and dedicated legal team have been instrumental in this success.

Ster-Kinekor also intends to establish an industry forum, including all participants, to address the challenges facing the cinema industry, including declining attendances and the ongoing changes in digital technology.

PROSPECTS

Primedia Content remains committed to stimulating cinema patronage by black consumers as well as by traditional cinema-goers and anticipates that attendances will increase to well above current levels once the impasse with Nu-Metro Product Distribution is resolved.

The dynamics of the growing DVD market augur well for the group and we anticipate that distribution of PlayStation will continue to be strong.

The proposed Convergence Bill will open up previously restricted markets and foster greater competition within existing digital delivery platforms. We firmly believe this will create growth opportunities for Primedia Content. We are confident and optimistic about the future prospects for the division.

F Gazendam
Divisional chief executive
Content Division

21 October 2005

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