The blockbuster film Barbie is making headlines for bringing audiences in droves to movie theaters this summer. For investors looking to capitalize on their successes, it's not as simple as you might think, as a big-budget movie will have multiple stakeholders.
So, let's dive into the movie business, examine the industry trends, and explore a few potential investment opportunities.
Who makes money from a blockbuster movie?
This summer's biggest hit, Barbie, recently topped the domestic box office for the fourth consecutive week, grossing nearly $1.2 billion worldwide. With that kind of return, many investors naturally want to look at which public companies might benefit. But to find the answer, you must first understand the business model of theatrical releases. There are three main players in releasing a big-budget movie: the production company, the distributor, and the exhibitor.
The production company is the team or teams in charge of everything related to making the film. For some studios, like Disney, this is often done in-house, meaning the production company for the recent release Guardians of the Galaxy Vol. 3 was done by Marvel Studios, a subsidiary of Disney. However, for less movie-centric companies like Mattel (NASDAQ: MAT), you might find four separate production companies, including Mattel, that had a hand in making Barbie. Neither path is right or wrong, but with more companies involved in production, the profits can often drop as production costs become less efficient.
Second, the studio owns the intellectual property behind the movie and will have the most at stake as the film's financial backer, responsible for production and advertising costs. Conversely, because the studio takes on the most risk, it is also the party with the most to gain when it comes to distribution. While the exact numbers aren't known, experts estimate Mattel spent $145 million in production costs with an additional $150 million budgeted for marketing Barbie.
Finally, the exhibitor, or movie theater, collects the revenue and shows the film to audiences. Historically, studios take 55% to 60% of the domestic box office revenue on the first weekend, with the movie theaters taking the remaining percentage. Notably, the movie theater's stake generally rises each week following the initial release, and foreign box office agreements are less favorable to the studios -- estimates range from 25% to 40% retention.
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The theatrical business is in decline
Despite the success of theatrical releases like Barbie this summer, the movie theater business is trending in the wrong direction.
Even before the pandemic, the movie theater industry declined compared to the early oughts. Specifically, movies in the U.S. and Canada peaked at roughly 1.6 billion tickets sold in 2002 and steadily declined to 1.2 billion in 2019. While movies made a comeback last year, with 800 million tickets sold in those markets, there's no guarantee moviegoers will return, especially as streaming becomes more popular. In a recent survey of 1,050 American adults, 77% responded they "strongly agree" or "somewhat agree" that they prefer watching movies at home over going out to a movie.
Despite the negative long-term trend, there is positivity surrounding cinemas. Notably, movie studios increasingly regard theaters as a strategic avenue to present their films, distinguishing them from the crowded streaming landscape. To exemplify the point, Amazon recently announced its strategy to launch 12-15 movies in theaters annually, and Apple is allocating a budget of $1 billion per year to finance films that will initially debut in cinemas before transitioning to its streaming platform.
How can you invest in blockbusters?
For investors interested in the theatrical movie business, you can own shares of studios or movie theaters. The largest public movie studios are Amazon, Apple, Universal Pictures (Comcast), Disney, and Paramount. However, none of these companies are pure plays because they are all involved in other businesses, whether e-commerce, theme parks, or linear television.
The next tier of publicly traded studios is traditionally known for making toys: Hasbro and Mattel. Both companies leverage their intellectual property, with Hasbro having more experience with its Transformers films and Mattel recently announcing 14 new movies based on its toys.
The other primary way to invest in blockbusters is through movie theaters. The leading U.S. public companies operating movie theaters are AMC Entertainment and Cinemark. However, even on the other side of the pandemic, both theater chains are struggling under outsized debt that will only become more expensive to pay back with interest rates increasing.
What's the investing takeaway from Barbie's success?
There is no secret formula for success at the box office, but it helps when a company has proven intellectual property like Mattel's Barbie. The company, which generated $5.4 billion in revenue and $256 million in free cash flow for its fiscal year 2022, will undoubtedly benefit from its blockbuster with the bonus of higher toy sales and licensing fees. Still, management recently maintained its tepid guidance for its fiscal year 2023 with "comparable revenue" and a slightly higher free cash flow of $400 million.
So despite the boom from Barbie, the company will need more than one box office hit to make a difference. And even then, box office results can be temporary. Look no further than the current state of Disney's Star Wars and Marvel franchises, where audiences have shied away from the oversaturation in recent years. Therefore, Mattel must navigate its toy releases carefully to keep audiences engaged.
Overall, the movie industry is challenging to predict, and due to high production costs, one mishap can bring financial distress. So take a page from the book of enduring studios that needed to diversify into other businesses: A sound investment thesis should involve more than one blockbuster movie.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Collin Brantmeyer has positions in Amazon.com, Apple, Hasbro, Paramount Global, and Walt Disney. The Motley Fool has positions in and recommends Amazon.com, Apple, and Walt Disney. The Motley Fool recommends Comcast and Hasbro. The Motley Fool has a disclosure policy.