Digital media will be too disruptive for the traditional media industry: Lehman analyst downgrades the sector

The television and the video business is heading for a nasty downturn within the next couple of years, says a Lehman Brothers analyst. Anthony DiClemente at Lehman downgraded the entire entertainment industry on Monday and cut down the forecasts of its five major player in an alarmingly bearish report on the sector.

The stocks of all major public media firms, Walt Disney, News Corp., CBS, Time Warner and Viacom, fell slightly more than the broader market by the close of the day.

The takeaway from his report: digital media is proving too disruptive to the film and TV industries. He blamed the Internet for the broken video business models, specifically citing digital distribution, audience fragmentation and widespread file-sharing as the primary technology-enable culprits that are eating into television network and studios' profits, which may evaporate forever. The big winners will be technology companies enabling digital distribution, such as Apple (iTunes) and Google (YouTube), as the power shifts from content owners to distributors.

"We believe the feature film and TV content businesses are on the verge of structural changes that appear to impact the core revenue and profits of entertainment business models," wrote DiClemente. He compared the scenario to that faced by the music industry earlier in the decade.

While most of the findings in the report are consistent with my views on what traditional media firms need to do to succeed in the digital world, DiClemente's analogy with the music industry is not entirely true. While the technology shift came as a surprise to the music industry, which was too slow to react to the changing reality and held on to its traditional business model for too long, the video industry has the advantange of learning from the music industry and not repeating the same mistakes. How fast will the video industry move in terms of experimenting with new business models and adopting new technologies remains to be seen.

paidContent has a good coverage of the Lehman report.