Time Warner (NYSE: TWX) is in an okay spot at the moment. At the market’s open, the was hovering above $36, just below its 52-week-high. The company’s first quarter report came in with earnings of 58-cents per share, one penny ahead of analyst expectations. Though that’s a year-on-year dip of -4.9%, Time Warner revenue for the quarter grew 6% to $6.7 billion. Of its three reporting segments, networks (which includes the company’s cable business and channels like TBS and premium channels like HBO) is doing very well, with advertising sales surging up 31% and subscriptions to its cable service up 9%.
The filmed entertainment segment, which includes big theater releases like the Harry Potter movies as well as home video sales, didn’t fare quite as well, though. The doldrums plaguing the broader film industry hit Warner Bros. as well, with sales dropping down -3% to $2.6 billion.
The dip would have been greater if it weren’t for Star Wars. Not the film franchise though — but the latest video game based on George Lucas’ long-running science fiction brand, LEGO Star Wars III: The Clone Wars. Yes, it’s a video game that is exactly what it sounds like players control iconic Star Wars characters built out of iconic Lego building blocks… Don’t ask.
Though some may wonder why the odd game is a hit, the bottom line is that its great for TWX stock and the company’s bottom line. CEO Jeffrey Bewkes singled out the title as a bright spot for the company. Believe it or not, LEGO Star Wars III was released on Mar. 22 just days before the quarter ended, and almost single-handedly offset losses in the filmed entertainment segment.
What’s more, this is becoming a recurring theme for Time Warner. As consumers turn spend less going to the theater and are spending more on streaming video services like Netflix (NASDAQ: NFLX) rather than purchasing DVDs, Time Warner is relying more heavily on the success of branded video games. In fact, the first half of 2011 is looking distinctly similar to the first of 2010—Time Warner relied on the performance of a spring release of a video game in the LEGO franchise, in that case LEGO Harry Potter: Years 1-4, a game that led to $2.5 billion in earnings for the segment in the second quarter of that year.
Yes, that’s billion with a B.
Time Warner’s video game release schedule in 2011, more robust than in past years, should help them recover from the slight loss in the filmed entertainment division of the first quarter. The April release of Mortal Kombat for the Microsoft(NASDAQ: MSFT) Xbox 360 and Sony (NYSE: SNE) Playstation 3 should prove very profitable. The game sold 732,000 copies in its first week alone. And the superhero game Batman: Arkham City, due out in October, has the potential to be one the best-selling games in the whole industry this year.
Zacks Investment Research currently has a neutral rating on Time Warner. The company’s summer movies Harry Potter and the Deathly Hallows Part 2 and Green Lantern will, based on early consumer buzz, likely help the filmed entertainment segment catch up with networks. It will be that slate of upcoming software, however, that will really make the segment shine come earnings reporting time at the end of the year.
Time Warner shareholders should find succor in the fact that the company is leveraging that industry in ways that will continue to offset the changing film industry. And if TWX plays its cards well, the video game segment could actually be a reliable source of revenue — and growth.
As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.
