Paramount Summer Illo

Studio’s operating income has been in decline, pressure's on big summer tentpoles

While Paramount Pictures has argued that its austere slate churns out profitable films at a price, the studio’s operating income has been in decline, putting even more pressure on big summer bets like “World War Z” to perform.

While most of Paramount’s rivals also reserve their biggest theatrical releases for the next few months, they also roll out more titles throughout the year, which somewhat mitigates the fortunes of a single season. But under topper Brad Grey, Par has cut its slate and reduced overhead, choosing to bet on big, sexy pics like “World War Z” and “Star Trek Into Darkness” that will put the onus on the studio’s summer performance.

But “Star Trek” has been good news for Par, netting $181 million over its first three weeks at the domestic box office. Par also kicked off summer with a third pic, “Pain & Gain,” which did a respectable $50 million in the U.S. over six weeks.

Now it’s up to Marc Forster’s “World War Z.” Starring Brad Pitt, the zombie actioner will be under considerable pressure to succeed, in part because it was developed with franchise potential in mind. But the film’s pricetag, the need for reshoots and a delayed release date (June 21) have caused some to speculate that the pic could underperform. Early reviews have been mixed.

But Par says its shrunken slate puts no more pressure on its larger films. “There is pressure on every big investment a studio makes,” said Par vice chairman Rob Moore. “What puts more pressure on your slate isn’t having fewer movies, it’s having movies that didn’t work.”

In addition, Moore says that a small slate gives Paramount more flexibility. Case in point: The studio moved the release of “G.I. Joe: Retaliation” from last summer to March, and credits the move with the pic’s success (it earned $356 million worldwide). “Hansel and Gretel: Witch Hunters,” which earned $219 million globally, marked Par’s other release last quarter.

The studio’s filmed entertainment revenue declined 20% last quarter from the same period last year, and its profits dropped 43%. The decrease was all but inevitable considering carry-over coin derived from blockbuster “Mission Impossible: Ghost Protocol,” which inflated the same quarter the previous year. While worldwide theatrical revenues were down 15%, home entertainment revs sank even further, down 38%.

During a conference call with analysts to discuss last quarter’s results, Viacom chief financial officer Wade Davis blamed Par’s shrunken slate in the current year with the decline in homevid revenue, and said cost-cutting helped offset lower theatrical profits overall.

Between 2012 and 2011, filmed entertainment profits dropped 5%. But the studio’s low-cost strategy and financial partners buffer much of that decline.

It also helps that Paramount’s $300 million film business is just a small sliver of parent company Viacom’s $4 billion media operations.

“I don’t think investors pay that much attention to Paramount unless there’s a big problem,” said Doug Creutz, senior research analyst at Cowen and Co.’s media and entertainment group.

On top of that, the studio has financial partners on its bigger bets. Deals with Jeff Sagansky’s Hemisphere fund and David Ellison’s Skydance have helped pay for “Jack Ryan,” “World War Z,” “G.I. Joe” and “Star Trek.”

“Even if ‘World War Z’ bombs, they’re not going to take that big of a loss on it,” Creutz said. “They need to be able to put out a ‘Star Trek’ film every few years.”

Par released 14 movies last year and has 11 skedded for 2013. Three of its franchises, “Transformers,” “G.I. Joe” and “Mission: Impossible,” each have one release scheduled for 2014 and 2015, respectively.

That’s better than what the studio had five years ago, when its biggest films came from distribution deals with Marvel, Lucasfilm and DreamWorks Animation. Analysts estimate that the distribution fees Par got from those deals were comparable with what the studio was making from its own pics, which in 2008 included “Drillbit Taylor,” “Stop-Loss” and “The Love Guru.”

Par balances its big bets with a slate of smaller-budgeted films. Its biggest success thus far among the lower-budget fare has been its “Paranormal Activity” franchise, which includes four pictures, none with budgets of even as much as $10 million. Pricier fare that still ran in the midbudget range (generally between about $30 million and $60 million) included “The Dictator,” “Fun Size,” “Flight,” “The Guilt Trip” and “Jack Reacher.”

But the departure of its three biggest partners over the past three years has put pressure on Par to develop its own intellectual property. To that end, the studio has been more aggressively pursuing projects with franchise potential. It recently wrapped production on the Chris Pine starrer “Jack Ryan,” and had hoped that “Jack Reacher” would perform well enough to spur a sequel. “Reacher” earned more than $200 million worldwide, and some chatter about future installments remains.

“The goal is to get visibility in repeatable franchises,” said RBC Capital Markets analyst David Bank. “They’re adding to that kind of visibility, but they’re also always asking, so how many more ‘Transformers’ do we have left?”

Par will find out how much gas is left in the “Transformers” tank next year when a fourth installment hits screens. But its director, Michael Bay, is also looking to launch a new franchise for the studio with a reboot of “Teenage Mutant Ninja Turtles,” also for 2014.

In the Par pipeline as well: a sequel to Will Ferrell laffer “Anchorman,” Martin Scorsese’s “Wolf of Wall Street,” and Christopher Nolan’s “Interstellar,” which the studio recently skedded for Nov. 14, 2014.

But for this year, summer’s sizzle — or lack of same — will be telling.

PARAMOUNT STATS

FOUNDED IN: 1912

CEO: Brad Grey

LOCATION: Los Angeles

2012 PROFITS: $325 Million

2012 MARKET SHARE: 11.4%

FOUNDER: Adolph Zukor

PARENT COMPANY: Viacom

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