One of the reasons I broke into show business as early as I did was because producer Lynda Obst discovered me fresh out of film school, and helped nurture me in the early days of my career. Her new book Sleepless in Hollywood: Tales from the New Abnormal in the Movie Business is invaluable for investors interested in entertainment stocks.
It’s important to understand that revenues generated by DVD sales have cratered. While streaming revenues are replacing some of this, there still is a massive hole to be filled, and studios like Warner Brothers — a subsidiary of Time Warner (TWX) — are looking to international sources of revenue.
However, for American content to travel overseas, films need to be tentpole blockbusters as opposed to smaller, more artistically driven films. The subtleties of character-driven films don’t hold widespread appeal in the international markets. The result is that Hollywood now favors these very expensive films that have franchise potential and built-in audiences.
This takes us to the vision of Robert Iger, who has brilliantly steered Walt Disney (DIS) into the 21st century with the company’s purchases of Pixar Studios, Marvel Studios, LucasFilm and the Muppets. Disney has locked up brands that are recognized and enjoyed by international audiences and will provide them with decades of content.
Pixar has never had a financial dud. The studio’s output consists primarily of four-star gems, proving that Pixar is about great storytelling and wonderfully produced movies. Its films have generated a combined $8.14 billion at the worldwide box office, not including merchandising or combined budgets of $2 billion (and maybe $2 billion to $3 billion in marketing). As long as Pixar tells great stories, the brand will continue to be a blockbuster for Disney.
The same goes for Marvel. There’s already awareness for Marvel’s brand name, given its decades-old presence in comic books. The studio is now able to bring core characters to life in the movies and combine them into sub-franchises like The Avengers. We’ll undoubtedly see superheroes paired off into their own mini-franchises. As with James Bond, actors in each role will come and go — audiences care most about the characters, and Marvel has more than 7,000 of them. So far, there have been nearly 30 Marvel films totaling $12 billion in worldwide box office revenue. And there’s so much more to come.
We know all about the success of Star Wars; Disney will be able to milk that franchise and its ancillary revenue sources forever. The Muppets were revived in 2011 to great success. And don’t forget about Winnie the Pooh. All of these have hugely successful, recognizable brand names that Disney can milk, well … forever.
Disney also is able to offset any risk with these franchises because it is the most diverse entertainment conglomerate out there. When you add all these factors together, it’s clear that if you want to be investing in the movie business, the one and only choice is Disney. No other studio has this kind of content under lock and key. Paramount, which is part of Viacom (VIAB), has Star Trek and Mission: Impossible, which is all well and good, but those are small potatoes in comparison.
Disney remains a buy even at these levels, and I wouldn’t sell shares unless we see simultaneous bombs from the three big brands they own … and even then, I’d think twice about it.
As of this writing, Lawrence Meyers was long DIS. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets @ichabodscranium.