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.