Wall Street usually shows little love for the movie business with its typically low, and unpredictable, profit margins. But in a combined look at the studio and exhibition businesses this morning, MoffettNathanson Research’s Michael Nathanson and Robert Fishman tell investors that it’s time to take a fresh look — as long as they proceed with caution. They lowered profit estimates for major exhibition chains Regal and Cinemark, citing expectations for weaker domestic summer box office results vs 2013. They project a full-year decline of 1.6% to $10.7B followed by a 5% jump in 2015 to $11.3B and then a drop of 2.6% in 2016 to $11.0B. The analysts appeared more upbeat about the studios. “After several terrible years post the popping of the DVD bubble, we believe the film industry is showing signs of health,” they say. “The combination of fewer releases, greater international focus and lower overhead expenses are all driving studio margins ahead of pre-recession levels. These results show that a good crisis wasn’t wasted in Hollywood.” Revenues fell over the last few years at the big four film studios (Warner Bros, Disney, Fox, and Paramount) as they reduced their output. Yet cash flow margins improved to a little under 12% which is “a tribute to their ability to curb bloated studio expenses.”
Warner Bros’ latest visit to Middle Earth should generate $1.26B in revenues from all major sources — 3.59 times its expected costs — putting it on track to become the most profitable movie released in December, SNL Kagan says today. The research company builds a financial model for films by using early box office results to estimate likely revenues from theaters, home video, and free and pay TV deals against probable costs. To account for many variables it can’t ascertain (including distribution fees, interest, profit participation, and residuals), Kagan figures a movie will be profitable if expected revenues are 1.75 times higher than estimated costs. Those with a lower ratio but that are still higher than 1.40 times are in a gray area. Films below that are deemed likely money losers. By that standard three other December films will end up in the black: Universal’s Les Miserables ($396.7M in expected revenues/2.37 times costs), Weinstein Company’s Django Unchained ($473.2M/2.18X) and Columbia Picture’s Zero Dark Thirty ($230.7M/2.10X). Those falling short include: Paramount’s Jack Reacher ($253.8M/1.38X), Universal’s This Is 40 ($159.5M/1.14X), Fox’s Parental Guidance ($163.3M/1.12X), Disney’s Monsters, Inc 3D ($75.0M/0.77X), Paramount’s The Guilt Trip ($89.1M/0.57X), and FilmDistrict’s Playing For Keeps ($37.7M/0.28X).
Movie making is often an insane business. But moguls turn out to be pretty rational about it according to a chapter in an upcoming economics text and a recent article in an academic journal. Researchers say that studios wisely bet on stories and directors. Star worship “is all but a myth,” writes S. Abraham Ravid — a finance professor at Yeshiva University — in The Economics Of Creativity, to be published next month. “Stars can still sell magazines, but not movies.” Why do studios pay big bucks for Academy Award-winners? It’s part of a strategy, along with co-financing, to reduce the risk of making big-budget films — especially R-rated ones, which represent the biggest gambles. Stars should draw at least some fans, even to a stinker of a movie, the theory goes. “In an industry where a big failure is much more dreaded than a big success is wished for, insurance is worth its weight in gold, or in eight-figure salaries.”
Only four of last month’s 12 major movie releases are clearly destined to be profitable according to the latest monthly tally from SNL Kagan. The research firm says that DreamWorks Animation’s Madagascar 3: Europe’s Most Wanted should lead the pack with projected total revenues (at $783.3M) coming in 2.31 times higher than total costs (of $339.4M). Kagan forecasts each film’s revenues from all sources, except for merchandise and second-cycle TV sales. It compares that to all the expenses it can identify, except for things like distribution fees, interest, profit participations and residuals. Since Kagan can’t account for everything, it figures a film is clearly profitable if estimated revenues are at least 1.75 times estimated costs. Films with an expected revenues-to-costs ratio of at least 1.40 are considered to be in a gray areas while those below 1.40 are deemed likely unprofitable. By that standard, Warner Bros’ Magic Mike came in second at 2.23 ($252.6M revenues to $113.5M costs), followed by Universal’s Ted at 2.20 ($439.4M to $199.4M), and Disney/Pixar’s Brave at 2.11 ($788.9M to $374.1M). Those on the bubble are Lionsgate’s Tyler Perry’s Madea’s Witness Protection at 1.57 ($91.2M to $58.3M), Fox’s Prometheus at 1.54 ($450.7M to $292.0M), and Universal’s Snow White And The Huntsman at 1.52 ($531.4M to $349.7M).
It was a close contest but sci-fi/fantasy films came in second in the research firm’s analysis of different films’ financial performance in the decade from 2002 through 2011. Since analysts can’t tell how much studios spend for things like negatives, marketing, and DVD reproduction, SNL Kagan figures a film is clearly profitable if the revenues it can estimate from all sources are at least 75% higher than the costs it can calculate. Those with margins of at least 40% are considered to be on the bubble (profitability usually depends on specific deals the studios have with theaters) while movies below 40% probably lost money. By that measure, the decade’s 1,444 films were on the bubble with average worldwide revenues per film of $216.6M and costs of $133.3M, resulting in a 63% margin. The best investments overall were animated films that had a budget of between $90M and $100M: The five films in that category had a 292% margin. The worst performers were two westerns with a budget of $50M or less; costs ran 80% ahead of revenues.
I love these kinds of reports because they confirm for us what we already suspect. According to research firm SNL Kagan, a film must hit 1.75 on its Kagan Profitability Index to become a moneymaker. But the dozen March releases will average 1.03 — down from the 1.78 average from a year ago (which included hits Disney’s Alice In Wonderland and DreamWorks’ How To Train Your Dragon.) Analyst Wade Holden writes that certain money losers will be Relativity’s Take Me Home Tonight and Warner Bros’ Red Riding Hood. But Holden expects Disney’s Mars Needs Moms from Robert Zemeckis’ ImageMovers Digital to be the biggest bomb, projected to generate just $81.3 million in revenues, although it cost $264.8 million to produce, distribute, and market. The Kagan report says Sony’s Battle: Los Angeles, Relativity’s Limitless, and Paramount’s Rango may come close “if [the studios] have a favorable distribution agreement” with theaters.
STUDIO SHAME! Even Harry Potter Pic Loses Money Because Of Warner Bros’ Phony Baloney Net Profit Accounting
EXCLUSIVE: Signing a deal that makes anyone a net profit participant in a Hollywood movie deal has always been a sucker’s bet. In an era where studios have all but eliminated first dollar gross and invited talent to share the risk and potential rewards, guess what? Net profit deals are still a sucker’s bet. I was slipped a net profit statement (below) for Harry Potter and The Order of the Phoenix, the 2007 Warner Bros sequel. Though the film grossed $938.2 million worldwide, the accounting statement below conveys that the film is still over $167 million in the red. (Text continues below…)
I ran the data above by several attorneys and agents, who are so accustomed to seeing studio accounting wave magic pencils over hit movies that they weren’t surprised even a Harry Potter film that grossed nearly $1 billion would fall under the spell. Dealmakers say studio distribution fees are a killer, as are incestuous ad spends on studios’ sister company networks. They also cited the $57 million in interest charges, an enormous pushback on profitablity. Since Warner Bros didn’t invite in a co-financing partner on the Potter films, has the studio borrowed money from parent company coffers? Are they paying that interest to a bank, or to themselves? Bottom line: nearly $60 million in interest for the estimated $400 million required to make and market Harry Potter, …