Media companies like Disney (DIS), News Corp. (NWS), and Time Warner (TWX) are dependent on a healthy celluloid industry. As times have changed, the industry has become more challenging. Home video, for example, is mired in a complex conundrum: how does one grow physical media revenue in the digital age? How does video-on-demand fit into the picture? What about online downloads? When you think about it, theatrical exhibition is becoming more important than ever before as post-multiplex channels of distribution undergo radical changes to keep up with the times.
Unfortunately, the following article from the Associated Press indicates that there's a lot of marketing work to be done in Hollywood. You see, while summer box-office sales are up, the quantity of admission transactions has declined.
The projection right now is for sales to reach $4.35 billion during the summer period. The article says that this is $100 million better than last year's number (which isn't shockingly impressive, I hasten to add). However, 552 million actual tickets may end up being purchased, which is about 11 million less than what was sold five years ago.
It's a very difficult act to balance. I'm in favor of raising ticket prices to keep a premium value on the entertainment experience. I own shares of Disney, so I guess I have to be in favor of that. But it does come at a cost in terms of price elasticity.
These data points don't necessarily capture everything that is going on within the movie-business dynamic, but they do tell me that studios need to concentrate on lower-budget productions backed by strong concepts. Also, targeting specific demographics in the summer is extremely crucial to getting a return on investment. And you know what? When you look at the kind of mainstream product that was released over the last few months, I think you can say that Hollywood has succeeded as far the demo game goes. It's that bloated-budget problem the industry has to deal with now. Plus the expensive marketing schemes and the overpriced (in my opinion) overhead structure in place at most studios.
Alas, even though execs have sometimes made claims to the contrary, I don't believe the system is truly becoming more efficient. And that bothers me as an investor. A reboot in strategy at every studio is necessary to ensure that shareholder value is the primary goal of every studio head. The reboot would involve cheaper budgets to allow for more concepts to be released to the marketplace. The more concepts that reach the marketplace, the better the odds that a few of them will serve as catalysts to juice ticket transactions. We're in an era where media conglomerates want to reduce the number of films they put into the pipeline. On the contrary, they should be releasing more. We want more Paranormal Activity-type surprises, to be certain.
Granted, you don't buy a Disney or a Time Warner just for the movies they release. But studio operating segments can have an impact. And it starts at the theater. When looking at the stocks in this sector, be sure to examine the state of the movie business as part of your process of due diligence.
Disclosure: I own Disney; positions can change without notice.