Most Wall Streeters hate the movie business. It’s messy and unpredictable, and the profits typically aren’t high enough to justify the risk. But RBC Capital Markets’ David Bank urges investors to take a fresh look this morning with a 104-page report that says studios have “the greatest visibility and least downside risk in the long term versus other businesses in the [media] conglomerate mix.” He recognizes that this is a tough sell. Cash flow margins at the strongest studios rarely top 10% while cable channels typically hit 40% or more. What’s more, “investors usually do not give much credit for individual [box office] wins, while they tend to punish individual losses.” But spending on home video “has appeared to stabilize domestically” following the collapse in DVD sales. Home entertainment declined to 34% of distributors’ average revenues from about 50% in 2007. That should improve as consumers warm to electronic downloads and Blu-ray discs. Bank also expects “substantial growth” in the ranks of the middle class — and entertainment spending — in China, Brazil, Russia, and Eastern Europe. Hollywood is responding by releasing more “culturally neutral” stories, he says, “with an emphasis on action-adventure movies as opposed to comedies, which tend to be more culturally biased” and especially “globally recognized franchises.” Other tidbits in the report: The term “tentpole” was first used in 1987 for Beverly Hills Cop 2. And the film with the highest profit margin so far this year (as of the end of July) probably is Warner Bros’ The Conjuring, while the studio’s Magic Mike likely was the winner last year. Going father back, the film with the highest return on investment in recent years was ET: The Extra-Terrestrial, which had an $11M budget and generated $793M in worldwide box office sales.
Studios Could Become Major Profit Drivers As Home Video Business Recovers: Analyst
What's Hot on Deadline