Disney’s movie business is doing (even) better than it seems

five movies

DIS has had five major releases since its fiscal 2010 began in November: The Princess and the Frog, Alice in Wonderland, IronMan 2, Prince of Persia: The Sands of Time and Toy Story III.

ratings

According to Rotten Tomatoes, critical reviews have been mixed.  Out of a possible 100–based on the percentage of positive reviews, scores are as follows:

Toy Story 3 98

Princess 84

IM 2 75

Alice 51

Prince of Persia 38.

Prince of Persia turns out to have the second-highest score of any movie based on a video game.  Most in this genre are relatively low-budget films that hope for modest box office success.  As a big budget (an estimated $200 million–more than IM2, Prince breaks with this pattern in hopes of wider consumer acceptance than video game aficionados.

box office

————————–US————-foreign——–total

Alice $334.1 mill            $685.6           $1019.7

IM2 $304.6                    $300               $604.6

Prince $81.4                      $213.1             $294.5

Princess $104.4                   $162.6             $267

TS3 $125.9                    $44.8              $170.7   —in its first weekend, limited foreign release

note the strong foreign sales

Together Prince and Princess will probably break even, thanks to much stronger foreign box office than US receipts.  Alice was a mega-hit.  IM2 is inching toward total US box office for IM ($318.4 million) but has already blown by the original’s foreign take of $266.7 million.  In addition to its strong domestic start, TS3 has set records for an animated release in China and Latin America.  In addition to its extremely good critical reviews, the film is demonstrating unusually strong appeal to young adults–apparently because they grew up with the earlier TS movies.

Over and above box office, revenue for DIS will come from:

merchandise sales

DIS is estimating that TS3 will generate $2.4 billion in sales of licensed merchandise this year.  IM2 may not match that number but it will doubtless handily exceed the take from IM, where uncertainty as to the success of the film meant only small amounts of related merchandise were available on its release.

dvds

Several years ago, DVD sales made up over half of a typical movie’s revenue.  DVD purchases have been severely curtailed since the financial crisis hit, however.  The one exception:  blockbusters like the original IM. My guess is that the same will prove true for IM2 and TS3.  Alice is also one to watch carefully.  DIS has begun selling Alice DVDs much closer to the box office release date, in hopes of benefitting from the positive glow of the movie’s success, as well as from the promotional spending that accompanies a movie’s debut.  It will be interesting to see how well the experiment works.  In any event, for DIS’s strongest films, there’s a good chance that DVD sales will be better than expected.

conservative accounting?

Film companies write off production costs by estimating total film revenues, calculating the percentage of that estimate that is being recognized in a given accounting period, and subtracting the same percentage of costs.  In other words, they use project accounting.

Given the fact that DVD sales have been deteriorating over the past couple of years, I don’t see any reason for DIS’s accountants to make the aggressive assumption that the company’s films will counter that trend.  In the case of TS3 and IM2, and maybe for Alice, DVD sales will likely be very good.  But it’s much better to write off costs early and have a positive surprise than to be too optimistic and end up having to write off a bunch of costs at the end of a film’s earning life.  The latter is what DIS, ex Pixar and Marvel, was doing at the end of last fiscal year.

It seems to me that the result will be that the writeoff of costs will be aggressive in the beginning, with surprisingly high profits being recognized later on.



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