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March 08, 2008

Final Wrap-Up of 2007 Box Office

The Motion Picture Association of America (MPAA) released its package of theatrical market statistics for 2007 last week. Most of the data I have already recounted in my many updates about the box office. However, there is some interesting data, especially as it relates to the major movie studios which are owned by Disney, News Corporation, Sony, Viacom, and Time Warner. The data referencing MPAA members only covers studios owned by these five companies but industry box office data includes all studios and all movie releases.

The MPAA data confirms previous reports that the 2007 domestic box office rose by 5.4% to $9.63 billion. This builds on the 2006 gain of 3.5% which broke a three year slump that saw 2003, 2004, and 2005 box office change by -1.2%, 0.5%, and -4.2%, respectively. Also, as I previously noted, ticket sales were up just 0.3% in 2007 so the domestic box office gain was driven by a 5% increase in ticket prices. The ticket price increase accelerated from 2002 thru 2006 when price increases ranged from 2.2% to 3.8%. In the three prior years, from 1999 thru 2001, ticket prices increased rapidly in the range of 4.9% to 8.3%.

Despite rising ticket prices, total admissions in 2006 and 2007 are almost exactly equal to 1997 and 1998. Admissions are down about 10% from the 2002 peak but ten years of unchanged ticket sales with the last two years up by about 2% cumulatively seriously challenges the myth that the box office is dying. This is a critical conclusion as far as analyzing the prospects for theatre and studio owner stocks.

Last year was also very good abroad as the international box office reached an all-time high of $17.1 billion, up 5%, representing 64% of the worldwide box office of $26.7 billion. International box office has doubled since 2001 with growth every year except 2005. Total worldwide box office has risen in five of the last six years and was 60% higher in 2007 than in 2001. Hollywood studios produce their films for a worldwide audience making the growth in international box office over the past decade another dagger in the myth that the movie business is dying.

Completing the 2007 recap, MPAA produced some other statistics confirming data I have previously supplied. The data shows that 2007's record box office was driven by blockbuster films. 2007 had 4 $300 million films vs. just 1 in 2006 and 28 films reached the $100 million blockbuster status vs. 19 in 2006. Growth in the domestic box office in 2007 was driven by the record breaking summer. MPAA notes that the top ten summer movies in 2007 grossed 23% more than the top ten in 2006. The next ten were up an astounding 39% but the third ten fell by 25%.

2007 was a blockbuster driven year which is why 2008 faces difficult comparisons which started last weekend and will extend pretty much continuously through summer. This was the main reason why I sold my multi-year long position in Regal Entertainment. I plan to stay on the sidelines until Regal makes a new 52 week low or we learn that this summer's slate will show better comps than currently expected.

MPAA confirmed one other point I have written about: in 2007, R-rated films did well generating 15% of the total domestic box office, up from 10% in 2005 and 2006. 15% is not an unprecedented level, as it was matched or exceeded in 2003 and 2004, but it does show that records are made when there is depth of interesting movies across all movie going demographics.

The most interesting new data in the MPAA report concerns the cost of making movies and the impact of new media on the movie business.

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The graph on the left shows that for major releases by the five MPAA members the cost of producing and marketing a movie grew by 8% last year to $107 million. The major studios are also starting to dominate the independent business. Each major has started its own independent studio, which are competing with the independents traditionally associated with films festivals like Sundance. The graph on the right shows that the costs associated with these films has skyrocketed and is not too far behind the traditional big budget, widely released film. How the studios are coming to dominate the "independent" business is a topic for another column.

Facing rising production and marketing costs, the studios are increasingly turning to outside financing. Unfortunately, this MPAA data excludes the portion of costs that are paid by outside film financing ventures. David Poland, founder of Movie City News and author of the The Hot Button and , estimates that outside financing would push the actual cost up 30%. The idea behind outside financing is for the studio to slice revenue and costs on a film into lots of pieces to increase predictability on their own piece and give outside investors the ability to match their own risk tolerance to the appropriate investment vehicle (insert your joke about the credit crisis here!).

For the studios, it is these costs which really determine the profitability and growth potential of the movie business....

....As revealed in the historical box office data, the movie business is a lot more stable than most observers assume. From year-to-year, the fortunes of one studio to the next vary widely. Only Disney manages any real stability in revenue and profits thanks to its animation franchise and the reliable secondary sources of revenue it generates including DVDs and merchandise. And even Disney has its share of bad years when its live action films prove disappointing. 20th Century Fox, owned by News Corporation, has matched Disney's success recently, while Paramount (Viacom), Sony, and Universal (General Electric) have lagged over the last few years.

All of the studios are now trying to increase growth and profitability by limiting the number of films they release, developing franchises with high sequel probability, narrowing their focus on genres where they have traditional strength, and tightening overhead costs. Each year different studios will win and lose but with a growing global box office, still growing international DVD business, and the potential for Blu-ray to boost the domestic DVD business, there is reason to believe that the studio segments of the entertainment conglomerates can provide a real boost to financial results and shareholder value in the years ahead.

One other interesting item from the MPAA report is the impact of new media on the movie business. MPAA completed a study asking moviegoers where they had first heard about a movie before seeing it in the theatre. The internet and TV were mentioned 73% and 75% of the time, respectively. Movie trailers, word of mouth and print ads each got around a 50% response. Significantly, among those who research movies online, per capita movie attendance is higher as is going to a movie on its opening weekend.

Not surprisingly, studios have shifted ad budgets online, mostly at the expense of newspapers. Not only are moviegoers spending more time online, but online ad costs remain below print helping studios more effectively market their films. Also contributing to the shift from newspapers to the internet is the ability to build word of mouth through internet campaigns and create the occasional, but by no means guaranteed, surprise hit. Movie ads are big business for Gannett, New York Times, and other newspaper companies, so this trend is another contributor to the secular decline in newspaper advertising revenue.

MPAA concludes its report by producing evidence that the theory that alternative forms of entertainment are hurting ticket sales may not be as solid as generally perceived. MPAA is obviously biased but a study they completed comparing moviegoing to ownership of DVRs, home theatres, iPods, cable and satellite TV, DVD rental services, and movie downloading services shows that those who own or use a majority of these technologies attend 4 more movies per year than those who use these technologies less. A good argument can be made that early adopters with higher incomes and younger demographics are driving the discrepancy and that as the newer services reach a broader audience incremental moviegoing will dissipate. But an equal argument can be made that making movies more accessible and improving the out-of-theatre experience will increase interest in movies.

I think the music industry proves the point because iPods have made music more popular than ever. Moviegoing, however, remains popular, providing a unique experience for the ticket buyer. Music offers no equivalent experience and can be enjoyed more at an incremental cost not far about zero.

Posted by Steve Birenberg at March 8, 2008 12:19 PM in Box Office