Colonial Purchasing 2013 Annual MeetingState of the Industry

April 26, 2013

Kevin Sullivan

Technicolor Home Entertainment Services

Introduction

1

“The reports of my death have been

greatly exaggerated”

– Mark Twain

Big Picture Perspectives

2

� U.S. Household Player Penetration

• 51 million households / 43%

• 27 million households / 23%

Total players in use over 300 millionDoes not include multi-player households, PC drives, portable / car players, etc.

Total players in use over 300 million

• 105+ million households / 90%+

• 105+ million households / 90%+

Big Picture Perspectives

3

� 2012 US Consumer Spend Information

2012 Home Video Sales

EST

$0.8bn

DVD/BD

$8.4bn

2012 Home Video “Rental”

VOD

$2.0bn

DVD/BD

$4.4bn

SubscriptionStreaming

$2.3bn

2012 Music Sales

DigitalDownload

$3.0bn

Physical

$2.8bn

SubscriptionStreaming

$1.0bn

� 13 years (!) after the launch of Napster

Source: DEG, RIAA

Big Picture Perspectives

4

� Price vs. Volume

Source: DEG, Home Media Magazine, Futuresource Consulting

2012 DVD & Blu-ray Sell-Through

%∆ vs. 2011

Revenue -5%

Unit Sales -2%

– Average sale price of DVD down 2.5%

– Average sales price of Blu-ray down 6.0%

– Unit volume driver of replication activity

– But pricing major driver consumer purchasing behavior

0

5

10

15

20

25

9/29 10/20 11/10 12/1 12/22 1/12

Dollars ($)

For week ending (date)

Average U.S. disc retail price by format*

BD 2011

BD 2012

DVD 2011

DVD 2012Black Friday

0

10

20

30

40

50

9/29 10/20 11/10 12/1 12/22 1/12

Millions

For week ended (date)

Unit sales for Blu-ray and DVD*

BD 2011

BD 2012

DVD 2011

DVD 2012

Black Friday

Big Picture Perspectives

5

� Ongoing Consumer Appeal of Physical Media

– Ease of use

• Ubiquitous availably of players

• No internet connection required

• Many portable options

• Secure / permanent storage (no fear of file loss / DRM issues)

– Dependable, high quality experience

• Generally highest video / audio quality possible

• Highly reliable CE based hardware

– Value

• $1 rentals / $5 ‘bargain bin’ purchases

– Collectability

• Ongoing popularity of combo-pack and collector sets

– Gifting

Big Picture Perspectives

6

� Studio Economics

– Strong vested interest to maintain physical media market

• Largest single revenue source; ~20% larger than box office

– High margins / significant gross contribution

• “Physical dollars vs. digital pennies”

2012 US Box Office vs. DVD/BD Sale and Rental Revenue

Source: DEG, Box Office Mojo, Technicolor Management Estimates

Estimated Gross Contribution per Unit to Content Owner*

* Estimated gross profit after direct manufacturing and supply chain costs (excludes marketing and other overhead)

North American Replication Market – 2012 Recap

7Source: Futuresource Consulting

2012 North American Replication Disc Output Mix

Total Output

3,369m Discs* All recordable formats

Segment %∆ vs. 2011

DVD -12%

CD -18%

Blu-ray +6%

Recordable -8%

Total -12%

North American Replication Market – 2012 DVD Detail

8Source: Futuresource Consulting

DVD by Segment Total Discs % of Total DVD

Studio / IRH 1,302m 71%

Music 9m <1%

Covermount 17m 1%

Promotional / Religious 121m 7%

Pirate / Adult 125m 7%

DVD-Video Subtotal 1,574m 86%

Xbox 85m 5%

Nintendo 57m 3%

Sony 3m <1%

PC Games / Software 106m 6%

DVD-ROM Subtotal 250m 14%

Total DVD 1,824m 100%

– Studio / indie video account for large majority of market volume

• Major studios account ~60% of all market volume

• Trends generally more stable vs. other segments

– Pirate / Adult rapidly declining with migration to digital

– DVD-ROM also rapidly declining

• Maturing console platforms / shift to BD (PS3)

• Software distribution heavily moving to digital

Studio volumes much more resilient vs. broader DVD category

North American Replication Market – 2012 Other Detail

9Source: Futuresource Consulting

Blu-ray by Segment Total Discs % of Total BD

Video 298m 80%

ROM 74m 20%

Total Blu-ray 372m 100%

– Blu-ray

• Video dominated by major studios

• ROM almost exclusively PlayStation 3

• Disappointing 2012 growth - re-acceleration expected in 2013

– CD

• ROM declining faster w/ digital software migration

• Audio declines of ~15% in 2012

– Recordable

• Minor N. America market – most production in Asia

Blu-ray growth expected to re-accelerate in 2013 after disappointing 2012

CD by Segment Total Discs % of Total BD

Audio 592m 67%

ROM 294m 33%

Total CD 886m 100%

Recordable by Segment Total Discs % of Total BD

DVD +/- R 137m 48%

DVD – RAM 1m <1%

CD-R 149m 52%

Total Recordable 287m 100%

North American Replication Market – Outlook

10Source: Futuresource Consulting

Segment CAGR 2013-2016

Blu-ray +11%

DVD -23%

CD -36%

Total -18%

– Total volume of ~1.4bn discs by 2016, 55% of today’s size

– Blu-ray not expected to offset declines in DVD and CD

– Biggest hit to segments most directly impacted by digital delivery

• Music (CD)

• Software (CD and DVD ROM)

• Games (PC and Console based activity)

• Adult / Illegitimate product (DVD)

– Potentially overly pessimistic view

• Source has history of overstating declines

• Not inclusive of potential upsides (new games consoles, 3D/4K, etc.)

North American Replication Market – Outlook

11

� Key Challenges

– Overcapacity / Continued Intense Pricing Pressure

– Materials Pricing Exposure

– Tighter Supply Chains

• Smaller order sizes, quicker turns

• Increasing seasonality / more peaky demand

• Focus on ‘chasing’ demand, minimizing returns

– Offload

• Need greatly diminished in DVD

• Limited BD investments by 2nd tier

– Supply Chain Reorganization / Consolidation

• Maturing volume base will require more efficient supply chain for packaged media

• Broad potential implications for replicators

• Content owners and retailers seeking supply chain efficiency (e.g. Andersen in Music category)

DVD Utilization

2012 NA DVD Capacity4,821m

(~640 DVD lines)

2012 NA DVD Output 1,824m

Annual Utilization 38%

BD Utilization

2012 NA BD Capacity930m

(~144 DVD lines)

2012 NA BD Output 372m

Annual Utilization 42%

Source: Futuresource Consulting

Increasing Supply Chain Complexity

12

Planning ReplicationPackaging & Custom Pack

Logistics & Distribution

Returns

Blu-ray32%

DVD68%

5.1m Packaged Goods

47 different configurations / SKUsSingles

Combo PacksCollector’s EditionsRetailer Specific

17k Retail Display Assemblies

65 different configurations162 piece standing displays72 piece standing displays12 piece tray displays

Etc.

7.9m Discs

SD-DVDDigital Copy Discs

Blu-ray 2DBlu-ray 3D

Rental Versions

10k+ U.S Retail Ship-To Locations

Secure Street Date Fulfillment Direct-to Store

Walmart 3,900 Target 1,764 Kmart 1,204Best Buy 1,055Sam’s Club 619Toys R Us 597Costco 439

Raw Material Procurement / Coordination

Expected execution: 99.9%+ on-time and in full by street date

What’s Next?

13

� Key Opportunities

– Ongoing Blu-ray growth

• Picking up momentum in Q412 / Q113 – have we turned the corner?

• Potential lifecycle extension via 3D and 4K

– Next Generation Game Consoles

• Optical media in all three

– Hybrid Digital / Physical Business Models

• Ultraviolet

– Evolving Supply Chains – Opportunity for New Services

• MOD / JIT Models

• Direct-to-Consumer Fulfillment

• Business Process Outsourcing (BPO)

• Diversification into New Segments

– Consolidation and/or Enhanced Industry Cooperation

– Maximize cash generation over the ‘long tail’

14

Thank You