If Hollywood were Vegas, then the average Joe could put his money on Disney prior to the weekend and watch his number come up Monday morning when Pirates of the Caribbean 2: Dead Man’s Chest collected its record-breaking box office booty. The closest to that is Wall Street. True, Disney’s stock price spiked 41 cents at one point in trading today, but then it settled down to its normal range. Which just goes to show that, no matter the Hollywood grand slam, the Street is awfully hard to impress. So I contacted a lot of people much smarter than me and asked: Why is it that Wall Street ignores when a studio movie soars? The answer is pretty interesting. I’m told it’s because Wall Street understands that filmed entertainment has become just a small part of a major media company’s overall portfolio of businesses. (One educated guess is that Disney’s entire film/tv unit accounts for about 16% of the company’s market value: that’s only about $4.80 out of the $30.) So an individual film just doesn’t move the dial very much at these huge companies. What’s more, since stocks are typically priced on multiples of the expected value of discounted cash flows, for a film to have an impact, it would not have to do well — it would have to be a shocker. In other words, generate far more profit than investors expected, without something else pulling down the total. (As people who read DHD regularly know, I’ve been predicting P2‘s titanic tracking since May.)
OK, so now the question is: will the movie/TV unit, because of Pirates 2 (and 3, and 4), generate significantly more profit than the Street expected? And the answer is, no. Everyone expected the film to be at least as big as Pirates 1. The problem here specifically is that, while Pirates 2 clearly topped those expectations in a big way, Disney/Pixar’s Cars hasn’t lived up to expectations that it would equal Finding Nemo, which was released about the same time relative to Pirates 1. So Cars‘ $60 mil opening weekend gross, which might have been a cause for celebration under different circumstances, was actually perceived as disappointing because it was at least $10 mil below even the most modest predictions. That caused Disney’s stock price to dip slightly after Cars’ opening weekend before it rebounded later in the day. (UPDATE: As for today, Bernstein research analyst Michael Nathanson pointed to precisely this: that any outperformance by P2 was likely offset by an underperformance by Cars. By day’s end, only Goldman Sachs analyst Anthony Noto predicted Pirates 2 could help boost Disney’s earnings by 3 cents per share in fiscal 2007.)
Also, you can’t forget the costs vs the returns. According to Box Office Mojo, Pirates 1 cost $140 mil to make and Pirates 2 $225 mil (though I say it’s more likely $250+ mil). And let’s not forget that marketing costs are astronomical these days. So, say if Pirates 2 simply matchess Spidey, and grosses $822 mil worldwide, then the studio would probably collect about half, say $411 mil. And suddenly that big blockbuster doesn’t look so big, at least in theater revenue.
But, at many infotainment companies today, there is no real after-life — the so-called “long tail” — for some of these films. DVDs, yes. But after six months that’s the gift that stops giving. Disney is an exception because it can milk theme park rides, make TV shows for the Disney channel, and sell more tchotchkes. Then again, Johnny Depp, Jerry Bruckheimer, etc. probably didn’t leave much money on the table. That’s why the parent company Walt Disney Co. has scaled back mostly to Disney-branded and Pixar movies. On top of all that, movies are inherently risky. Check out the profit margins for the movie business and you’ll wonder why anyone sane is in this biz. As one really knowledgeable guy told me, “The perception is that the best way to make a million dollars in Hollywood is to start with two million. Old joke, I know, but they still believe it on Wall Street.”
Moreover, Wall Street is obsessed more with the distribution side of the media world right now — specifically at digital distribution. Disney’s Bob Iger did that deal with Steve Jobs, gets new technology, and the market knows it. Same with Rupert, who spent $1.5 billion and has seen his stock rewarded accordingly. On the other hand, Time-Warner is still getting dunned for the AOL acquisition, which in hindsight might have been a good deal had it come way later.) Viacom’s share price is way down precisely because it has no over-arching digital strategy. Sony, too is in turmoil. “Net net,” as one source explained, “the films are great, and content may be king, but right now the Street is clouded by visions of digital riches.”
Bottom line: Wall Street would have really taken notice if Pirates 2 bombed. No one would have expected it, and the stock would have reflected that big-time.
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