Technicolor CEO Predicts Other Studios Won’t Copy Direct-to-HBO Max Model

Technicolor CEO Richard Moat doubts other studios will replicate AT&T’s “interesting move” to funnel WarnerMedia’s 2021 slate of feature film releases direct to streaming (see 2012030053), he said Thursday on a Q4 earnings call. “I don't see that as being a fundamental shift in the industry paradigm,” he said. Key Technicolor customers include Apple TV, Disney, Netflix and Universal for film and episodic TV content production, but not Warner.

AT&T’s motive “was obviously to try to drive up subscriptions on HBO Max,” said Moat. “They were taking a big bet there in terms of the number of incremental customers” they would gain, he said. “It remains to be seen whether that was a sensible financial bet,” he said. “Under normal circumstances, the studios are going to make a lot more money from pushing the product out into cinemas than they are through going exclusively to a streaming platform.” AT&T declined comment Friday.

When movie theater restrictions ease, “people are going to want to be entertained,” and they will clamor to “get out of their homes,” said Moat. “They're not going to want to sit watching Netflix with a tray of food on their lap for any longer.” Technicolor’s “firm belief” is that “a rebound in the theater market” will fuel revenue growth in its production services and DVD and Blu-ray replication businesses, perhaps as soon as 2021's second half, he said.

Revenue in Technicolor’s production services sector declined 41.4% in 2020 to 513 million euros ($613 million) due to pandemic-induced lockdowns on global casts and crews, said Moat. “As vaccinations continue to roll out globally, the industry is optimistic about a steady return to normality during the back half of 2021,” he said. “By 2022, we expect unprecedented demand from clients for new content as their COVID-impacted inventory is finally released over the period 2021 to 2022.”

Disc replication services “performed well in a difficult environment” during 2020, said Moat. Revenue declined 18.6% to 706 million euros ($844 million). Technicolor replicated 22.9% fewer discs in 2020 than in 2019, but the rate of decline was “lower than anticipated,” said the CEO.

The company blamed the unit volume decrease in DVDs and Blu-rays on the limited number of new film releases last year due to COVID-19, not the public’s waning appetite for packaged media that predated the pandemic. “Resilience” in demand for back-catalog titles mitigated some erosion, said Technicolor. It produced 560 million DVDs last year, 20% fewer than in 2019. The 218 million Blu-rays it produced were down 27% from a year earlier. CD unit volume was 39 million in 2020, down by a third from 2019.

Technicolor’s major semiconductor supplier “moved to a requirement for us to supply forward-looking forecasts of up to 50 weeks, quite recently, from 36 weeks,” amid the global chip shortage, said Moat. Supply chain constraints are mostly affecting Technicolor’s connected home business, which supplies set-tops to cable and telco customers.

The sudden need for longer-range forecasting is a “negative development” because “we have to force our clients to think quite a long way ahead in terms of their requirements,” said Moat. “At the same time, it gives us an excellent forward view of what probably the next 15 months is going to hold.”

Connected home “delivered a strong year” for Technicolor in 2020, “exceeding the original targets” that were set before the pandemic, said Moat. “Increased demand from cable customers in North America drove revenues, but we were hit by a slowdown and supply constraints in Eurasia. Latin America was negatively impacted by the difficult macroeconomic situation in the region.” Revenue in the segment declined 7.6% year over year to 1.76 billion euros ($2.1 billion).

Moat “can say with confidence” that the connected home demand “we saw in 2020, particularly in North America, is going to continue in 2021,” he said. “I don't think that the resolution of the COVID crisis or the relaxation of restrictions is going to have any significant impact on that because I think that large numbers of people have worked out that they just have to have a better broadband and Wi-Fi experience at home.”

The strong consumer demand for upscale set-tops is driving “very high sales amongst our major cable and telco customers,” said Moat. Comcast picked Technicolor as the supplier for its "latest-generation XB8 box," he said. “They've already placed a significant order with us for 2021, and so we've got excellent forward visibility, and I'm convinced that the demand is going to remain strong.”

Comcast referred our request for comment to Technicolor, whose spokesperson told us Moat "made a misstatement" on the call, and that he meant to refer to Comcast orders for the XB7, not the XB8. She also said the XB7 is a "gateway" device, not a set-top box, as Moat mistakenly called it. She declined to discuss the commercial status of the XB8. "As a business rule, we never disclose anything about our commercial relationships with our customers, and we do not make any forward-looking statements either," she said. Comcast didn't comment about the XB8.

“Traditional video” will continue “to be on the decline” the next few years, “despite a transitional rebound” expected in 2021, said Moat. “Multi-gig broadband access markets and streaming Android TV are on the rise with solid growth. In 2021, the market will continue to be driven by the expansion of fiber and the adoption of Wi-Fi 6.” But the electronics supply chain will continue “to be stretched by excess demand” for semiconductors, he said. “In 2022 and 2023, these trends will continue, together with 5G deployment and the early introduction of next-generation DOCSIS.”