With The Avengers, Disney Scores More Than Just Box Office Redemption

By Demitri Kalogeropoulos - May 10, 2012 | Tickers: DWA, HAS, LGF, DIS | 0 Comments

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As the old saying goes: "Success is the best revenge." Just days after closing the books on an awful second quarter, Disney's (NYSE: DIS) movie studio -- with the help of a few Marvel characters -- notched a record breaking opening draw at the box office. "The Avengers" grossed over $700 million globally in its opening days, promising to more than make up for the $200 million that Disney expected to lose on that unfortunate budget buster, "John Carter."

But for Disney, this win is about more than just avenging past mistakes on the income statement. Instead, the movie's success is confirmation of Disney's strategy to use its movie studio as a launching ground for billion dollar franchises, and to profit from those franchises in a way that only Disney can.

The Fall

A crucial first step to that strategy, though, is box office success, something that Disney really lacked this past quarter. Disney's studio segment reported (pdf) its worst quarter in years, booking an $84 million operating loss due mainly to the poor reception of "John Carter."

What's more, the quarter looked no better when compared to the year ago quarter which logged an $80 million contribution despite its own big budget flop, "Mars Needs Moms." As a movie studio, you know its bad when you have trouble beating a comparison like that.

Looking ahead to the next quarter, with "The Avengers" blowing away box office records, the studio should have no trouble beating the $49 million in operating profit in the year-ago quarter. That quarter's profit was driven by the movies "Thor" and "Cars 2," which together grossed a disappointing $400 million.

The Rise

Despite the rough movie quarter they had just reported, Disney executives were sounding downright giddy in their earnings conference call. With the ink still drying on the first week of Avenger's receipts, CEO Bob Iger was already trumpeting the green-lighted sequels for its various characters including Iron Man and Thor next year, Captain America in 2014, and The Avenger's sequel already approved but at a date to be determined. "I think what you're essentially seeing here," Iger said, "is a true franchise not necessarily in the making but having been made and launched."

But it isn't until after a successful launch that Disney can truly capitalize on its intellectual property. Because the company owns its own consumer products, media, and parks divisions, the profits from a franchise launch are captured by Disney in a way that pure studios like Dreamworks (NASDAQ: DWA) and Lions Gate (NYSE: LGF) just can't replicate. Merchandising, licensing, theme park attractions, TV shows, and video games are just a few of the avenues that send dividends into Disney's bottom line from a hit piece of intellectual property. Not even Hasbro (NASDAQ: HAS), with its similar strategy of box office launches leading to merchandising profits, can capitalize on its properties so completely. 

Disney's Iger was quoted in Walter Isaacson's biography, Steve Jobs, telling the Disney board of directors at the time that "a hit animation film is a big wave, and the ripples go down to every part of our business -- from characters in a parade, to music, to parks, to video games, TV, Internet, consumer products. If I don't have wave makers, the company is not going to succeed."

Iger was reportedly trying to convince the board to purchase the animation studio, Pixar, when he said those words. But they are as true for comic book heroes today as they were for animated toys then. In that way, the company's purchase of Marvel a few years ago mirrors the Pixar purchase before that.

For Disney, it all starts at the box office. And with the break-out success of The Avengers, Disney's movie studios have their redemption. But more importantly, Disney has its latest crop of wave makers that should be padding the company's profits for years.

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