Tentpole risks and rewards

Analysts take stock of pricey summer pix

With summer tentpole season in full swing, Wall Street seers are gazing into their crystal box office balls once again, weighing the impact increasingly expensive and risky pics will have on the already fragile prices of entertainment stocks.

The weeks between May and August represent around 43% of the total year’s take, so there’s good reason for the intense pre-season glare and sideline prognostications.

Some 39 films are due to open wide between May 7 and Sept. 3.

In a report out late last week, Smith Barney entertainment analyst Jill Krutick predicted that 2004 summer domestic box office should rise 8% over last year, helped by low single-digit increases in average ticket prices. Last summer ultimately saw a 3.6% increase over 2002 (which was up 7.5% over 2001).

Krutick bases her optimism in part on the very big-budget nature of today’s tentpoles, since films with negative production costs of $100 million or more typically drive three-quarters of the summer B.O. total. That top-line gain should help boost the overall 2004 box office growth rate tally to 4.3% from its current 3%.

Profitability is another matter.

Last summer’s wide releases averaged $88 million in domestic box office revenue, about $26 million of which came in the first weekend, noted Douglas Mitchelson of Deutsche Bank. That puts a lot of pressure on studios to open strong or else face huge loses. Krutick noted that debut weekends last year were not particularly good indicators of films’ overall performance, with many pics suffering hefty 50% declines between first and second weekends. Historically, second weekend declines have been closer to 40%, with the opening weekend typically representing 25%-30% of a picture’s total domestic haul.

The cycle of ever-rising marketing and production costs to drive a strong opening weekend performance increases financial risk and eventually “chases the profits away,” Mitchelson said in a recent research note.

“Our view for this summer is that the movie industry is likely to see fewer winners and more losers, at least financially,” Mitchelson added. He noted that 17 of last year’s summer pics broke the $100 million mark and estimated that at least 13 of them were profitable. “However, of the 24 films rounding out the top 41 that did not break the $100 million mark, only six appeared to be profitable. Thus, in total, it already appears that more than half of major summer releases do not reach breakeven. The totals would be even worse if studio overhead was included.”

Analysts like to keep a close eye on box office, if only for the disproportionate impact success or failure can have in the eyes of jittery investors. Some studios are more exposed than others. Fox Entertainment is expected to generate over 40% of its sales and 38% of its operating profits from its film division this year. At Viacom, by contrast, Paramount reps a mere 15% of sales and only around 4% of operating profit.

With eight releases on tap, Krutick believes Time Warner has the strongest release slate, thanks in part to a “Harry Potter” sequel, while Viacom and Fox will benefit statistically from easier comparisons over last year’s so-so outings. By that same reckoning, Disney could be in for a tough summer relative to last year’s “Nemo”-fueled B.O. boom. As a result, its 2004 box office numbers will likely decline year over year.