As the holiday movie season gets kicked off, another way to view movie metrics emerges. Disney's "Thor: The Dark World" has already made $109 million in its first three days at the overseas box office. This Marvel movie, and many more like it, are upcoming in the years ahead. "The massive opening of Thor lifted the studio's overall overseas grosses to $2.31 billion for the year, marking the fourth consecutive year that Disney has surpassed the $2 billion benchmark overseas. The previous record was $2.302 billion, set in 2010," writes a UK correspondent.
The movie business made a fairly recent debut in America's gross domestic product figures, helping growth trend upward. Making films or movies are now part of a 'new' investment class called "intellectual-property products." Films like Avatar, Iron Man 3 and the Hunger Games will formally bolster the U.S. economy in the future. Annual box office revenues reached $10.6 billion in the United States/Canada in 2010. The rest of the world voraciously consumes blockbuster American films as well. The industry even created a trade surplus of $11.7 billion, more than those of the management and consulting, legal, and insurance services sectors.
While larger entertainment conglomerates like Disney (NYSE:DIS), Time Warner (NYSE:TWX), Sony (NYSE:SNY), Twenty-First Century Fox (NASDAQ:FOXA), and Viacom (NYSE:VIA) may not be impacted as much as smaller peers by the following operational efficiency play, it is relevant all the same. Bigger movies suffer more from production delays. Smaller film companies like Lion's Gate Entertainment (NYSE:LGF), with the Hunger Games trilogy, and Dreamworks Animation (NASDAQ:DWA) can also benefit from better operations management, which improves profitability.
New research by Professor Tom Tan of SMU Cox School of Business shows how to more effectively manage movies' production stages, and in the process create a better bottom line. A shorter time-to-market is a key source of strategic advantage.
Significant variation in box-office performance and budgets across movies in the 300-plus-movie sample were observed. A small number of movies involve the lion's share of revenues and costs. Average U.S. box office revenues for a movie are $47.78 million, and opening weekend revenues are $13.5 million on average, or 28% of total gross revenues. For reference, today's blockbusters such as Ironman 3 grossed $1.2 billion and Marvel's Avengers $1.5 billion, both earning more abroad than domestically.
Consumers are more aware of the release of movies through the Internet and social media. This makes understanding delays' impact on product success even more salient. A good amount of movie industry research relates to forecasting its uncertain demand. The study, focusing on supply-side factors, says that understanding how the product development process relates to market success can help studios and filmmakers better plan their production process.
Many time-to-market studies focus on the electronics industry, which is quite different from creative industries, with their multi-stage product development process. The study, linking marketing and operations management, consists of Hollywood movies released in the U.S. market from January 2005 to December 2009, including their advertising data, which extended into the early parts of 2010.
The study examines the relationship between the box-office success of a movie as well as the production timing of specific, well-defined stages: development, pre-production, filming, post-production, and distribution. Development time, developing the movie idea or story, is not included in the study as it is not as well defined and measurable as the other stages. The authors found that 1% additional duration of production can lower box office revenues by 0.94%, or nearly 1% on average.
The authors discovered that total production duration has a larger negative impact for successful movies than for moderate and low-revenue movies. Also studios should invest more resources in speeding up the post-production and distribution phases.
Shaving off production time in the right places can save time and add to profitability. Given that average distribution time is about 160 days and average box-office revenues are $48 million, a 10% reduction in distribution time (16 days on average), is associated with a 3.8% revenue lift, or $1.82 million. (Results show that an additional 1% of distribution time is associated with 0.38% lower box-office revenues on average.) The authors model that increasing opening weekend by 100 theaters is associated with approximately a 4% revenue lift. Said another way, reducing distribution time by 16 days is equal to securing an additional 95 theaters during opening weekend. Based on the average total production time of 633 days, or two years and nine months, and average gross box office revenues of $48 million, a one-week delay translates to an average $4,880,000 box-office loss.
The findings apply to other industries with multi-stage production processes having similar dynamics to those of making and producing films. Tan observes that the video gaming industry has very similar production characteristics as the movie business, where the combination of delays and consumer buzz from cult followers can have negative outcomes. Other creative industries that require a significant upfront investment and have extremely uncertain demand can learn as well.
An Extra Day Can Matter
Owing to its length, post-production can bottleneck the entire production process, according to the research. Of the four production stages, post-production tends to be the longest, with an average duration of about 205 days. Distribution is the second longest stage with an average duration of 161 days, followed by pre-production (158 days) and filming (111 days).
Across the four movie production stages, pre-production and filming are the most labor-intensive. However, a stage with high labor intensity can generate higher quality improvements, and benefit from additional time. If a movie is delayed then make sure that quality compensates for the delay, notes Tan.
The pre-production task of hiring a crew and casting the film is also highly labor-intensive and time-consuming. The number of crew in The Matrix Revolution (2003) exceeded 700 people, according to Filmreference in 2011. Paramount's action movie Sahara (2005), with its 20 producers and four credited screenwriters, created coordination complexity, which contributed to a box-office loss of approximately $144.9 million.
In contrast, post-production and distribution are less labor-intensive because they involve few cast or crew. Specifically, the post-production stage-editing, readying the film for distribution, and audience testing-is generally a lengthier and critical stage where time can be lost but also economized. The distribution phase with advertising involved is also noted by the researchers as a place where profitability can be dampened by taking too long.
When multiple firms are developing related products and consumers are aware of and waiting for these products, time is of the essence. A longer time-to-market may reduce a movie theme's timeliness and possibly a shorter selling period, which squeezes box-office revenues. Delays may generate negative publicity about the movie, which can hurt box-office revenues. For example, Columbia's All the King's Men (2006) starring Jude Law and Kate Winslet announced a delay two months before its planned Christmas release date, and generated widespread negative buzz. It lost approximately $45 million. Delays can become self-perpetuating and begat more delays in other stages or shift resources to other projects.
One day can matter depending on how long the movie has already been in production, according to the findings. The negative impact of production time is stronger if the production time is longer than the average of roughly 633 days. For example, if production time is 800 days, "firms need to watch out." A one-day delay for movies that have exceeded the average production time results in an even bigger loss for box-office revenues."
Marvel movies --The Avengers, Thor, Captain America--would almost seem to transcend financial metrics' analysis.
Analysts offer that Disney is a strong buy/buy to hold by 14:8. Disney was trading at $3.20 EPS; P/E 21; dividend yield of $1.09. Time Warner had a P/E of $19, trading around $68 (Nov 4 end of day). Lion's Gate was up slightly at the end of the day (Nov 4).
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