Hollywood Plays Craps as Big Media Raises Bets for Next Blockbuster

NEW YORK (TheStreet) -- Hollywood has always loved making movies but as television enjoys a resurgence that has dampened the allure of the local cinema, film executives at Disney (DIS), 21st Century Fox (FOXA), Viacom (VIA), Comcast's  (CMCSA) NBCUniversal, and Time Warner (TWX) are focused on the single blockbuster.

The largest U.S. movie studios are making fewer films while favoring features based on already well-known characters and popular products as a means to guard against the big flop while boosting revenue at other parts of their entertainment conglomerates.

"Increasingly, the studios are making bigger bets," Doug Creutz, media industry analyst at Cowen & Co., said in a phone interview from San Francisco. "It's not worth it for them to make a small bet because even if it works, you're not going to make a lot of money, most of the time. There's a move toward the blockbusters, and as a result, we have a lot of those." 

Thor: The Dark World met expectations for its opening weekend earlier this month, bringing in $86 million in box-office sales, according to Rentrak, RENT, the media measurement agency, and lifting Disney's global movie theater sales beyond its previous record of $3.791 billion set in 2010.

Thor's solid debut follows the write-off of roughly $190 million for Lone Ranger, the Johnny Depp-led misstep that might have rattled most companies. But Disney's film studio actually increased profits in the quarter, largely on the back of Monsters University, which generated $264 million at North American box offices this year and Iron Man 3, poised to be the top grossing film of 2013 with more than $1.2 billion in global box-office sales with $408 million coming from North America.

For Disney CEO Bob Iger the Lone Ranger episode recalls 2012 when the world's largest entertainment company took a $200 million writedown for the sci-fi blunder John Carter, only to regain profitability with Avengers and Rocket Ralph

In the hunt for the blockbuster, there are winners and sometimes there are duds.

"The media likes to pounce on the fact that Disney released 'Lone Ranger' but they have such a healthy group of creative organizations," Phil Contrino, chief analyst at BoxOffice.com said in a phone interview. "Focusing on 'Lone Ranger' is letting a fly on the windshield distract them from the bigger picture."

For this coming holiday season, Eiger is betting on Frozen, a Walt Disney Animation Studio film due for release just after Thanksgiving, and Saving Mr. Banks, a family-friendly feature about the making of Mary Poppins, a film that may do well at the Oscars.  Looking into 2014, Disney's stakes get higher with the early-April release of Captain America: The Winter Soldier, a Marvel Studios production that Contrino says could generate $200 million in North American ticket sales augmented by consumer product revenue and theme park attractions.

Movies may set the tone for these wide-ranging media companies, at least for Disney, but they have ceased to be their financial backbone.

Disney's movie group accounts for just 5% of the company's operating profit. Its sports megalopolis ESPN supplies a full 40% of Disney's earnings. Similarly, Comcast's Filmed Entertainment division which includes the Universal Studios, accounted for just 15% of operating cash flow at NBCUniversal, which in turn comprised just 23% of the operating cash flow for the whole company. 
Comcast's cable-TV networks and theme parks bring in more revenue than its movie studio though Universal's year was brightened by the success of Despicable Me 2, which totaled $365 million in U.S. and Canadian box office sales.

"The movie business for these guys is growing a little bit but not a lot, and it's getting smaller and smaller as a percentage of the whole," Creutz said. "It's becoming more of a prestige business for these companies. It's not that important for their economics."

In 2004, Disney made 20 movies whereas the Burbank, Calif.-based media conglomerate will have made 10 films in 2013, according to BoxOffice.com. Similarly, 21st Century Fox made 18 movies in 2005 and 24 films in 2006. This year, Rupert Murdoch's movie studio will have released 13 titles.

The backdrop to Hollywood's more careful movie making is the ascendancy of television series that has transformed Netflix NFLX into a major player in mobile entertainment.Movies remain a good business if consumers can be convinced to spend more on an evening out than they would for a month of streaming.

"There's no other way to monetize a high-cost movie's opening that's akin to the box office," Harrigan said. "You just can't charge those kinds of prices on VOD."At Fox, the Avatar sequels are shaping-up to be the studio's biggest bets while the May 2014 release of X-Men: Days of Future Past, could bring in as much as $255 million in North America, according to BoxOffice.com. The Avatar sequels aren't due to begin until 2016.

For the holidays, Viacom's Paramount Studios will release Anchorman: The Legend Continues, the sequel to its own family-friendly franchise, and a movie that BoxOffice.com forecasts will reach $140 million in the U.S. and Canada. Paramount's shot at the blockbuster will come in June with Transformers: Age of Extinction, its own science-fiction action series. This latest movie, based on the Transformers toy line, will add Mark Wahlberg to the mix. 

Fox is hoping for a lot out of The Secret Life of Walter Mitty, which opens on Christmas while 12 Years a Slave appears poised to appeal to adults who enjoy Oscar winners. "Mitty" is a lower-costing production that Cruetz says fits into Fox's strategy of pursuing mostly smaller-budget films while putting a great deal of money into a couple of potential blockbusters.

One possible dud may come in February when Fox releases The Maze Runner, a sci-fi action thriller that "might be viewed by audiences as a 'Hunger Games' rip-off," Contrino says. "Maze Runner's theatrical run will generate $55 million, forecasts BoxOffice.com. 

If there is a loss from The Maze Runner, 21st Century Fox will have little trouble absorbing it: Fox's movie business accounted for 20% of the company's $1.6 billion in operating income in the quarter ended Sept. 30.Of course, all isn't perfect in Burbank as Disney's Pixar elected in September to delay The Good Dinosaur by 18 months, leaving the makers of Toy Story without a yearly release for the first time since 2005. Pressure is high to avoid another Lone Ranger.

"Eiger has thrown up his hands at Disney and they're very focused on a few tent poles, live-action characters," Matthew Harrigan, a media analyst at Wunderlich Securities, said in a phone interview from Denver. "[Comcast CEO] Brian Roberts at Universal has done better with movies like "Despicable," but there's limited tolerance for losing money."

Blockbusters or busts, media stocks have more than outpaced the benchmark Standard & Poor's 500 in 2013, fueled in large part by their cable-TV networks. Viacom has gained 53% this year, Time Warner has added 43% while Disney is up 39% and Fox has advanced 32%. The S&P has advanced 25% in 2013, its best year since 1997.

This holiday season, though, the biggest blockbuster is likely to come from Lions Gate Entertainment LGF, the studio-only company that hit the jackpot with its "Hunger Games" franchise. The latest entry, The Hunger Games: Catching Fire, scheduled for release on Nov. 22, and it's expected to generate at least $390 million in North America through its theatrical run, according to BoxOffice.com.

To match Hunger Games, Disney may have to wait until Dec. 18, 2015 for the release of Star Wars: Episode VII

--By Leon Lazaroff in New York.

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