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Big Picture

Theatres shrug off downturn as cheap date destination Add to ...

It may be because of the recession or despite it - experts appear to be divided on this issue - but everyone agrees 2009 has been a blockbuster year so far at the box office.

Consider the numbers: As of Sunday, gross receipts from Canadian and U.S. theatres were about 8.1 per cent ahead of the same period in 2008, according to Box Office Mojo, a California-based tracking service of film revenue. Attendance is also up, but not by as much.

"That's a tremendous increase," says Brandon Gray, Box Office Mojo's president, "and it's on pace to be a record year in terms of gross."

North America may be in a recession, but the box-office gross for this year is so far 10 per cent higher than the same period in 2007, 15.5 per cent more than 2006 and 21.8 per cent higher than 2005.

Why are the numbers so high this year? "Movies do remain one of the cheapest events out there, which is why they continue to do well in spite of the recession," Mr. Gray says.

But he attributes this year's success mainly to the quality of movies themselves. "The slate, overall, has been stronger this year than recent years."

Other analysts aren't quite as sure that the reason box office sales are strong has to do with quality.

Jeff Bock, analyst for Los Angles-based box-office tracker Exhibitor Relations, scoffs at the quality, citing Paul Blart: Mall Cop, Gran Torino and Taken - three movies that grossed about $150-million (U.S.) each this year.

"These are run-of-the-mill films for their genres - there is nothing exceptional in any way about any of these films. So for these films to do that type of business, it really points more to the economy than the quality of the films."

Mr. Bock, however, does give credit to Hollywood for having one of the strongest release schedules in years - positioning bigger films throughout the year rather than piling them all on during the summer. "Doing that keeps people excited about going to the movies."

So how can investors best play a strong box office? Tuna Amobi, the New York-based senior research equity analyst at Standard and Poor's, says investors need to consider more than just the box office. Studios have two big challenges: parlaying these high box-office numbers into DVD sales - "where most of the back-end profits are made" - and making sure they do well at the international box office.

In the case of the latter, Mr. Amobi says this year's global numbers "seem on track to be setting a new record as well."

The problem is with DVD sales. According to data released earlier this month by the Digital Entertainment Group, a U.S. industry trade organization, sales of DVDs fell 13.5 per cent in the first half of 2009. Consumers were choosing to rent instead, with rental revenue increasing 8 per cent in the same period.

Mr. Amobi also pointed out that most studios are owned by conglomerates, so investors have to consider the other components of the conglomerate's holdings. For instance, he cites Time Warner Inc., which owns Hollywood's largest studio, Warner Bros.

Warner Bros. has had a very good year, with a 20.5-per-cent market share of box office totalling almost $1.3-billion as of Sunday, according to Box Office Mojo.

But Standard & Poor's has a "hold" rating on Time Warner, mostly because of its weak publishing holdings and AOL, which Mr. Amobi calls "a drag on its results."

The same goes for Viacom, even though its studio, Paramount, makes up 30 to 35 per cent of the company's results and is also doing well this year. Mr. Amobi says Standard and Poor's hold on Viacom stems from the fact that its distribution deal with DreamWorks is ending, and its MTV television holding is struggling.

Mr. Amobi is excited about DreamWorks Animation, a company that's pure studio. DreamWorks Animation, he says, makes two films a year, and they are always good ones. "Our 'buy' recommendation reflects the films they make, and the anticipation of them."

Standard and Poor's also has a buy on The Walt Disney Company, even though its studio "has been somewhat lacklustre in the past 12 to 18 months," Mr. Amobi says. The company has very solid cable stations that are doing well despite the recession, and theme parks "that are expected to improve as the economy improves this year."

Toronto-based analyst Ben Mogil of Thomas Weisel Partners also likes DreamWorks Animation, which he rates as "overweight." Part of the reason for that rating is that the children's high-end animation market is holding up better, especially in DVDs.

"The concern that people have had over the last year has been the DVD business has been very tough, and that's true, but it's held up a lot better for the children's animated stuff than in other genres."

DVD sales are also an issue for Lions Gate International Corp., which Mr. Mogil rates as "market weight." The studio has been hurt, he says, because its smaller performing titles are having trouble getting the space they used to at such mass merchants as Wal-Mart.

It's an issue that the Digital Entertainment Group raised in its July report - while box-office blockbusters are selling well as DVDs, sales of smaller titles are soft and the problem is compounded by the fact that large stores are devoting less space to DVDs and more to video games and other products.

Mr. Mogil says that Lions Gate also has had strong third-party financing that has run its course and is not getting renewed. Financing, he adds, is becoming an issue for many studios, who were "big users" of hedge fund and private equity money in 2005 to 2007.

"That money is obviously gone, so you'll see everyone doing fewer movies starting next year."

Mr. Mogil also covers North American exhibitors, the theatres that actually show the films. He has designated Cineplex Galaxy Income Fund, Canada's only publicly traded exhibitor, as "overweight."

"Its business is doing well. It's gained over the last couple of years some market share." In the United States, he rates as "market weight" Regal Entertainment Group, the largest theatre chain, saying it is benefiting from this year's robust box office.

"Regal is 20 per cent of the U.S. box office. If the U.S. box office is up, Regal has to be."

He rates Cinemark Holdings Inc., the No. 3 theatre circuit in the United States, as "overweight."

Mr. Mogil, who doesn't believe the movie business is recession-proof, instead calls it "recession-resilient." "That means as long as there are good films out there, because it's a relatively cheap way to get out, people will come," he said. "They'll come to good films in a bad economy but they won't go to bad films in a good economy."

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