Are Pure Play Movie Studios The Answer?
With media conglomerates tanking, pure play movie studios Marvel and DreamWorks Animation look like pretty robust places to ride out the recession, on this day that both report earnings. All that exposure to advertising at the likes of News Corp and CBS Corp is just a whole lotta trouble. People are still packing theaters, and franchise-driven, family friendly films are still highly profitable. Marvel Entertainment is down just about 10 percent over the past twelve months — it's stock popping up this morning on earnings news — and DreamWorks Animation is off 20 percent, while the DOW is down more than 40 percent.
Marvel's earnings report this morning was positive — an increase in EPS to 80 cents from 33 cents during the year-ago quarter showed no impact of the recession. What a huge contrast to evertyhing we've heard from the media conglomerates. Marvel's studio really works — it focuses exclusively on established brands and since it's started producing films in 2007 (instead of licensing rights to other studios) it seems it's been able to manage costs. (Sources confirm reports that Marvel is holding a hard line with Mickey Rourke, refusing to pay him more than $250,000 for a role in "Iron Man 2"). And while all sorts of publishing businesses — from magazines to local papers — are struggling industry-wide, Marvel's publishing revenue grew 9 percent in the quarter.
Here's why Marvel is better positioned than other studios: It's not going to waste tens and tens of millions of dollars on high-minded Oscar bait (and tens more on marketing it) that have virtually no chance of ever being profitable. Marvel has great brands to work with, brands that appeal internationally, and to the crucial "fan boy" movie going demographic that pack theaters opening weekend. And while DVD revenues are suffering across the industry, Marvel is benefiting from the fact that its blockbusters are the rare DVDs that continue to sell. It's not a huge company — net sales were just $224 million for the quarter on $63 million in net income — but its strategy is smart and it's well insulated from some of the other factors dragging its larger rivals down.
DreamWorks Animation reports after the bell today, and it has some of the same benefits. Jeffrey Katzenberg's company doesn't release many films - usually just two a year —but these films like "Kung Fu Panda" and this year's "Monsters vs. Aliens" are big events that draw the whole family into the theater. (As opposed to smaller arty films, which adults could just as well watch on DVD). DWA will suffer more from the slumping DVD market than Marvel, as it relies on its home video revenues between theatrical releases. We'll see if its movies' appeal to kids can help overcome DVDs slide.
DreamWorks Animation has a key weapon in its arsenal — digital 3-D, which costs about three dollars more per ticket, and traditionally attracts bigger audiences. Starting with "Monsters vs. Aliens" it'll be releasing its films exclusively in 3-D. I've gotten a sneak peak at "Monsters vs. Aliens" and it really convinced me that DWA's proprietary technology to shoot in 3-D was really unlike anything I've seen, more impressive than other 3-D films, which are effectively turned from 2-D into 3-D after the fact.
After the bell we're sure to hear about a drop in DVD sales and we should expect a 20 percent drop in revenue. But because DWA releases so few films, those kinds of swings in results are not uncommon. At the end of the day the company is in a stronger position for its lack of exposure to advertising, as we face a trough in ad spending that's unlikely to improve any time soon. Now we'll have to see if DWA can ramp up the variety of its productions (more shows to sell to TV networks) and continue to churn out hits, in theaters and on the shelves of Wal-Mart.
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