The film industry faces an “increasingly dire” outlook as audiences continue to shrink in the U.S., with too many studios producing too many tentpole films, which end up cannibalizing each other’s audiences, analyst Doug Creutz reported Friday.
The Cowen and Company entertainment expert said that there is no easy solution for Hollywood studios but that a “slow-moving consolidation” is the likely end result.
In “Another Memo to Hollywood. Prediction? Pain,” Creutz says the industry’s woes are demonstrated by the fifth consecutive year in which domestic box office demand “has taken a step function lower.” The fight for remaining audiences has become increasingly fierce as “the market appears to be condensing into fewer, but bigger, hits,” as studios crank out more films in the $100 million-plus budget range.
The analyst reports that, when the video game industry faced a similar dilemma, with fewer but bigger hits, it resulted in dramatic change. Rather than a series of mergers — the preferred result — a number of big gaming companies simply went out of the business, including THQ, Midway, Acclaim, Atari and LucasArts.
A similar breakdown in the film industry would not help investors, Creutz wrote. “We note that even the stocks of the eventual survivors of the video game shakeout didn’t do well during most of this period, until their recent spectacular out-performance,” the Cowen report says.
Creutz offers a welter of stats to back up his contraction argument: “Last year, over 25% of total box office came from just five films, well above the average of roughly 16% from 2001-14 and the prior peak of 19% in 2012.” He called this a “consistent phenomenon.”
The top grossing films each week accounted for 33% of total box office in both 2015 and 2016, almost twice the average of 18% that prevailed in 2011-13, Creutz wrote. And No. 1 films tend to persist, he said, noting the “nigh-unexplainable” persistence of films like “American Sniper” in 2015 and “Deadpool” this year.
It’s not only the few films, but the few studios that are taking most of the spoils. While Disney and Universal’s combined profits were up 54% year over year and, collectively, managed 70% of total industry profit, the other studios saw profits drop 40%. “We expect this type of volatility to continue due to the narrowing of the window for hit films,” at least until there is a “likely slow-moving, consolidation,” Creutz wrote.
In many other industries, the consolidation might move more quickly, Creutz contends. But the entertainment business puts weight not just on profits but on concepts like “prestige” and “star power,” Creutz wrote. He said it would make sense for Viacom to sell Paramount — a move that is reportedly under consideration — but suggested a deal might be difficult because Viacom’s exit from the movie business would be seen as “diminishing its importance and reputation in Hollywood.”
Creutz predicts tough sledding for most of the studios in 2016, though he adds: “We expect that one or two of the companies will likely outperform our generally negative view; however, we also think picking the winners at this point is a high-risk proposition.”
A summary of some of the analyst’s predictions:
DISNEY: He calls the studio “the lead dog” and sees likely “outsized hits” in “Captain America: Civil War,” “Finding Dory” and “Star Wars: Rogue One.” But even the industry leader will face stiff competition with April’s “The Jungle Book” and its July distribution of “The BFG” for DreamWorks. Despite huge performance, Creutz worries “that investors are capitalizing what in retrospect may prove to be peak studio margins at a very high multiple.”
WARNER BROTHERS: Creutz is concerned about the company’s broad slate of 18 films for 2016, though he expressed some optimism for “likely success” in a new entry in the “Harry Potter” franchise and the kickoff of a two-film-a-year series of DC Comic films, beginning this month with “Batman vs. Superman.” A drag on performance could come from mid-budgeted films like “The Nice Guys,” “Central Intelligence,” “Sully,” “Storks,” “The Accountant” and “Collateral Beauty.” If the DC films underperform, he said, “then results could be very disappointing.”
FOX: Starting the year with runaway hit “Deadpool” sits well, but the studio’s year rests largely with three big summer sequels: “X Men Apocalypse,” “Independence Day: Resurgence” and “Ice Age: Collision Course.” Cruetz concluded: “We tend to think ‘Deadpool’ was more luck than skill (plus a heavy dose of passion from Ryan Reynolds) and so we don’t necessarily expect any success this year to be sustained.”
PARAMOUNT: “We see little hope for a significant turnaround in operating performance over the longer term, and expect this year to be characterized by continued struggles.” Creutz cites “indifferent film quality,” as an issue and too many “Zoolander 2”-type films to make up for winning franchises like “Mission Impossible,” “Star Trek” and “Transformers.”
LIONSGATE: Predicts “an uphill climb” to get back to better profitability, with focus on low- to mid-budget films and some bigger swings, like the $140-million-budget “Gods of Egypt,” missing the mark. Creutz sees a “struggle,” given the competition, for upcoming sequels such as “Divergent: Allegiant” and “Now You See Me Two.”
DREAMWORKS ANIMATION: “We think that being the 4th- or 5th- or 6th-best animated studio (behind Disney Feature Animation, Pixar, Illumination, and arguably Blue Sky and/or Warner Bros.) is not a good place to be.” Creutz worries that upcoming “Trolls” (November, 2016) and “The Boss Baby” (March 2017) will tough time in midst of competition from other animation and tentpole offerings.