DVD, foreign revs might drive Cruise vehicle toward profits

No matter how you slice it, “The Last Samurai” is in for a long slog in its battle for profitability.

Fortunately for Warner Bros., that quest is helped considerably by expectations that homevid interest in the Tom Cruise starrer will be high. So even though domestic box office is likely to fall far short of matching production costs — estimated at $140 million — all is not lost.

For years, a rule of thumb has seen pics break even when domestic B.O. matched production costs, with foreign grosses equating to exhibitors’ split. Ancillary revenue from homevid and TV distribution was viewed as compensating for marketing costs.

But the enormous popularity of DVD is changing the profitability equation. Today, many pics can fall short theatrically and still turn a profit thanks to homevid.

And a pic like “Samurai” — big star, lots of action — reps just the kind of title that should perform especially well in homevid when it hits store shelves in April or May. With an exception or two, Cruise’s recent titles have produced $100 million to $200 million domestically in studio homevid revenue.

“If you have Tom Cruise and you have action, the DVD performance is going to be on the high end of the range,” observes David Davis, an entertainment analyst with Houlihan, Lokey, Howard & Zukin. “That can make up for any theatrical shortfalls.”

Through Jan. 14, “Samurai” had grossed $98.5 million domestically and $110 million internationally. Execs figure they’re safe counting on more than $100 million in total domestic B.O., if only because they’re spending heavily to sustain moviegoer interest in the pic.

“This picture will wind up at $105 million to $110 million domestically (and) I’m disappointed with that number,” Warners prexy Alan Horn acknowledges. “We were looking for $125 million, and we didn’t get it.”

But Horn adds it’s wrong to think of “Samurai” as a misfire, because Japanese grosses have been boffo at $76 million through six weeks. Indeed, Japan alone could contribute a phenomenal $100 mil to the pic’s global B.O.

Pic’s also gotten solid reception elsewhere abroad with several territories still to open. In so outpacing its domestic perf, “Samurai” reps just the latest of several recent foreign overachievers including “Terminator 3,” “Charlie’s Angels 2: Full Throttle” and others.

Still, even figuring on a worldwide haul of, say, $350 million, it’s clear “Samurai” can’t cut it on theatrical revenue alone. Consider:

n?Exhibs will get a B.O. split of roughly 50%.

n?Topliner is believed in line for a payday of up to $60 million, largely involving back-end compensation.

n?Estimates put worldwide marketing at $90 million.

Thus, Warners’ film rentals on “Samurai” could be limited to just over $150 million, even as the studio’s expenditures on the pic push $230 mil.

Fortunately, the movie gods saw fit to create homevideo.

“Nothing makes money in its theatrical window, because the cost of P&A (prints and advertising) has gone too high,” Horn says.

Compensating for this uncomfortable fact of modern studio life is the happy knowledge that film library reps pure gold in the DVD age. “The value of these movies in their afterlife is very, very impressive,” Horn muses.

Sell-through success

The DVD phenom is fueled in large part by consumers’ new enthusiasm for buying titles in the digital format rather than merely renting them.

“That’s the key thing driving this,” says Tom Adams of Adams Media Research in Carmel Valley.

In a recent Adams research report, “Filmed Entertainment by Pipeline to 2012,” Adams calculates that studios’ “sell-through” revenue from sales of homevid titles rose almost 300% over the past decade to $11.7 billion. By contrast, rental revenue from the same studios was $2.7 billion, up just 18% over the same span of years.

Studios like consumers’ buying their homevid titles, because their profit margin is greater on sell-through than with rentals.

“This concept of allowing people to own movies is the greatest thing that’s ever happened to studios,” Adams says.

Hopefully for Warners, sufficient numbers of movie fans will want to own “The Last Samurai.”

Follow @Variety on Twitter for breaking news, reviews and more