By Andy Fixmer and Michael White
May 18 (Bloomberg) -- Film flops threaten to leave Walt Disney Co. in last place at the box office among its Hollywood peers for the second-straight year and are testing Chief Executive Officer Robert Iger’s movie strategy.
Since 2003’s “Pirates of the Caribbean,” Burbank, California-based Disney has produced at least 16 pictures based on past film hits, television programs or theme-park rides. The company has also cut output by a third to about a dozen films a year, to focus more on family fare and less on mature themes.
The strategy is faltering. In a record year for the U.S. box office, with sales soaring 14 percent, Disney’s ticket revenue from a slate that includes cable TV stars Miley Cyrus and the Jonas Brothers was up 4.2 percent to $332.5 million as of May 14. News Corp.’s Fox leads with $640.6 million, according to Box Office Mojo LLC, which tracks receipts.
“They’ve hit a creative dry patch,” David Bank, an analyst at RBC Capital Markets in New York, said in an interview. “They need to make better movies.”
The company’s film profit plunged 97 percent to $13 million in the quarter ended March 28. Revenue tumbled 21 percent to $1.44 billion, reflecting the box-office sales and a drop in DVDs. Fox’s film profit rose 8 percent.
Disney has a chance to stem the studio’s slide with “Up,” the animated 3-D Pixar fantasy. The film, set for wide release on May 29, opened the Cannes Film Festival last week and reviews on the Rottentomatoes.com Web site were all positive as of May 15. “Up” should take in $257 million in U.S. and Canadian theaters, estimates Spencer Wang, a Credit Suisse analyst.
Looking ‘Up’
Disney acquired Pixar three years ago for $8.06 billion. “Wall-E,” the animation studio’s last title, collected $534.8 million in worldwide ticket sales, according to Box Office Mojo, based in Sherman Oaks, California. The film cost $180 million to make, according to IMDB.com, a movie industry Web site owned by Amazon.com Inc.
Iger took responsibility for the studio’s performance on a May 5 conference call. He also suggested the company will consider further cuts in production.
“It’s about the choice of films and the execution of the films that have been chosen for production, and we’ve had a rough year in terms of performance” Iger said. “It’s not the marketplace, it’s our slate.”
Iger declined to be interviewed, said Jonathan Friedland, a company spokesman.
Iger’s Strategy
Since 2006 Disney has released fewer films after cutting production to about 12 movies a year. Meanwhile, Disney’s average film budget has increased as “tent pole” films took on a bigger role, Iger said.
“The Chronicles of Narnia: Prince Caspian,” released in May 2008, cost $200 million and had worldwide ticket sales of $419.7 million, according to the two film research sites. “Bolt,” made for $150 million, collected $294.5 million in worldwide ticket sales after its November 2008 release.
Cutting production hasn’t worked in the past for other studios, said Tom Sherak, the former chairman of Fox’s domestic film group and now a marketing consultant to Marvel Entertainment Inc. on movies including “Iron Man.”
“If everybody thought they could make six or eight pictures and have them all be hits, they’d make six or eight pictures,” said Sherak, who was also a partner at Revolution Studios and released films including “Black Hawk Down.”
In addition, Disney already operates one of Hollywood’s most-efficient studios, said Bank, who expects the stock to outperform peers and doesn’t own it.
Disney gained 80 cents to $24.21 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have advanced 6.7 percent this year.
Summer Prospects
The company’s box-office prospects later this year will be helped by the re-releases of “Toy Story” and “Toy Story 2” in 3-D in October, “Toy Story 3,” and “Alice in Wonderland” featuring Johnny Depp, Wang wrote in a May 11 report.
Disney has also agreed to distribute as many as six films a year from Steven Spielberg’s newly independent DreamWorks studio starting in 2010. The accord may let Disney make the additional cuts Iger is considering while keeping as many as 18 movies on the yearly release schedule.
The company will collect a distribution fee from DreamWorks, risking less and earning less than it does on films owned outright, Bank said.
Wang had previously viewed Disney’s strategy of making fewer, higher-quality movies as a way to “sustain above average performance in the notoriously volatile” movie industry and says recent results are “severely testing this thesis.”
The analyst predicts studio revenue will rebound 5.4 percent to $5.68 billion in fiscal 2010 starting in October. Profit should recover 25 percent from his fiscal 2009 estimate of $303 million, which would be the lowest since 2005.
Sherak also expects the studio to come back. Disney does well picking and marketing films, he said.
“If I had my own movie, I’d go to Disney to distribute and market it for me,” Sherak said. “If I had a good idea, I’d pitch it to them.”
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