'Pan' Adds to Warner Bros Woes, Putting More Pressure On Time Warner
For Time Warner's (TWX) film business, Warner Bros., 2016 can't come soon enough.
One of Hollywood's six major studios, Warner Bros. has suffered a string of high-profile bombs this year, a streak ignominiously punctuated by the resounding flop of Pan, the fantasy film that cost an estimated $150 million to make and stands to earn only $40 million in domestic box office.
Pan's pratfall follows other duds this year from the studio, including Jupiter Ascending, Man from U.NC.L.E. and Entourage. What's more, Warner Bros. has no titles among the 10 top-grossing films of 2014 -- a list dominated by Comcast's (CMCSA) - Get Report Universal Pictures and Walt Disney (DIS) - Get Report releases Jurassic World and Avengers: Age of Ultron.
It's a sharp contrast to Warner Bros.' run of blockbuster franchises that included The Hobbit, Harry Potter and the Dark Knight.
"This has been very much a transition year for Warner Bros.," Daniel Loria of BoxOffice Media said in a phone interview.
Warner Bros.' lackluster box office performance this year only adds to the pressure Time Warner is under to deliver solid results when it reports third-quarter earnings Wednesday. Like other major media companies, Time Warner is having to adapt to the shift of consumers and marketers to on-demand viewing, along with declining viewership, higher programming costs and weaker ad spending.
Investor concerns are reflected in Time Warner's share price, which has fallen close to 12% this year to around $75, well below the 52-week high of $91.34 reached in July, shortly after an unsolicited takeover bid from Rupert Murdoch's 21st Century Fox (FOXA) - Get Report . When Fox withdrew its bid in late August, the stock was trading around $75.
Speculation remains that Time Warner could be vulnerable to another takeover offer if the stock remains at this level.
The negative publicity surrounding Pan and Warner Bros.' other misfires certainly hasn't helped Time Warner's share price. Warner Bros. as a unit -- which also includes its television studio and videogame businesses -- accounted for 43% of Time Warner's total revenue of $14.5 billion in the first half of 2015, and 18% of the $3.6 billion in operating income.
Within Warner Bros., theatrical revenue accounted for $2.7 billion, or 42%, of total segment revenue. That marks a 6% sales decline from the year-earlier period. A 75% jump in Warner Bros.' games business helped the unit increase revenue 9% in the first six months of 2015.
Analysts, though, suggest the movie studio is poised to bounce back in 2016 through a reinvestment in its franchise properties. That effort starts with the slated March release of Batman v. Superman: Dawn of Justice, the first of 10 DC superhero movies in the next five years.
Next up will be Suicide Squad, featuring DC villains including the Joker, and set for an August 2016 bow. The following November brings Fantastic Beasts and Where to Find Them, a Harry Potter prequel. Slated for 2017 is the followup to last year's surprise hit, The Lego Movie.
Warner Bros. has a lot riding on Batman v Superman in particular because it brings together the two main DC characters and kicks off the superhero movies to follow. "They really have to get that one right," said Tim Nollen, a senior analyst with Macquarie Securities.
The relaunch of the superhero films would also help drive merchandise sales for Time Warner. Batman merchandise sales, for example, totaled almost $500 million in 2013.
Still, Creutz cautioned in his note that a return to tentpole franchises won't guarantee box office gold.
"While Warner's slate should be stronger over the next couple of years, we also believe that the general level of competition for franchise films will be much higher, with the potential for more Pan and Fantastic Four-type results for the industry," he wrote.
Things won't get any easier for Warner Bros. the rest of the year.
This month, Sony (SNE) - Get Report releases Spectre, the latest film in the gold-plated James Bond series. Then, in December, comes the hugely anticipated reboot of the Star Warsfranchise from Disney. Lined up against Episode VII - The Force Awakens, Warner Bros. has a remake of the 1991 Keanu Reeves surf thriller Point Break. May the Force be with it.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.