Disney is the Movie-Making Powerhouse for the Next Five Years

Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Marvel cinematic universe really hit it out of the park. The quality of movies and the integration managed to work out really well. Obviously, some movies were better than others, but overall I think the whole brand has tremendous potential. So many movies are in the works, and the revenue potential for Walt Disney Co. (NYSE: DIS) is enormous. At least in the sense that hit movies tend to have some nice returns. As long as the budget size is controlled and marketing costs are kept reasonable, each of the movies should take in far more than their budgets. I see this as a high margin endeavor if it can be pulled off. It's safe to say that the rest of the movies planned for the Marvel cinematic universe will be successful. Ironman 3 should be pretty impressive. Disney also has all its other great movies from Pixar like Brave.

Obviously, Disney is massive and even one movie making $500M would have a small effect on the revenues. However, I think that movies will tend to be on the higher margin side as long as they are very successful, and the budget is planned out. The reason is that other businesses such as the cruise line needs to have competitive pricing, but movies are just about how many people go. All we ever have to go on are the budget and the gross. We do not get the chance to analyze a movie with its own specific off-budget costs. Instead we have to take all the movies and add them to all the other businesses. I still think that successful movies have strong margins.

While the revenue of a single movie might be small compared to the whole, I think movies have a larger impact on the bottom line. A massively successful movie versus a very successful movie is all about ticket sales. The budgets might be comparable, but the massively successful movie will be more profitable. Expenses do not scale with revenues in movies, since movies are mostly upfront expenses. A certain number of tickets get the movie to break-even, and everything after that is profit. For so many companies we are dealing with the sale of goods or services. In those cases you have expenses like cost of goods sold or having more employees on staff.

With a movie there is a marketing budget, but overall once the movie is out most of the money flows in. Sounds like a great business, which explains the rise of the exploitation industry. However, now it is harder to make the big hit that is really needed. I am not worried about Disney not having hits. Another reason I am not worried separate from the strength of the movie franchises is that Disney has the capital to absorb some misses.

Lions Gate Entertainment ) is an example of a company that cannot afford high profile misses. Movies are so expensive, and Lions Gate's cash balance is not enough to absorb a couple of lackluster performances. It is good then that they have a solid television branch, and recently acquired the cash cow that is Twilight. A couple of successes in Lions Gate's pocket will mean more to it than Disney. However, it is obviously the riskier move. It may have some good movie franchises, but aside from Twilight nothing is as big as the Marvel Cinematic Universe. Twilight also just finished so I wonder what the future plans are. Lions Gate also paid to get Twilight and the studio that made it. I do not think more acquisitions are a good idea or possible. I like Lions Gate, but people looking for stability might find it a bit nerve-wracking.

I have always been more of a DC fan, and DC is ultimately owned by Time Warner (NYSE: TWX). I have liked Marvel for years though stretching back to the SNES game War of the Gems, but the DC-based cartoons were always my favorite like Batman: The Animated Series.  There is no equivalent of the cinematic universe for DC. All the movies are being treated as if they were in their own little bubble. That is fine, but it does not have that interconnectedness of success. Batman is batman, and green lantern is green lantern. It is not like having to go see Thor, because The Avengers is coming. Next on the DC slate is the new Superman movie, and that is far from a guaranteed success. I think it is probable, but definitely not a guarantee. If Time Warner wants to build a strong movie universe it needs to make a greater effort. A hint of continuity is really effective at getting people to come back, and I think that is the benefit the Marvel movies enjoy. They do not need to be heavily integrated, but the simple connection keeps people coming back. I know it had an impact on me. Time Warner is another company that has the cash to absorb some less than excellent films, and large enough revenues that individual movies are drops in the bucket.

Lions Gate would be my movie stock of choice, but you cannot simply discount Disney's almost guaranteed upcoming successes. So I would consider both. Lions Gate is something I can consider right now because its business is focused and this is not the first time I have looked at it. Disney seems fine, but you cannot just invest in the movie business. There are other things you need to consider. The last earnings call, though mentioned that the other businesses are doing well, and that television accounted for most of the growth the last quarter. That is good news if you are considering a position in Disney. There is still a bit more research to do, but Disney looks good. I just wish we could get another John Carter to give a nice opening.

TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney and Time Warner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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