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November 22, 2005

Latest Harry Potter Film Tracking Above Expectations

Despite widely expected success, executives at Time Warner (TWX) have to be happy with the $102 million opening weekend for the latest film in the Harry Potter series. Even adjusting for ticket price inflation, the opening of Goblets of Fire was the strongest of any film in the series since the first movie. International box office is also off to a fast start and looks set to match or exceed prior films in the series.

Click here for tables comparing the Potter films opening weekend and full box office runs.....

All of the data in the tables was pulled from BoxOfficeMojo.com. The ticket price data reflects total nationwide average ticket prices for all shows and all ages. It is not specific to the Potter films which may have a lower average ticket price due to the high number of tickets sold at matinees and to children. Nevertheless, for purposes of comparison, the tickets sold column (box office divided by average ticket price) functions as an equalizer.

Not to be overlooked is the international box office, which for these films exceeds the domestic box office. The table shows international box office along with estimated production and marketing costs for each film in the series. It is probably fair to assume that the marketing budget for the latest film is at least as large as any of the prior films.

It is really not possible to gauge profitability to a studio for any particular film as important items like residual payments and participations are never made public. However, it is fair to assume that for a big budget film like those in the Harry Potter series that the studio will receive as revenue slightly over half of the box office. Thus films, in this series are highly profitable based solely on their box office run.

Ancillary revenue comes from the merchandising, DVD sales, DVD rentals, and sale of TV rights. I have never seen any good data on merchandising revenue and profits but DVD sales for a family film can easily exceed 20 million units. At a wholesale price of $15, this could represent another $300 million in revenue to the studio. Typical margins historically have been in the 40% range for DVD sales.

So TWX execs awake today to the guarantee of several hundred million in profits over the next couple of years from the release of just this one film. Furthermore, there are still three films remaining in the series. Given that the Filmed Entertainment division is projected to have operating cash flow of about $1.4 billion in both 2005 and 2006, it is easy to understand why the Street and the media obsesses about the box office numbers.

I remain optimistic that TWX shares can move into the low $20's over the next few months.

Posted by Steve Birenberg at November 22, 2005 09:31 AM