Meet the Street: Harry Could Work Serious Magic for AOL Time Warner

This weekend's potentially record-breaking opening for Harry Potter and the Sorcerer's Stone is only the tip of the iceberg as far as producer AOL Time Warner(AOL Quote) is concerned, says Deutsche Banc Alex. Brown director Douglas D. Mitchelson.

Douglas D. Mitchelson Director, Deutsche Banc Alex. Brown

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Mitchelson estimates that between the movie, its international release and all of its ancillary revenue, AOL could wind up collecting as much as $1.8 billion on the little book that could. In fact, Mitchelson says, "With rights to [make movies from] the first four Harry Potter books and an option on the next three, AOL could launch a new installment every 12 to 18 months for the next 10 years with very attractive economics."

Not everyone agrees that one or even several hit movies can contribute materially to the bottom line of such a huge company, but Mitchelson, whose firm has not done any underwriting for AOL Time Warner or any of its divisions, says Harry Potter can do it for AOL.

TSC: What does the Harry Potter franchise mean for AOL given that it's such a huge conglomerate with so many revenue streams?

Mitchelson: It actually helps several divisions. First off, for the film division, we think it will bring a little bit more than $300 million at the box office domestically. In fact, we think it will range between $325 million in our bear case, and in our bull case, $400 million.

This weekend, it is launching at 3,672 theaters, and the ticket sales online have been at record levels. Also, if you think about the international possibilities, with the author based in the U.K. and the U.K. being the third-largest market in the world for movies behind Japan and the U.S., it is expected to reach record levels there as well.

From the film division perspective, you spend your entire year trying to find the next big hit. Harry Potter looks well positioned to be a huge hit and it's also sustainable over a period of years because it looks like there will be multiple [movies made from the books].

In fact, AOL Time Warner is planning to release a new Harry Potter movie annually. So to the extent that you think of Harry Potter as big, multiply that by seven.

TSC: So what kind of numbers are we looking at and over what kind of time frame?

Mitchelson: Total revenue for the film and consumer-product sales will be $1.8 billion over at least the next 10 years, with this initial film bringing in probably $500 million.

TSC: Has there ever been a movie like this before?

Mitchelson: We went back and looked at other movie franchises, and one movie that really was bigger was the Star Wars series, which averaged a total of $706 million at the box office for its first four films [for a total of $2.8 billion].

The first three Jurassic Park films averaged $625 million per movie in global box offices [for a total of $1.9 billion].

The upshot is that we think Harry Potter will be somewhere between Star Wars and Jurassic Park and that the firm will be able to leverage its ownership of the product across multiple divisions through chats, access to the author via AOL, etc.

I have a strong buy [rating] on the stock, as I have since we began covering AOL Time Warner in the summer.

TSC: How much of this has Wall Street already factored into the stock price?

Mitchelson: Usually, with smaller movie studios, like Metro-Goldwyn-Mayer(MGM Quote), the stock usually does very well up until the film's launch and then sells off.

In AOL's case, it has been participating in a broader media recovery for the last couple of weeks, so to some extent I would say that while Harry Potter may be fully priced in, I think that the company is expected to grow fast and do very well in addition to Harry Potter.

TSC: What is your general outlook for the company?

Mitchelson: We see tremendous upside for the film division over the next decade, as well as its ability to leverage the brand across the divisions.