Avatar: Money Maker or Hype?

The Reuters new release reporting News Corp quarterly earnings has some interesting results. Suggesting that while AVATAR is creating a lot of box office sales, not much of it is accruing to Fox Studios directly. Making the fuss over AVATAR’s box office more hype than a Hollywood game-changer.

The release noted:

News Corp, which also raised its dividend by 25 percent, said fiscal second-quarter net income was $254 million, or 10 cents a share. A year earlier, it posted a net loss of $6.4 billion, or $2.45 a share, before items.

Last year’s loss included a writedown for its purchase of Dow Jones, and other items.

News Corp’s bottom line in the latest quarter included a $500 million litigation settlement payout to Valassis Communications.

Excluding one-time charges in both periods, second quarter adjusted profit was 25 cents a share, up from 15 cents a year ago. Analysts were expecting the company to post earnings of 20 cents a share on average, according to Thomson Reuters I/B/E/S.

Revenue rose 10 percent to $8.684 billion, ahead of analysts’ average forecast.

News Corp’s Hollywood studio business saw its operating income nearly triple to $324 million thanks to a record-breaking performance from the 3D sci-fi movie “Avatar,” which James Cameron directed.

“Avatar” has sold more than $2 billion in ticket sales at the worldwide box office, overtaking “Titanic” to become the biggest movie of all time.

Its worth noting that total, world-wide box office for AVATAR in December (the close of News Corps Second Quarter, which does not match the calendar year) was $268.9 Million, according to Alt Film Guide, and $525.3 million foreign box office for a total of $794.2 million globally. So for total global box office revenues, News Corp (through subsidiary Fox) gained about $212 million. That’s a rough gross margin of 26%.

The COST of AVATAR to produce and market in the US has been estimated at $430 million by the Financial Times, other estimates run higher to $500 million. At the current rough margin of 26%, that’s roughly an operating income of $520 million against global ticket sales of $2 billion.

Of course, this assumes that there won’t be any increased charges for prints, digital conversion, marketing, cost-sharing to convert foreign theaters to IMAX-3D, and so on. Assuming that this is not the case, and that increased costs from later foreign release nations such as China, Japan, Italy, etc. get booked for the next Quarter, AVATAR will still make a profit from its theatrical box office run. News Corp claims that it has booked most of the costs for AVATAR in the past quarter, but will see most of the revenue in the third and fourth quarter. Because of course, News Corp likes to be paid later rather than sooner by those who owe it money. As a practical matter, it is unlikely that significant amounts of revenue remain to be booked in the later quarters, particularly from foreign releases. The only possible reason to delay recognition of revenue is expected large operating losses in other divisions, i.e. an ad-market collapse in print and broadcasting. This does not seem to be the case.

But it won’t make much. It is at best mildly profitable, purely from the box office. Note the low gross margin Fox gets (again roughly 26%). Add against that the far lower DVD/Blu-Ray sales. Fox will be unable to charge a premium price as exhibitors did with fully 20% higher IMAX 3D ticket prices. Consumers are turning to Redbox rentals (the most explosive growth) which is why Wal-Mart and others have been pressured not to sell to Redbox (i.e. the five DVD limit per customer for new release titles). Redbox of course can simply dispatch legions of employees to buy five titles each of say, “AVATAR” and rent them for $1.

If you are a consumer, and like 90% of the consumer base, have only ordinary TV, and an ordinary DVD player, which looks like a better deal to you? Renting AVATAR from Redbox for $1, or buying it full price?

AVATAR had the ability to be a game-changer for Hollywood. Make IMAX 3-D movies that generate big box office to more than cover production and marketing costs as home video, the most profitable segment of Hollywood’s revenue stream, declines under discounting pressure. Its not just Redbox, Netflix, Amazon, and others provide cheaper alternatives than buying a DVD or Blu-Ray at full retail price. However, Cameron made AVATAR just too darn expensive. And, there is only one movie that will be the first serious, effects driven CGI 3-D spectacle (and not “Spy Kids 3-D”). Marketing expenses for the home video releases will be nearly as much as for the theatrical release, after all.

This is why Hollywood is not rushing in to make AVATAR clones. They know how much money was spent and how thin the marginal return overall will be.

To quote Rupert Murdoch on the AVATAR sequel

Murdoch also said News Corp. is pushing for an Avatar sequel.

“There’s no agreement, budget, or timing yet. Since it’s Jim Cameron, I wouldn’t hold your breath to have one soon, but we’ll be pushing for one,” he said.

Murdoch also said this about Conan O’Brien:

The company’s Fox Broadcasting Co. has expressed interest in signing Conan O’Brien for a late night talk show following the recent controversy that resulted in the comedian reaching a deal with NBC to terminate his contract just seven months after he was named host of “The Tonight Show.”

Although formal negotiations have not taken place with O’Brien, Murdoch said the company is giving “a lot of thought and examination” to the idea, and ‘if the programming people can show us that we could do it and be fairly confident about making a profit, we’d do it in a flash.”

If AVATAR were such a money maker, Murdoch would have waved another half a billion at Cameron who’d be busy on the sequel, instead of a movie about a Hiroshima survivor. Just as FOX is not throwing money at Conan O’Brien (who is free to talk to them) because of the latter’s poor ratings and limited appeal.

As always, ignore the hype and follow the money.

About whiskeysplace

Conservative blogger focusing on culture, business, technology, and how they intersect.
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29 Responses to Avatar: Money Maker or Hype?

  1. Anonymous says:

    New Avatar review…brought to you by the folks who recently eviscerated The Phantom Menace.Enjoy.http://www.youtube.com/watch?v=uJarz7BYnHA&feature=player_embedded

  2. Anonymous says:

    Mel Gibson's, Apocolypto, would have no doubt been a more realistic look at "native-tribal-life" than Avatar (which I refuse to see). I wish libtards were forced to see what lousy conditions and practices really go on in many native tribes around the world. Its easy to pick out some of our more benign native American tribal groups and hold them up to us in comparison and find some things about us wanting, but as a rule third-world primitives are not so noble as that, in fact they can be downright barbaric by our standards. There never was a "noble savage". There aren't any semi-attractive blue people out there in the universe either, and even if there were they are atsronimical distances away so that we'd never get to them, even if we could travel at lightspeed.

  3. Rose says:

    Whiskey, what to do think of the new populist Oscar noms?

  4. Anonymous says:

    why would anyone with a dvd burner in their computer "buy" a movie–they are free with 2-3 easy free programs to decode, rip, compress and burn themi am copying netflix's catalogue as fast as they can mail me movies

  5. You don't even have to rent movies to get a copy. Anyone with high speed internet can just download any movie or tv show they want within hours of it being released. Get a divx compatable dvd player and you can watch the movie on your tv just like any other. You don't even need any conversion software to do this.

  6. Whiskey says:

    Rose, it seems the Academy is getting worried. The top moneymakers are making out, but the money train stopped after the 2008 crash left Hollywood unable to play with Wall Street's money any more. And movies are really, really expensive. AVATAR cost ~$500 million, but even a "lower budget" movie can cost $100 million.Hence movies people actually saw in theaters nominated, instead of say, "the Reader."Winston — That is very true. And piracy is huge abroad. Fox and other studios simply shut down their Korean and Spanish language DVD divisions because of piracy. Apple's Ipad eventually (when it is smaller and cheaper so people can buy it), plus mobile phones and cheap netbooks, mean an opportunity and threat.Opportunity: "beat" piracy by offering cheap/convenient streaming video (probably ads with personal info you provide targeting you, a "super-Hulu" model) or cheap downloadable movies like music from Itunes or Amazon.Threat: this will be a LOT cheaper. Hollywood is delusional in that it thinks it can hold back the wave of moving to cheap entertainment and erosion of DVD/Blu-Ray sales. A LOT of people lack the technical skills to rip from Bit Torrent or what have you, or copy a Netflix/Blockbuster video. But they can always rent $1 from Redbox at the supermarket, super-convenient.At the mass end, Hollywood loses because Redbox steals mass home DVD sales. If you saw AVATAR in the theater, and its only in 2-D, why not rent it from Redbox for $1 than buy it right away? Even if you have to wait a month.At the high end, collapsing wages and employment means that the technically savvy folks will probably go Bit Torrent or copying versus purchasing, except for a few special movies. So a guy who bought say, 5 DVDs a month will probably buy only 3 the entire year. Watch the rest on Hulu, or Netflix, or whatever.

  7. Truth(er) says:

    Don't forget about this comment.I have a more general question about the the interconnection between Hollywood executives, profitability of movies and the agency problem.If you notice the opening credits to any film, you will see all kinds of deeply nested corporate entities. For example, you may see something like: Time Warner presents a Spyglass Studio production in association with Legendary Pictures and Village Roadshow Productions, or something like that.In other words, there seem to be a lot of "shell" corporations operating in the production of movie.Might it be possible that the profitability of these shell corporations is not the utmost priority? What we may be seeing is a similar confusion noted in non-profit entities: just because the corporation is a non-profit does not mean nobody is making money. Likewise, just because "Avatar" may not be profitable for a studio does not mean that all kinds of principals are not making money.

  8. A thought occurs!You know, AVATAR was very very hyped. I know some who genuinely wanted to see it from the get-go, and weren't disappointed by the shiny graphics. However, there were quite a few like me who were only dragged along, and we allowed ourselves to be dragged along because we didn't anticipate it being this bad, AND we heard such good things about it, even if we weren't 100% complacent in believing it.Well, that means there were quite a few tickets sold that "shouldn't" have happened, and the money received from tickets is not an actual basis of "interest" in the movie. This doesn't entirely matter NOW in the theater setting, but it does matter in every other setting (which will be minimized anyway by Redbox, piracy, etc.) AND it will affect any potential "sequel".I was certainly had, and have only myself to blame, but if a sequel comes out I'm not making that same mistake again just to appease a family member. I don't know just how many others will feel the same way, but when the sequel bombs, they'll likely blame it on the "sequels are never as good as the original" excuse, rather than realizing that people wised up from the first time.Any thoughts?

  9. Soap says:

    @Anonymous -I love that guy's reviews!@ Amateur Strategist -Good question. I wonder if Avatar 2 will have a similar result to Blair Witch 2?

  10. Whiskey says:

    Truther, that's a good observation. Basically the shell companies take pay-outs that get to the execs (who play musical chairs as executive producers then studio execs) and actors/directors with production / development deals. However, it all depended on financing from Wall Street which is now very questionable. Even Wall Street has constraints as to how much money it can throw around.Amateur Strategist makes good points, in that the DVD revenue is unlikely to be what Murdoch suggested, i.e. a bonanza. That makes financing an AVATAR sequel fairly iffy (and why likely Fox has not already done a deal for it).How sustainable Hollywood's nepotistic and inter-connected networks of executives, producers, a few "stars" and directors, taking the cream off the top, through shell corps, with the downward pressure of lower US consumer dollars and Redbox type competitors (or piracy) is questionable. I think we are seeing the end of that strategy.Look at Box Office Mojo's reports for foreign box office for AVATAR. Significant amounts come from either "tiny" box office nations like Egypt ($1 million USD or so) where the cost of producing prints / dubbing / marketing etc. probably exceeds revenue, or places like China where Fox will net more than $0 dollars in revenue but rule of law, transparency, contracts etc. are a joke. I would not count on China paying what they owe to Fox. What will Fox do? Sue?

  11. Wamma says:

    Whiskey you need to be corrected on a few things:An overwhelming majority of the 3D showings of Avatar were in Real 3D, not IMAX 3D.Tickets for movies shown in Real 3D are only 2 to 3 dollars more than a regular priced 2D movie. There is talk of Avatar 2 now being in the works.

  12. Wamma says:

    Correction: I just looked it up, it is called RealD 3D (kind of a funny name), not Real 3D.Either way, most showings of Avatar are in RealD 3D, and tickets for movies shown in RealD 3D are not really that much more expensive than tickets for regular 2D movies.

  13. TGGP says:

    I thought you'd like this link on the better data we're getting for what radio people listen to:http://www.nytimes.com/2009/12/16/business/media/16radio.html?_r=1Murdoch says he's pushing for a sequel. You had been saying that Fox didn't want to do a sequel. So why hasn't any contract been signed? Because James Cameron is a huge egomaniac who gets to do whatever he wants whenever he wants. Remember what he did after making a shitload of money with Titanic: whatever the hell he wanted to for quite a few years.

  14. Wamma says:

    "Murdoch says he's pushing for a sequel. You had been saying that Fox didn't want to do a sequel. So why hasn't any contract been signed? Because James Cameron is a huge egomaniac who gets to do whatever he wants whenever he wants. Remember what he did after making a shitload of money with Titanic: whatever the hell he wanted to for quite a few years."Cameron is a true alpha male, both in terms of women (married 5 times) and power (directed some of the most expensive movies ever).He is the kind of guy that could get you to go along with his idea even though you hate it. The guy can pretty much do whatever he wants in Hollywood at this point.

  15. Anonymous says:

    Whiskey is trying to pathetically salvage his retarded prediction that "Avatar" would fail.Moving goalposts, sophistry, dissimulation – he's pulling out the whole works.How very "Scotch-Irish" indeed.

  16. Whiskey says:

    The Daily Beast reported that AVATAR is playing on 2200 3D screens out of 3600, in 3D. That's roughly 60%.So AVATAR is taking in most of its money from 3D tickets, which cost between 15-25% more than regular tickets depending on the area of the country (in SoCal it is about 20% or so).The News Q2 results are in, and AVATAR seems to have contributed a whopping … $200 million the film division quarterly operating income.Murdoch spun some whoppers — including that he expects robust DVD sales (but will only release it in 2-D). Wow. So people will pay (instead of pirate or rent for $1) a spectacle in 'flat' 2-D as opposed to the 3-D theatrical release?Second, why hasn't News booked foreign revenue?Two reasons. One is that much of it comes from places like China, rule of law and contracts optional, or places like Egypt, where the revenues ($1 million gross) probably don't even match the expenses for Marketing, dubbing, etc. Note, Fox would get a fraction of the gross box office, even from a rule-of-law nation like Japan or Australia.Then there was buried in some of Murdoch's statements in the admittedly not good reporting, that implied that Fox had a financing partner for AVATAR.IF Fox had to reach out to a financing partner to cover the cost of half a billion dollars, up front, they had to give up the upside. There is no other way to get this done. ANY Sequel to AVATAR, no matter how cost-controlling, would escalate due to actor, producer, and technology demands. So it will cost NORTH of $500 million or so, requiring a financing partner that will want to know:1. How much revenue can we get out of theatrical domestic release.2. How much revenue can we get out of foreign theatrical release (subject to HUGE risk from piracy).3. How much revenue can we get from DVD/Blu-Ray release (subject to HUGE risk from piracy, both domestic and foreign).Don't forget, Fox closed its Korean and Spanish DVD operations due to piracy. They couldn't make any money. Sony Home video laid off around 500 people for the same reason: PIRACY (and the growth of Redbox instead of sales).

  17. Whiskey says:

    Cameron is certainly Alpha, but he cannot do what he wants. He had to wait 12 years not making any movies (and the guy loves to make movies) because no one would work with him despite Titanic making a boatload of theatrical box office money.Given that the Wachowskis (one of whom is a trans-sexual), or Oliver Stone (subject to fits of alleged drug use, his movies never make money) don't lack for work, only one thing can explain Cameron's inability to find ANY movie for 12 YEARS: Titanic was perceived to lose money, lots of it. Regardless of the reality.Guys like Stone and Woody Allen and Clint Eastwood and so on can do film after film, the risk is low (they don't make, ALEXANDER the sole exception) movies that lose a lot of money. Their budgets are low and stay low. They don't make much money but don't lose much either. Michael Bay is every bit a jerk as Cameron is, allegedly, but makes money.If there was a will (and money) to do an AVATAR sequel, it would have been announced by now (particularly since other studios would be bidding for Cameron). Murdoch could have thrown money and deals (i.e. finance, distribute/market Cameron's next three non-AVATAR movies). He's declined to do so.I think the real story is the FAILURE of the AVATAR model. Because it requires too much money.AVATAR required somewhere between $430 and $500 million (various estimates) to make and promote. Which probably required a financing partner, who takes most of the risk and thus most of the upside. IS that model sustainable in the world of rampant piracy, shift to renting for $1 (Redbox) and streaming free (ad supported) media? No. Hence no sequel. Hence News putting of recognizing AVATAR foreign revenue.[You can go to Box Office Mojo and see reported totals from foreign nations for AVATAR. A lot of the totals seem pretty risky to me. I doubt Fox will see much of the China, Russia, and Mexico totals given the rampant corruption there, for example.]Cameron is a guy who lives to make movies. That he went twelve years between them (being a jerk is no barrier to working in Hollywood, losing lots of money is) and his next movie is about a Hiroshima survivor should tell you something.Cameron is a T-Rex when the meteor strikes. Too vulnerable and "big" to respond to a money-short (food) environment.

  18. Gil says:

    You can the difference between a normal person's view of Avatar versus a nerdy git . . .Normal Person: "A visually stunning movie with the interesting plot of a fellow who is torn between his duty and his newfound understanding of the natives.Nerdy Git: "Anti-white tripe! And unobtanium?! Is Cameron joking or what?! If I wanted a movie with high-end special effects and a pathetic storyline I would have watched Star Wars: The Phanton Menace again on my computer.

  19. Anonymous says:

    The First Tim Tebow Super Bowl Ad Doesn't Mention AbortionCommenter jdhawk wrote, "During the game, what struck me in regards to the commercials, was the constant plugging of CBS' own shows. Something is not right. Either they were charging too much for their advertising spots or the economy is so bad that few were interested in advertising in one of the most watched TV events all year."Is that a bad sign for CBS? Is plugging their own shows worth the forgone ad money?

  20. Anonymous says:

    W, I don't know if you're right or wrong, but your arguments would be a lot stronger if you mentioned things like the time value of money, which would imply that big-budget big-reward movies are financially inefficient.

  21. TGGP says:

    Now I'm just confused. My narrative for why Cameron took so long is because he chose to: he indulged pet projects rather than work for a living. You seem to suggest that Titanic really did make a lot of money, but for some unexplained reasons folks in Hollywood PERCEIVED that it didn't and so refused to work with him. Can you cite any evidence of Cameron seeking to make a film and getting turned down by anyone in that time period? And if he wasn't trusted to make any more movies, why did Fox give him a gazillion dollars to make Avatar?

  22. Mel Gibson's, Apocolypto, would have no doubt been a more realistic look at "native-tribal-life" than Avatar (which I refuse to see). ………….Which tribe? There are still literally hundreds of tribes existing on this planet, so which one(s) are you talking about?

  23. Whiskey says:

    TGGP — I think it is unrealistic to assume that a talented director, one who basically lives for … directing, being the man who makes the movie, would sit on the shelf for 12 years. That seems to be stretching it. Cameron is in good health, but getting older. He had a string of mostly successes, particularly the second Terminator movie, that made a lot of money.No other director who would be roughly his peer, spent 12 years off the shelf: not Scorsese, not Spielberg, even Lucas had a number of executive producing stuff the Young Indiana Jones TV series.Titanic generated REVENUE. Revenue does not equal profits. MOST of the revenue, particularly at that time (1998) came not from Box Office (which was remarkable) but home video (which largely wasn't by all accounts). Recall, the project was so expensive it had to be co-financed. Leaving first call on revenues from both box office and home video to financing partners.Taking into account, time value of money, Cameron requires ever-increasing amounts of money to make movies. The risk if the movie FAILS (and that's always a risk, see the Abyss) or simply does not perform in the biggest piece of the revenue stream: home video and TV sales, can sink a studio.Which means that Cameron requires co-financing from Wall Street Partners, and given the collapse of German tax shelters (which killed "VIP's" financing — the Pamela Anderson syndicated TV series) that money is hard to get and requires lots of first-calls on the income generated by the movie.Guys who are lower risk: Oliver Stone, Woody Allen, Clint Eastwood, work all the time, even though Stone is alleged to be a coke-head (which might or might not be true). Regardless, his movies don't cost half a billion dollars to make.Divisional chiefs don't share in the upside (of which because it cannot be studio financed, there is little anyway), but fear the downside of another Heaven's Gate or Waterworld. Cameron's movies DO generate money. But most of the profits seem to go to those financing his movies.George Lucas net worth is estimated at 3 billion. I've seen estimates for Cameron at $200 million. Sure, a lot of that is the toys, and games, but consider THAT revenue stream. How many toys, games, and such came out of Titanic or Terminator or will come out AVATAR?This IMHO is why Cameron spent 12 years on the shelf. No one could afford to work with him.

  24. @whiskey, you right about piracy is huge in abroad. I live in asia especially in developing countries, that is still difficult to get rid of the habit of piracy. Even if the price is cheap, but the nature of piracy can not be lost, need a long time to heal it.

  25. Michael says:

    Baseball Mitt, you were wrong. Not all Asian people do piracy. We should not declare such statement. If the person is lazy, wherever he lives, piracy will still occur.

  26. Frest says:

    Avatar was very hype. It look like financial management is key for success in addition profit from box office movie.

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