How Is Time Warner’s Movie Business Trending?

Time Warner (NYSE:TWX) has come up with handful of popular titles in 2013, including Man of Steel, The Great Gatsby, We’re The Millers, The Conjuring and The Hangover Part III. These movies performed well and so far this year, the studio has managed to gross $1.3 billion in the domestic box office. The company currently commands 16.6% market share in the U.S., just behind Comcast (NASDAQ:CMCSA). It will be interesting to see how the studio performs in the coming months given the release of Hobbit sequel The Desolation of Smaug later this year. The previous Hobbit movie – An Unexpected Journey, grossed over $1 billion worldwide.

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Time Warner’s Movie Business

Time Warner’s Film and TV Entertainment segment consists of businesses managed by Warner Bros. that principally produce and distribute feature films, television shows and video games. Earlier this month, Amazon’s (NASDAQ:AMZN) LoveFilm struck a new deal with Warner Bros., which will allow the video-on-demand service operator to offer a library of hundreds of hours of animated content including Batman and Superman. ^[1] Such deals aid overall growth of the content owners such as Time Warner.

For Warner Bros., DC world characters are the key to success in the movie business. In a shift of strategy, the studio may now bring different characters in each other’s film. For instance there were six DC world characters teased in Man of Steel and the studio may move forward with more of such attempts. ^[2] On the other hand, Comcast has been focusing on its strategy to partner with international franchisees and target the international box office, while Disney (NYSE:DIS) has been eyeing bigger franchisee names and comes up with limited number of releases. Given the solid box office performance this year, all three studios appear to be on the right track.

Box Office So Far And Timer Warner’s Performance

Labor Day brings an official end to Hollywood’s busiest season and 2013 appears to be the most profitable summer of all time for the movie industry. Domestic earnings jumped 7% to $4.6 billion as compared to the previous summer. The solid run up was led by Iron Man 3, Despicable Me 2, Man of Steel, Monsters University, and Fast and Furious 6. ^[3]

In the first half of 2013, Time Warner’s Film and TV Entertainment division saw 4% increase in revenues amounting to $5.6 billion. This accounts for 37% of the company’s total revenues. However, the division’s operating income for the same period was $444 million, accounting for 15% of the total operating income. ^[4] The low value contribution can be attributed to lower EBITDA (earnings before interest, taxes, depreciation and amortization) margins and high distribution expenses associated with this business. According to our estimates, Warner Bros. movie business contributes hardly 5% to Time Warner’s value. We estimate full year box office revenue of $1.8 billion, as the studio will have few more releases later in the year. However, even if the movie business were to outperform, it will have a minimal impact on Time Warner’s stock price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. UK’s LoveFilm To Stream Warner Bros TV’s Animated Superhero Library, Deadline, Sep 4, 2013 [↩]
2. David Goyer Says Warner Strategy Will Go In “Opposite Direction” Of Marvel, ‘Justice League’ To Launch Spin-Off Films, Indiewire, Jun 18, 2013 [↩]
3. 2013 DOMESTIC GROSSES, Box Office Mojo [↩]
4. Time Warner’s SEC Filings [↩]