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‘Mars Needs’ Blu-ray as Disney Studio Income Plummets

10 May, 2011 By: Erik Gruenwedel

Mars Needs Moms

CEO Bob Iger said home entertainment conversion rate topped industry by 25%

Disastrous results from the animated theatrical release of Mars Needs Moms undermined strong Blu-ray Disc sales to contribute to Walt Disney Studios posting a 65% drop in second-quarter (ended April 2) operating income to $77 million, compared with operating income of $223 million during the same period a year ago.

Moms, which was released March 11 with a production and marketing budget exceeding $200 million, has grossed just $21 million at the box office through May 8.

Write-down costs associated with the Robert Zemeckis film coupled with a global decline in home entertainment unit sales combined to generate revenue that paled in comparison to strong disc sales from Toy Story 1 and 2, the theatrical success of Alice in Wonderland (No. 1 at the box office at the time) and foreign home entertainment results from Up last year.

Indeed, Disney said disc declines in the quarter were offset in part by revenue generated from higher-margin Blu-ray titles.

Disney didn’t disclose which Blu-ray titles contributed to the higher-margin packaged media revenue in the quarter. The period also included foreign box office results from Tangled and Tron: Legacy.

CFO Jay Rasulo, in a call with analysts, said timing of disc releases year-over-year alone contributed to a $15 million decline in second quarter operating income. As previously mentioned, Up was released internationally on disc last year in the second quarter with no comparable (box office) disc released this year. And Toy Story 3 was released in most markets in the first — not second — quarter this year. “Mars” alone contributed to a $70 million hit to the studio's operating results, according to the CFO.

When asked if the improved sellthrough from Disney packaged media was more than an aberration on industry trends, CEO Bob Iger reiterated previous comments that secular trends in packaged media even affect Disney titles. He also said the studio's conversion rate of theatrical to home entertainment exceeded the rest of the industry by 25% in the quarter (driven by Tangled), and in eight of the prior 10 quarters.

“We believe that our titles tend to be titles that people would prefer to own than to rent,” Iger said. “That doesn't mean that every one of our titles works. We at times make films that don't convert as well because they're not considered a film that a family must own, or they don't convert as well because they're not very good films. And we've certainly had our share of those.”

Regarding recent license deals with Netflix for select Disney Channel and ABC TV content, Iger said he was not favoring the subscription VOD giant over Hulu.com, which Disney co-owns with Comcast and News Corp. The CEO said the rapid evolution of digital platforms affords content owners expanded opportunities to monetize content, even if it means sidestepping platforms it owns for higher margin deals elsewhere.

“We haven’t lost interest in Hulu,” Iger said.

Rasulo said “Mars,” combined with non-releases of Pixar titles; the lack of Easter holiday in the quarter, the impact of the Japanese earthquake on Disney consumer products, and the cost impact of last year’s $562 million acquisition of social game platform Playdom contributed to a combined $170 million hit on operating income.

Disney remains upbeat on current theatrical release, Thor, and upcoming releases Pirates of the Caribbean: On Stranger Tides, Cars 2 and Captain America: The First Avenger.

“The performance of these films will be key swing factors for the remainder of the year,” Rasulo said.

Iger concurred, saying the goal is to turn Marvel Avengers super hero characters into a combined tentpole property.

“We think we are going to have a big franchise on our hands,” he said.

Studio revenue in the second quarter declined 13% to $1.3 billion, compared with $1.5 billion last year.

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