Is the Hollywood global studio-driven tentpole a dying model? Cowen & Co.’s Doug Creutz earlier this week issued a pessimistic appraisal of the high-stakes global blockbuster game as an investment opportunity. His withering predictions creased the Armani suit of one investment banker/financier, who invests institutional capital with major studios and formerly produced event films. It bothered him enough that the banker, who preferred to remain anonymous so he could freely speak his mind, wrote this rebuttal.
Doug Creutz this week issued his annual gloom and doom prediction for the big studio movie business. Well, Doug Cruetz is wrong. The motion picture business is doing well and remains highly profitable for the studios. There is a lot to like in studio slates for the two years ahead. Let’s start there. Our expectations are that each studio — even Paramount, the one studio that will be hard-pressed to break even in 2017 — has chances for breakout hits. Studios build their slates around breakout (hit) pictures. No studio expects most of their 15 to 20 pictures released annually to succeed. However, if a studio averages two breakout pictures per year they are highly profitable. This is due to the exponential nature of a very successful picture which can throw off hundreds of millions of dollars in profits for a studio.
So here the likely candidates for breakout picture in 2017 and 2018:
Beauty And The Beast (certain to be massively profitable, and probably 2017’s first $1B picture at the worldwide box office)
Guardians Of The Galaxy Vol 2
Star Wars: The Last Jedi
Wreck-It Ralph sequel
Avengers: Infinity War
Ant-Man And The Wasp
The Fate Of The Furious (Fast And Furious)
Despicable Me 3
Fifty Shades Freed
Jurassic World sequel
Dr. Seuss’ How The Grinch Stole Christmas (Illumination)
[Potential breakout: Skyscraper]
Logan (already massively profitable)
War For The Planet Of The Apes
Maze Runner: The Death Cure
Two Untitled Marvel Pictures
Untitled Blue Sky Animation
The Emoji Movie
[Potential breakouts: Smurfs and Baby Driver]
Hotel Transylvania 3
Venom (Spider-Man universe)
The Equalizer 2
Bad Boys For Life
Untitled DC film
Fantastic Beasts sequel
[Potential breakouts: Oceans 8, Tomb Raider,Scooby Doo]
Paramount (studio that may not break even in 2017)
Transformers: The Last Knight (despite huge talent participations)
Mission: Impossible 6
Transformers 7 (despite huge talent participations)
In his report, Mr. Creutz claims that international markets are mature and, aside from China, not expected to grow materially. Although box office numbers from China can be difficult to rely upon, it is clear that the headline number of ~3.7% growth in 2016 Chinese box office over 2016 is misleadingly low. Simply adjusting for fx rates, the increase was 12.2% in constant dollars which means more people went to the movies. Even if U.S. and Western European markets are saturated, which is far from clear, both Asia and Latin America have had strong growth year-over-year, and have far more potential to continue to grow. And even where growth has slowed in percentage terms, that is on a higher base – growth in dollar terms, which is what ultimately matters to studio profitability, has continued steadily in almost all global markets.
We’ve seen ~8% more screens worldwide year-over-year for each of the past seven years. In many parts of the world we’re still seeing middle classes emerge with more disposable income to become moviegoers. There are also countries like China, Brazil and Mexico to use just three examples that have parts that are first world and mature, second world and growing, and third world and virtually untapped.
Studios now focus on international because ~70% of the worldwide box office gross comes from international theatrical. The revenue from studios’ international television output deals is huge, and recently when the major studios have renewed their overseas television deals they have received premium pricing. The competition for studio content globally is strong across all international markets. Day-and-date releases on 20,000-plus screens in 60-plus territories are commonplace for event pictures. It seems Mr. Creutz was more focused on domestic which isn’t nearly as important to studios profitability as international.
When television was invented, many predicted the motion picture business would die. Instead it turned into another revenue-producing market for studios. When VHS came out, predictions were made that no one would go to the theater. Instead studio Home Entertainment revenues came into existence. Now digital is producing another market while lowering manufacturing and distribution costs leading to greater profitability.
Mr. Creutz claims studio profits are down. However, the 10Ks of the public companies don’t break out the motion picture division. He doesn’t support his claim with any source. When we look at publicly available information, and incorporate our own estimates of profitability based on decades in the business and intimate knowledge of studio financials (their ultimates), we estimate that at least four of the six major studios have been highly profitable for four or more years in a row.
Mr. Creutz has a long history of being bearish on the motion picture business. Each year he predicts bearish results. Yet from 2009-2015 worldwide box office set records each year. In constant dollar terms, controlling for the volatile impacts of Brexit and other global phenomena, 2016 is another record year.
We are not the only ones who believe the movie business to be good business. Fox, Universal, Sony and Warner Bros all have institutional co-finance slate partners, the majority of which have re-committed to the investment multiple times. These large investors are not staying in the business because it is costing them money.
Studies from Kagan Associates, PwC, Guggenheim, Morgan Stanley, and our own proprietary research have all shown that pictures with budgets between $100M-$175M are the least risky and most profitable pictures. Mr. Creutz claims that these large “event pictures” are cannibalizing each other. Many studies have explored this idea and not one has found it factual. It is clear that two event pictures and perhaps three can exist in the marketplace simultaneously. There is no prisoner’s dilemma which needs to be solved by industry consolidation and collusion to make fewer large films. Studios are making larger pictures because those are the pictures audiences want to see and they are the pictures with the most attractive economics. 2017 and 2018 are likely to break records again at the box office. And those who invest in those studio slates are likely to once again be glad that they did.
We believe the motion picture business is still a robust and thriving industry.