Sep

11

I am doing an independent study in grad school regarding the predictability of movie revenues. I recently purchased a primer to become acquainted with the inner works of the biz. The book is titled, "This Business of Film" by Greenwald & Landry. As I spent several years in various fundamental equity shops, it strikes me this could be an area primed for M&A activity. The industry is dominated by the 6 major studios.

Some fun facts: approx 33% of films made are studio films, studios get 90% of industry revenues, new technologies are always feared but usually result in longer term revenue (sound, TV, video, DVD, cable, etc.), barriers to entry are very high, new technologies are generally allowed to incubate in smaller companies before being adopted by the studios, verticle integration is big in the industry. Right now the new thing is online exhibition and the market is dominated by, yup you guessed it, AAPL and AMZN. A few more facts: theaters account for 20% of revenues, TV 34%, and DVDs 45%. WMT controls 40% of the DVD market with TGT, NFLX, and BBI accounting for most of the rest. Target audiences are going to theaters less so the internet based models stand to work better. We all know what MP3s did to CDs. All these facts make me ask a few questions:

1. If DVDs go the way of CDs WMT is in a bad way, would they buy a company with online exhibition abilities vs building in house?

2. AAPL is the 2nd biggest market cap company in the SPX500 (behind XOM) and they have the exhibition medium (ipods) and the distribution medium (itunes). A media conglomerate likely doesn't have the market cap to buy AAPL. How long until AAPL considers getting into the production business? Depending on their legal status, they may be able to get an exemption from hiring union labor thus lowering their production costs.

Unfortunately, it doesn't seem a lot of the potential players are public but food for thought.

Stefan Jovanovich comments:

Sound did not "result in longer term revenue" for the motion picture studios for individual pictures; its effect was the reverse. It merged movies with radio and gave the public the same expectations: that there would be a new picture at the theater every week just the way there was a new script for Jack Benny on his radio show. The studios did everything they could to break that expectation by developing "epics" and building up "stars" so that they could hold over pictures for additional weeks, but they never really succeeded. That explains why the aristocracy of Hollywood hated television at the same time the people who were used to B picture production schedules - Lucille Ball, Dick Powell, for example - were busy creating their own mini-studios for TV. As your numbers indicate, online exhibition only accounts for 1% of current revenues; do you have any idea how much of that is going to Hulu?

Sound hurt revenues per picture because the audiences demanded new movies each week just the way they expected to hear new radio shows. Total revenues went up, but profits went down. The financial history of the motion picture business in the 30s is one of rising revenues and continuing restructurings. In that sense, George may be absolutely right; as profitability falls in an industry, people look for ways to lean against each other.

The economics of film production remains horribly simple: make once, show many times. Chaplin's silent comedies ran for months and still sold out. Birth of a Nation was an unimaginably big hit in the same way. There is no way to comprehend what a marvel the "movies" were in the 1920s and how thoroughly they captivated people's attention all over the world. Chaplin's Tramp and Rudolph Valentino's Sheik were universal icons in a way that no one - except possibly Muhammed Ali at the time of the Thrilla in Manila– has ever been since. Nothing in "talkies" came close. If you want to see what sound did to the profits in the movie business, United Artists is a perfect example. Nobody built Pickfair in the 30s and the "artists" never again could seriously try to take over the asylum after sound came in the way Douglas Fairbanks, Sr., Mary Pickford, and Charlie Chaplin had.
 


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