Disney: Movies Are Far More Profitable Than Given Credit For

Sep. 4.13 | About: The Walt (DIS)

Disney (NYSE:DIS) is a giant entertainment company with a long successful history. This year, the company was criticized heavily by the investors because one of its movies, The Lone Ranger, didn't perform as well as investors expected it to. While even the most successful movie studios will have one or two movies that don't perform impressively, Disney is expected to make good money in almost every movie it releases with some tiny exceptions. The company's business model leaves little room for error.

The Lone Ranger

In 2013, Disney released 5 movies in theaters and several movies in DVDs. Without a doubt, the company's worst performing movie was The Lone Ranger featuring Johnny Depp. The movie was released in the US in the first week of July and it generated $88 million in revenues so far. Outside of the US, the movie generated $150.7 million, totaling $238.7 million globally. Disney spent $215 million in this movie and it is expected to report a loss. As a rule of thumb, movie producers keep about half of the revenue of each movie, which means movies have to generate twice as much money as a movie's budget to reach breakeven. Earlier, The Lone Ranger was expected to result in a $190 million write-off; however, the write off will be closer to $100 million. The movie will be released in DVD and other formats in November and it will generate extra revenues for Disney from rentals and DVD purchases. Keep in mind that starting 2016, Netflix will pay Disney $300 million annually to be able to stream Disney's movies, which shows us that Disney can generate a lot of money from movie rentals once a movie is not in the theaters anymore.

Movies continue to generate revenues even years after they are released. For example, every time a movie appears on TV anywhere in the world, the producer of the movie gets paid for it. Disney owns a bunch of TV channels around the world, so it can put its own movies on its own channels and generate additional advertisement revenues whenever it desires to do so. Having said that, it's easy to see that eventually, even movies like The Lone Ranger will end up profitable for Disney. According to PBS, box office revenues represent only about 25% of all revenues a company could generate from a movie. This is something the investors seem to forget very frequently.

Oz The Great and Powerful

Now moving on to Disney's another not-so-successful movie Oz The Great and Powerful. The company spent $215 million for this movie just like it did with the Lone Ranger. The movie generated $234 million in the US, $258 million outside of the US, which brings the total to $493 million. Applying our rule of thumb where half of the revenues are kept by Disney, the movie was profitable by about $31 million. This movie was already released in DVD and other formats and it sold 797,284 DVD copies so far, generating $14.90 million in revenues. Keep in mind that this number only corresponds to the US market and excludes rentals. The movie also generated $18.7 million in blu-ray sales in the US. The analysts kept telling people that Oz The Great and Powerful was marginally profitable, but when you add all the numbers, the movie was a great success. Disney is also selling clothes, toys and other products related to this movie and I am not including those figures in this calculation in order to keep it simple. The main point is that Disney's movies are far more profitable than analysts give them credit for.

Monsters University

Monsters University was another Disney movie that was very successful. The movie generated $264 million in the US, $451 million outside of the US, totaling $715 million. The movie's budget was $200 million and the movie is highly profitable with box office revenues alone. Once the movie comes out on a DVD, the success of this movie will double if not triple. This is another movie that allows Disney to sell related products such as clothes, toys or baby products that are being sold in stores like Toys R Us. Also, keep in mind that when this movie was released, it bumped up the DVD sales for the first movie of the series, Monsters Inc. Last week alone, the movie sold 33,000 copies in the US.

Iron Man 3

Iron Man 3 was another Disney movie with a price tag of $200 million and it generated $1.2 billion in box office globally. The movie also boosted up sales of DVDs of the first two movies. The movie will be released in DVD later this month, and Amazon will sell the movie separately as well as in a package with the first two movies. Last year, the Avengers generated $87 million in DVD sales in the US alone (excluding other formats like the blu-ray). Iron Man 3 should perform similarly to the Avengers in the DVD market.

Planes

Finally, Disney's latest movie Planes already reached the breakeven point at the end of 3 weeks. The movie's budget was $50 million and it generated $104 million so far around the world. Planes is another Disney movie that will generate money in sales of related items, such as clothes, toys and baby products. Cars 2, which is somewhat comparable to Planes generated more than $80 million in DVD sales and Planes might come pretty close to that figure.

Overall Impact to Disney

In order to understand the overall impact of these movies to Disney, we have to open the company's books and look at some numbers. According to Disney's latest annual report, Disney generated $42 billion in revenues, of which, $5.83 billion came from the movie studio segment and $3.25 billion came from consumer products which are basically toys, baby products, books and other licensed gift items related to Disney's movies. Keep in mind that Disney's total box office revenue in 2012 was $4.2 billion, which means about $1.63 billion in movie revenues (in addition to the $3.25 billion in licensed product sales) came outside of the box office. The operating income was as high as $722 million for the studio movies, which yields an operating margin of 12.38%. For the licensed products, the operating profit was $937 million and the operating margin was 28.89%. Combined together, the two operations generated $9.08 billion in revenues, $1.66 billion in operating income and 18.27% in operating margin.

In comparison, Lions Gate (NYSE:LGF) generated $2.71 billion in revenues and $249 million in operating income (9.18% in operating margin), and Dreamworks (NASDAQ:DWA) generated $749 million in revenues and an operating loss of $62 million (negative operating margin). Sony's (NYSE:SNE) movie segment generated $7.35 billion in revenues and $479.82 million in operating profit, giving the company an operating margin of 6.53%. Compared to its peers, Disney's movies are much more profitable, especially after considering the fact that Disney sells a lot of licensed merchandise that are related to its movies.

In conclusion, Disney's movie business is far more profitable than the analysts and investors give it credit for. Looking at box office numbers alone is often misleading because Disney movies make money in many different ways outside of movie theaters including but not limited to DVD sales, rentals, related product sales, TV royalties, advertisement revenues, and some movies even end up becoming rides at Disney's theme parks!

Disclosure: I am long DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.