Avatar: Money Maker or Hype?

The Reuters new release reporting News Corp quarterly earnings has some interesting results. Suggesting that while AVATAR is creating a lot of box office sales, not much of it is accruing to Fox Studios directly. Making the fuss over AVATAR's box office more hype than a Hollywood game-changer.


The release noted:

News Corp, which also raised its dividend by 25 percent, said fiscal second-quarter net income was $254 million, or 10 cents a share. A year earlier, it posted a net loss of $6.4 billion, or $2.45 a share, before items.

Last year's loss included a writedown for its purchase of Dow Jones, and other items.

News Corp's bottom line in the latest quarter included a $500 million litigation settlement payout to Valassis Communications.

Excluding one-time charges in both periods, second quarter adjusted profit was 25 cents a share, up from 15 cents a year ago. Analysts were expecting the company to post earnings of 20 cents a share on average, according to Thomson Reuters I/B/E/S.

Revenue rose 10 percent to $8.684 billion, ahead of analysts' average forecast.

News Corp's Hollywood studio business saw its operating income nearly triple to $324 million thanks to a record-breaking performance from the 3D sci-fi movie "Avatar," which James Cameron directed.

"Avatar" has sold more than $2 billion in ticket sales at the worldwide box office, overtaking "Titanic" to become the biggest movie of all time.

Its worth noting that total, world-wide box office for AVATAR in December (the close of News Corps Second Quarter, which does not match the calendar year) was $268.9 Million, according to Alt Film Guide, and $525.3 million foreign box office for a total of $794.2 million globally. So for total global box office revenues, News Corp (through subsidiary Fox) gained about $212 million. That's a rough gross margin of 26%.

The COST of AVATAR to produce and market in the US has been estimated at $430 million by the Financial Times, other estimates run higher to $500 million. At the current rough margin of 26%, that's roughly an operating income of $520 million against global ticket sales of $2 billion.

Of course, this assumes that there won't be any increased charges for prints, digital conversion, marketing, cost-sharing to convert foreign theaters to IMAX-3D, and so on. Assuming that this is not the case, and that increased costs from later foreign release nations such as China, Japan, Italy, etc. get booked for the next Quarter, AVATAR will still make a profit from its theatrical box office run. News Corp claims that it has booked most of the costs for AVATAR in the past quarter, but will see most of the revenue in the third and fourth quarter. Because of course, News Corp likes to be paid later rather than sooner by those who owe it money. As a practical matter, it is unlikely that significant amounts of revenue remain to be booked in the later quarters, particularly from foreign releases. The only possible reason to delay recognition of revenue is expected large operating losses in other divisions, i.e. an ad-market collapse in print and broadcasting. This does not seem to be the case.

But it won't make much. It is at best mildly profitable, purely from the box office. Note the low gross margin Fox gets (again roughly 26%). Add against that the far lower DVD/Blu-Ray sales. Fox will be unable to charge a premium price as exhibitors did with fully 20% higher IMAX 3D ticket prices. Consumers are turning to Redbox rentals (the most explosive growth) which is why Wal-Mart and others have been pressured not to sell to Redbox (i.e. the five DVD limit per customer for new release titles). Redbox of course can simply dispatch legions of employees to buy five titles each of say, "AVATAR" and rent them for $1.

If you are a consumer, and like 90% of the consumer base, have only ordinary TV, and an ordinary DVD player, which looks like a better deal to you? Renting AVATAR from Redbox for $1, or buying it full price?

AVATAR had the ability to be a game-changer for Hollywood. Make IMAX 3-D movies that generate big box office to more than cover production and marketing costs as home video, the most profitable segment of Hollywood's revenue stream, declines under discounting pressure. Its not just Redbox, Netflix, Amazon, and others provide cheaper alternatives than buying a DVD or Blu-Ray at full retail price. However, Cameron made AVATAR just too darn expensive. And, there is only one movie that will be the first serious, effects driven CGI 3-D spectacle (and not "Spy Kids 3-D"). Marketing expenses for the home video releases will be nearly as much as for the theatrical release, after all.

This is why Hollywood is not rushing in to make AVATAR clones. They know how much money was spent and how thin the marginal return overall will be.

To quote Rupert Murdoch on the AVATAR sequel

Murdoch also said News Corp. is pushing for an Avatar sequel.

"There's no agreement, budget, or timing yet. Since it's Jim Cameron, I wouldn't hold your breath to have one soon, but we'll be pushing for one," he said.

Murdoch also said this about Conan O'Brien:

The company's Fox Broadcasting Co. has expressed interest in signing Conan O'Brien for a late night talk show following the recent controversy that resulted in the comedian reaching a deal with NBC to terminate his contract just seven months after he was named host of "The Tonight Show."

Although formal negotiations have not taken place with O'Brien, Murdoch said the company is giving "a lot of thought and examination" to the idea, and 'if the programming people can show us that we could do it and be fairly confident about making a profit, we'd do it in a flash."

If AVATAR were such a money maker, Murdoch would have waved another half a billion at Cameron who'd be busy on the sequel, instead of a movie about a Hiroshima survivor. Just as FOX is not throwing money at Conan O'Brien (who is free to talk to them) because of the latter's poor ratings and limited appeal.

As always, ignore the hype and follow the money.
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Avatar Is More And Less Than It Seems

James Cameron's epic, "Dances with Smurfs," er "Pocahontas in Space," oh wait, "Avatar" is on its way to make astonishing amounts of money world-wide and domestically. Avatar as of this date has made 1.1 Billion in world-wide box office revenue. According to Box Office Mojo the figures are $393.8 million domestically and $781.8 foreign. This is serious cash. Why then, aren't studios desperate to sign James Cameron for another film? An "Avatar 2" or whatever he wanted to make? Jon Favreau with "Iron Man," Bryan Singer with "X-Men," and Christopher Nolan with "Batman Begins" all were quickly signed to sequels, with money thrown at them.

The reason for the "dog not barking in the night-time" is that Avatar is not expected to be that profitable, despite the gobs of money it is making at box-office. Part of the reason is the high cost, but the other is that the movie really is not poised to reap a home video and TV rights sales, where Hollywood makes most of its money. Avatar is however, important in that it points out how Hollywood can make a bit more money: by releasing movies in 3-D, getting marginally more money from box-office receipts, and re-issuing movies that already exist in 3-D.


First, the cost of Avatar is reported by the Financial Times as $430 million, for production and US marketing. This makes the movie one of the most expensive ever made. Foreign marketing, including likely assistance for foreign exhibitors, who are financially pressed, to install IMAX 3-D systems likely impacts quite a bit of the otherwise impressive foreign box office (do note, that Avatar has about a 2-1 ratio of foreign to domestic receipts, an interesting point itself). It is likely that the net result is a lesser amount than the 40-45% range assumed for foreign box office grosses, when either "give-backs" or assistance in installing IMAX 3-D systems are included. Avatar netted approximate $57.75 million to the studio opening week-end (studios keep about 75% of the opening week-end box office) and about $158 million thereafter domestically. Avatar probably did less than $312.7 million net to the studio from foreign receipts. That should still be somewhere south of $528.47 million, so why aren't studios lining up to throw money at Cameron? Likely, real receipts from foreign box office are far less than even 40% of the $781.8 million currently reported. And things are not looking up for home video sales.

The Daily Beast reports that Avatar is showing on 3,600 screens, with 2,200, or 61% of them, 3-D IMAX. The 3-D IMAX tickets are about 36-40% more expensive than the ordinary movie tickets. This means that while the movie is popular, it is not as popular as people might think. And sales of home video, and TV rights, are still a mass-popularity game.

Edward Jay Epstein, author of "the Big Picture" maintains that Hollywood makes about 18% of its profits from theater box office, and 82% from home video (both sales and rentals), and TV rights sales (foreign and domestic). These also have much lower marketing costs, as well. In many cases, Studios use the theatrical roll-out as merely an extended marketing campaign for the DVD and pay-per-view releases.

Well, what of Blu-Ray? After all, the format is far more expensive, with say, "the Hangover" listing at $35 for Blu-Ray and only $29 for DVD. That's 20% more. Shouldn't "Avatar" on Blu-Ray be a natural sale? Making lots of money? Video Business reports that Blu-Ray for 2009 accounted for only 10% of home video purchases. Obviously there is a recession on.

To really enjoy Blu-Ray, you obviously need to pay (at least 20%) more for the Blu-Ray disc. You then need a Blu-Ray player (which list from $200 and up, though they can be discounted), and then of course, a Hi-Def TV. Those can be pricey, still around $500 and up. Though again careful shopping can find discounts.

If consumer incomes were rising as they were in the late 1990's, this would not be a problem. Hollywood would ride a wave consumer purchases of new players and high definition TVs to even greater heights of profitability. But it is not the 1990's. It is not even George Bush's economy. December job losses rose to 85,000 with the official unemployment rate at 10%, and the Labor Dept. "U-6" underutilization (those unemployed not looking for work, or underemployed) at 17.4%. This is in line with lower consumer spending for the Holiday season, with consumers purchasing mostly items on sale not spending as in past, pre-Recessionary holidays.

The economy is bad, and likely only to get worse. New health-care legislation (ObamaCare), Cap and Trade, Amnesty, are all likely to add new regulations and taxes on top of employers, making adding employees a pipe dream. Expansion that does happen will happen overseas, with fewer taxes and regulations. Due to population growth, the economy needs to add 1.9 million jobs every year. Since the onset of the December 2007 recession, the private sector employment which peaked at 115.8 million, has declined to 108.5 million. A loss of 7.3 million jobs, or around 6%. Public sector employment fell less than 1%, basically unchanged, at 22.5 million jobs. Most states are in severe budget trouble, with tax receipts tanking in ways not seen since the Great Depression. States are seeing double-digit tax revenue declines, contradicting the Obama Administration predictions of 3% growth for the economy.

With no wage increases and job gains in sight, and the economy terribly vulnerable to shocks, from oil supply (WTI and Brent Crude are both as of this writing above OPEC's $70-80 price band by considerable margins) to China, there seems little prospect of consumers rushing out and spending money on Blu-Ray players, Hi-Def TVs, and Blu-Ray discs. [The Financial Times is now comparing China openly to Dubai, noting that Tianjin has a development with buildings modeled after each continent, and an indoor ski slope, just like Dubai. Shanghai is filled with apartments and condos that are empty — wealthy Chinese lacking other investment opportunities and facing no property tax buy and hold luxury apartments. The skyline of Shanghai's residential districts are dark at night with empty buildings. This indeed echoes Dubai.]

Video Business again:

U.S. consumer spending on DVD and Blu-ray Disc rentals business rose 4.1% to $6.5 billion in 2009, according to Rentrak Corp.’s Home Video Essentials, which collects point-of-sale data. During the year, kiosk revenue grew 94%, with the Redbox-dominated channel approaching $1 billion in revenue, more than enough to offset a 3.2% decline in the bricks-and-mortar and online sectors combined.
Consumer sales of DVD and Blu-ray, in comparison, fell 13.7% to $12.2 billion, Rentrak estimates.

Redbox, the story notes, grew 94% (admittedly, from not very much to start with) in revenue for 2009. Clearly, consumers like entertainment cheap and convenient.

Which brings us to a wider point. Consumers over the decades have consistently chosen convenience, and cheapness, over high-quality sensory entertainment. In the 1980's, first cheap cassette tapes and then CDs won out over higher-quality vinyl, and the music machine of choice was the Sony Walkman and its imitators, not the high-quality home stereo. This followed over with personal CD players, and finally the Ipod and other MP3 players. People preferred music in portable packages, even if it meant giving up an immersive experience and superior sound. That the convenient packages were also cheaper, the Ipod really taking off when various models could be had for less than $170, was a bonus.

According to the Financial Times, Hi-Def TVs are less than 12% of the global market. See the picture below:


[Click Image to Enlarge]

This seems overly optimistic to me, as so far, the price point for adoption of new gadgets seems to be around $150 or so total cost. Apple's tablet device, whenever it reaches down to that level, is likely to be far more significant (given its rumored video capabilities) than fantasies of 3-D Hi-Def TVs, and ESPN's planned investment in a 3-D sports network. Consumers just don't have the money to spend, beyond that level. Unless consumer electronics companies can get the basic technology down to a very low level (i.e. a TV that costs around $150 and can play Hi-Def 3-D content with a built-in-player or high speed connectivity), 3-D at home is far away. People don't have the money.

What is potentially far more lucrative, is the technology Disney has, with "Keychest" that would authorize content to be streamed to any device, mobile phone, Ipod Touch, computer, internet-connected TV, and the like, from a central stored server. There, the technology is on the back-end, with compression and robust data networks not pricey consumer electronics being the key to content. Again, note the economics: mass-oriented content for cheap (this material is likely to be viewed on the equivalent of a Sone Walkman or Ipod for video) devices at cheap prices is likely to be the rule. The story of high-quality content devices and storage, such as Video Laser Disc, Mini Discs, and the like has not been a happy one compared to cheap and "good enough."

Avatar's true meaning is likely to be, instead of a rash of movies in 3-D IMAX, a few select movies in 3-D that eke out a few more dollars in extended, 3-D showings, that are a small margin for studios to transition (if they can) to the Itunes/Ipod world of cheap content anywhere, any time. Either purchased for cheap or rented even cheaper. With the "winner" whoever can provide consistently a high quality and low price mass entertainment line-up. A 3-D version of say, "the Goods" with Jeremy Piven is not going to save the movie industry, which faces a long-term decline in tickets sold (though this year had a partial recovery) and very high costs, with a few hits subsidizing the many failures.

Screenwriter William Goldman once observed that "nobody knows anything" with respect to profitability. Yet the golden age moguls, Warner and Mayer and did know something. Their movies almost always made money. Avatar might just be the last hurrah for the old-line Malibu Marxists before cheap, fast, anywhere, anytime media overwhelms their business model. Because it doesn't look like consumers will be shelling out $1,000 anytime soon just to watch a bunch of blue cats crossed with stilts, re-enact Pocahontas.
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