Walt Disney Co. (DIS) shares never broke stride the day following the holiday-weekend box office flop by big budget film “The Lone Ranger.” The stock was up 1.2% Monday morning, half again as strong as the Dow Jones industrials. And that makes perfect sense.
The Johnny Depp Western collected $48.9 million over the extended July 4 weekend, less than 20% of its reported $250 million production cost. The movie saw serious competition from Comcast Corp.’s (CMCSA) family blockbuster sequel “Despicable Me 2” (Universal Pictures), as well as from public indifference to the 80-year-old pre-television-era tale.
This marks the second “everyone-saw-that-coming” failure of a stale character in as many years, following last year’s Western-on-Mars gambit “John Carter,” whose weak ticket sales prompted a $200 million writedown by Disney and appears to have cost a studio chief his job.
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Beyond the fizzle to the strength
In that case, too, the market correctly looked beyond an embarrassing, expensive film fizzle, continuing to bid Disney shares up as the company proved a leader within an extremely strong Big Media sector. There are at least three reasons Disney investors have failed to worry much over such big-screen failures:
-- Disney is not, strictly speaking, a movie company. In fiscal 2012, the entire studio entertainment division generated $5.8 billion in revenue, or 13.8% of the corporate total, and kicked in a mere 7.2% of Disney’s operating income. Walt Disney is basically a cable-network juggernaut, with a nifty little film studio, several impressive theme parks and a nice mouse-ear-hat and toy-licensing business on the side.
Media networks, predominantly ESPN and Disney Channel’s global outlets, generate about two-thirds of company profits. Until cable-fee economics change for the worse (which could happen) or a nasty recession saps theme-park pricing and attendance, Disney’s basic profit machine hums along nicely.
-- CEO Robert Iger, who succeeded Michael Eisner nearly eight years ago, has successfully lowered the stakes in the film division by releasing fewer films per year and concentrating on “franchise” properties with loyal audiences and huge brand-extension and sequel potential.
When Iger took over, he immediately determined that Disney, and the industry as a whole, crowded theaters with too many “me-too” pictures – romantic comedies driven by a star-of-the-moment and such. Many of Disney’s own releases weren’t identifiably “Disney” at all. He decreed that all movies carry the Disney label, or one of its acquired hit-factory studios Pixar, Marvel or Lucasfilm.
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A strong priority was placed on producing new franchises, character sets that resonate across theaters, television, theme-park attractions and merchandising. Disney Princesses, “Pirates of the Caribbean,” “Cars” and “The Avengers” all apply. This is fabulously valuable intellectual property that lowers the volatility of Disney’s overall release slate. Even as “Lone Ranger” suffered from the arrows of hostile critics and a collective audience yawn, Pixar’s “Monster University” sequel and Marvel’s “Iron Man 3” continue to add to impressive box-office tallies.
True, the spotty recent track record of the core Walt Disney Studios production group that put out “Lone Ranger,” “John Carter” and the modestly successful “Oz: The Great and Powerful” might be cause for internal company concern, but investors are well-insulated from these struggles. The fate of the “Planes” follow-up to the blockbuster “Cars” franchise – set for an Aug. 9 release – is rather more important.
-- These labor-of-love big-budget white elephants were in a sense well paid-for by profits their producers have already delivered. “Lone Ranger” and “John Carter” can be seen from a big-picture view as a tolerable cost of enjoying the bounty of fabulously productive in-house talents.
“John Carter” was a long-held passion of Andrew Stanton, a core Pixar impresario who wrote, directed or produced nearly every massive animated hit by the Steve Jobs-incubated studio – a slate that earned a collective $7 billion in ticket sales over the years.
The “Lone Ranger” was made by producer Jerry Bruckheimer, director Gore Verbinski and star Johnny Depp, the trio behind the “Pirates” sequence – which grew from a Disney park ride, sold $3.7 billion in tickets and regenerated a craze for pirates among young boys, resulting in the sale of untold birthday-party eye patches and Keith Richards'-style blousy shirts.
Of course it’s not a stated strategy by Disney to give favored moviemakers a couple-hundred billion dollars to burn as a Thank You.
Dave Hollis, Disney executive vice president for distribution, told the Wall Street Journal this weekend, “We’d obviously hoped ['The Lone Ranger'] would connect with a broader audience.”
What went unsaid is that Disney is disciplined enough not to spend big bucks lightly, so they will do so only with proven talents who believe deeply in a film idea. In a sense, at Disney it takes a lot of past success to earn the right to helm a big-budget bust.
None of this makes Disney shares a screaming buy in the mid-$60s, just a hair beneath the all-time high of $67.89, but it does suggest the stock deserves its premium valuation. While no bargain at 18.5-times forecast 2013 estimates, Disney owns more irreplaceable brands than any media competitor. Iger, whose acquisitions of Pixar and Marvel were master strokes that were first criticized as too expensive, just agreed to stay on through June 2016. Disney’s first “Star Wars” release and the opening of Shanghai Disney are on the way in 2015.
Those are a lot of predictably positive things on the way – plenty to counter the occasional expensive embarrassment of having too few people show up for a filmed revival of an old Western radio serial that no one was asking for.
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