Internet Information for Alpha Generation

As you may have heard, Lions Gate Entertainment is in discussions with Apple to offer digital movie downloads from its library via iTunes. This story hit Yahoo! News The Motley Fool (thanks for the correction, Alyce) at 3:40pm yesterday. While many have speculated about Apple doing such deals with the studios, Apple had been conspicuously quiet on this topic.

In Lions Gate's earnings-related conference call (catch up with its latest quarter here), CEO Jon Feltheimer revealed some interesting information in the pep-talk segment of the call, according to my copy of the transcript: "We also have digital delivery deals with CinemaNow, Movielink, and iTunes, with upcoming announcements with at least two more industry players."

Say what? We know for sure that movie studios like Lions Gate have been signing on with Cinema Now and Movielink (and even file-sharing site BitTorrent). But the progress of Apple's talks with movie studios has remained in the realm of rumor and innuendo, although there was no doubt something's been going on. (Same goes with Amazon.com (Nasdaq: AMZN - News), although there were more rumblings about that yesterday.)

Lions Gate President Steve Beeks said the content should be available on iTunes by the end of the calendar year, adding, "We know when they are planning on launching, but since they have not announced it publicly, I don't think it is our place to say anything more about that."

Suffice it to say that this is an interesting and meaningful tidbit of information, likely giving comfort to Apple followers that someone is on the ball over there after all the lousy press over the employee stock option pricing issue. Examples of executives suffering from foot-in-mouth disease happen every day, and this just happens to be a particularly high-profile example involving a stock that is widely held, closely followed and "hot." Anyway...

The Story

The interesting thing here is that while the story hit Yahoo! News The Motley Fool yesterday (that's August 22nd for the calendar-challenged), the information contained in the story was actually generated August 9th. See those highlighted words in story snippet above - earnings-related conference call - that happened almost two weeks ago. Huh? Don't you think this should have been picked up by major media somewhat earlier than two weeks after the fact? Wait - don't you think this should have been picked up by Wall Street way before this? This is a classic example of information on the internet being available way out in front of information distributed via conventional news sources (if one can consider Yahoo! News The Motley Fool one of these sources; I mean, we aren't exactly talking about the Wall Street Journal or the New York Times, are we?). But to be clear, information concerning this leak has been bouncing around the web since it happened, and has been making its way into larger and larger forums over time. Let's consider the information dissemination cycle here to better understand what really happened.

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August 9th 4:30PM - The Call

Lions Gate management held a conference call with several Wall Street analysts to discuss Q1 2007 earnings. A transcript of the call was placed on Seeking Alpha shortly afterwards. On the call were the following analysts:

Lowell Singer - SG Cowen; Yolanda Masalan - Credit Suisse; Michael Savner - BofA; David Miller - Sanders Morris Harris; Jacqueline Spring - Thomas Weisel; Barton Crockett - JP Morgan; Eric Handler - Lehman; Matthew Harrigan - Janco Partners; David Bank - RBC; Michael Kelman - Susquehanna; and Berna Barshay - Ingleside.

During this call the President of Lions Gate, Steve Beeks, uttered the following (this taken directly from the call transcript):

"In terms of iTunes movie downloads, I think most likely some time before the end of the year. We know when they are planning on launching, but since they have not announced it publicly, I do not think it is our place to say anything more about that. Calendar year."

Sounds good, Steve. Questions, anyone? Anybody? Anybody??? Not one analyst on the call asked a follow up question related to this. We didn't see the studio analysts running to tell their analyst partners covering Apple of this new insight. So where did this information go? Presumably down a black hole - for now.

August 12th - Lions Gate and iTunes referenced by PaidContent.org

Rafat Ali wrote a short blurb in the wake of the Lions Gate conference call discussing their digital strategy. While the word iTunes was written in his post, it was not specifically referenced as an issue that warranted particular attention. The angle of the story was to review Lions Gate's plans and not the implications for Apple.

August 12-17th - In the Black Hole

Not a whole lot of chatter either in the blogosphere or in the news media during this period. Could the information leaked during the conference call be useful in the hands of a skilled investor? Maybe, could be, certainly couldn't hurt for someone who knows the stock, knows who owns the stock, understands sentiment around the stock, has a view of what news is priced in and what is not, etc. This one-week period "below the radar" spells one thing in my mind: opportunity.

August 17th 3:44AM - Picked up by /FILM

This industry site publishes a story titled "Lions Gate joins Apple's iTunes Movie Store" and adds some additional commentary to the discussion.

Apple was going to announce the new store at the Worldwide Developers Conference which took place last week, but elected to postpone the service's roll-out until September 2006 says Apple insider website Think Secret.

We are still being told that despite Apple's best efforts, the store will only feature movie rentals. In July we reported that Apple has signed agreements with Walt Disney, Universal Studios, Paramount Pictures, and Warner Bros.

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While a online movie rental store is not the perfect situation, it could be great for consumers if Apple offered a subscription model. Consumers would be able to pay a monthly fee (say for example $19.99) and would be able to download and watch (on their iPod or computer) as many movies as they want for as long as they pay the monthly subscription cost. But I doubt the studios would be up for such a service at this point in time. Or will they?

Ok, this is pretty good stuff. They know the industry and topic very well, add some historical perspective, and make a projection of what an digital download rental model might look like. So from here, where does the story go?

August 17th 5:00PM - Picked up by Apple Insider

Slash Lane at Apple Insider penned story titled "Studio spills Apple's iTunes movie store plans." This is the first time the issue started to gain traction. There were 22 commenters to the post all offering their view of whether or not this was news, whether or not the leak was on purpose and if Steve Jobs himself was behind the story. 27 blogs linked to this story, further amplifying the reach of the story.

August 18th - Picked up by those across the Mac world and it's out

Jonny Evan's story in Macworld announced confirmation of Apple's iTunes movie plans, and specifically referenced the /Film story as its source. A quick review of Google News shows how the story has been broadly picked up across the blogosphere.

August 22nd 3:40PM - Yahoo! News The Motley Fool gets the story

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So What?

I guess the key question here is whether or not early insight could have helped a skilled investor make money. Consider this: two days before the Lions Gate earnings call Apple held its highly- anticipated worldwide developers conference, a forum at which many expected Steve Jobs to announce some new and exciting developments and strategies at Apple. iPod and iTunes are the most exciting topics du jour, and much to the chagrin of Apple followers the main topic of Steve's discussion was that of the new Mac Pro line and a review of the new OS Leopard. This was reported on August 7th in Yahoo! Finance via bizjournals.com and the market appeared disappointed by a lack of news.

So, with dissatisfaction over Apple's August 7th disclosures and softness in the stock, could knowledge of the August 9th Lions Gate leak directly related to iTunes have positioned one to make money? I'll let you decide.

Comments

[Greg Battle]

Roger, you are spot on. If my posts reveal anything, it's that I believe the efficient markets hypothesis is a process, not a destination.

Along the same lines, did you read the front page story on the Sunday New York Times revealing 41% of last year's private equity deals exhibited abnormal trading patterns around allegedly "private" decisions made behind closed doors? Hence, we have material non-public information (insider) being abused and, from Roger's insight, material public information being ignored.

There's certainly an arbitrage opportunity somewhere here. If we utilize the price impact decay of available information (EMH mean reversion) to separate information based trades from liquidity based ones, we can fingerprint when valuable private information comes into play. Forensic trading analysis aka CSI: Wall Street.

Obviously, this is already being done.

[Roger]

Greg, your analysis may, in fact, be correct. The thesis of my post is that there is a lot of potentially valuable information out there that is simply not being picked up by mainstream media in a timely fashion. Some of this information can and should be market-moving and others isn't and should not be. The key point is that there is potentially valuable information out there not being rapidly disseminated by top tier news outlets, and that it has the most value in the hands of a skilled investor.

[Greg Battle]

Well, let's give both AAPL and LGF a closer look. From close 8/9/06 (pre-announcement) to open 8/18/06 (post Mac World article):

AAPL: $63.59 to $67.71 or 6.5%

LGF: $9.16 to $9.19 or .33%

Do we really think this news should move the AAPL needle over that long a period? Hmmm...

We should really look at the period right before the story broke wide, close on 8/17/06, and the next trading point, open 8/18/06 (off hours trading):

AAPL: $67.59 to $67.71 or .18%

LGF: $9.20 to $9.19 or -.1%

That looks a little more reasonable in the case of AAPL, but wtf is going on with LGF? Hmmm...

If you look at the trading volume, it's nearly halved for AAPL and quartered for LGF from the time before the initial announcement to when it broke across the Mac blogsphere. Hmmm...

Now let's step back. You'd think LGF would pop more given they will receive the lion's share (pun intended) of the revenue from a deal that provided a completely new distribution channel for their business, but it didn't. I'd argue that there can't be any bigger positive news for LGF during that period (but, since I didn't listen/read the call, I'll defer judgement).

As for the AAPL move, I'd venture to say the stock movement was much more related to opportunity created by overselling on the options backdating scandal (which is still HUGE news) than any tiny deal with LGF that signaled the inevitable (ie. already in the stock price) distribution of long form video content.

Just my opinion, but a very interesting case study.

[Yaser Anwar]

Regular visitors to Apple's site would know that, Apple has been featuring LGF's movie trailers for quite a while now. With the on-going speculation before the aforementioned August events, Apple was in talks with major studios (Warner Bros, Paramount etc), pertaining to movie renting/buying for iTunes users.

One of the only disagreements between the studios and S.Jobs was on the price these movies would be made available. Compared to its competitors, LGF is a smaller company, thus less bureaucracy. IMO, this led to working out the finer details, such as price & mode of delivery (buy vs. rent), with Apple a lot faster.

Answering Mr. Ehrenberg’s Q in the last sentence, could this leak have positioned one to make money? I believe so. If one looks at the historical prices, it is evident that on April 9th AAPL was suffering from its stock option blues, thus priced at 63 and change. Fast forward to April 17th, AAPL had appreciated 4 points (close to 6%).

One can argue that the jump in AAPL was not related to LGF deal. However, that doesn’t rule out the fact that this partnership would be mutually beneficial & thus it did indeed have a material impact on Apple’s stock price.

[Rafat]

The opportunity is: they read us, first :). really, i'm serious.
rafat