Consolidation in replication is not a new trend, but it came as something of a surprise that an independent would buy a plant from such a major player. The acquisition gives Cinram authoring and packaging capabilities and arguably equips the replicator to offer soup-to-nuts manufacturing as part of its core business. It won't be the first time Cinram has offered its customers authoring (though it stopped that service some time ago), but this level of packaging is a new phase for the company.
Needless to say, with an acquisition this big, speculation runs rampant, especially since Cinram hasn't been forthcoming with much detail on its plans for integrating the two companies. "It's far too early to be specific about how the two companies will blend," says Cinram Americas president Dave Rubenstein. "We expect it to go very smoothly. Both companies have a similar culture. We're in the same business, therefore we have the same challenges. We want to come together as one true and pure manufacturing, printing, and distribution company. We're not a content company. Our core business is replication, packaging, and distribution."
Some think the acquisition might present Cinram with a case of "be careful what you wish for." Robert Freedman, vice president of operations at Cinram competitor Crest International, says he has a lot of respect for Cinram and that this is an opportunity to catapult them to the top tier of replicators. But he also sees risk in Cinram's strategy. "They now have a 600-pound gorilla that needs to be serviced," Freedman says. "Cinram has to make sure their existing customers continue to receive the level of service they have come to expect, while integrating the new business with the existing operation."
On the other hand, Roger Talkov, president of DVD Labs, sees the acquisition as a positive move. DVD Labs has authored many discs that have then been replicated by Cinram. "Now it will be easier for us to get our DVD-A work completed. The Warner plant was one of two plants that could replicate DVD-A with copy protection. Now, we have access to that product through Cirnam—a super bonus," he says.
How will Cinram's acquisition affect new and old competitors? While packaging companies like AGI and Shorewood would not comment on the acquisition, replicators and authoring companies were not shy about discussing the effects of this move. "From an authoring perspective, our volume and focus is such that this segment consolidation does not really affect us," according to Anthony Angelini, president and COO of Zomax, Inc. As head of a packager/supply chain/replicator company, he views this consolidation positively. "Consolidation within the industry is important for the financial health of companies and will result in a healthy and reasonable amount of competition for the tier-one customers, and not an unhealthy and unreasonable amount of pricing pressure for the survivors," he says. "This in general promotes sound businesses to succeed and assists the shake out of the competitors that were/are making poor business decisions in the name of survival."
Talkov is unsure of the direct impact that the acquisition will have on DVD Labs. Until now, Warner has never really been considered a competitor for DVD-A authoring, according to Talkov. In the past, Talkov says, "authoring was clearly not a profitable thing for Cinram, since they used to offer authoring and stopped it. I would expect them to take a good look at the Warner operation and decide if authoring is something they want to keep or not."
Bob Michaels, president of 5.1 Entertainment, says, his company has been feeling the effects of replicator and authoring consolidation for a few years now. "Big content owners simply don't need to have as much customer service from the content side when everything is sitting at one facility," he says. However, there is still a niche for an authoring specialist. Authoring, he says, is highly competitive, and as a result he has had to prove to customers that quality is equal to the pricing. "I am perfectly honest with customers about what I go through to make a disc," he says. "Consumers are not allowing us to simply shove titles onto DVD anymore. They want quality and features that take a little time to produce."
The State Of Cinram
Regardless of industry opinion, Cinram's acquisition looks good on paper. The replicator will enter into exclusive long-term agreements with Warner Home Video, Warner Music Group, and New Line Cinema to manufacture, print, package, and physically distribute their DVDs and CDs in North America and Europe. Cinram has been a supplier to these companies in certain countries for more than two years.
Even without the added bonus of the Warner acquisition, 2003 was shaping up to be a very good year for Cinram. In November, the company reported increased net earnings of $19.1 million for the third quarter ending September 30, 2003. That's compared to $14.8 million last year; a 29 percent increase. Cinram reported its total DVD unit shipments during the first nine months of 2003 increased by more than 100 percent over the same period last year. The company also predicted that its upcoming holiday-season fourth quarter, which will include nine weeks of the businesses bought from Time Warner, would be its best to date.