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Kagan: Studios that Spend More on Movies Make More Profit

22 Oct, 2009 By: Erik Gruenwedel

The phrase, “You get what you pay for,” apparently holds true for Hollywood studios, according to a new SNL Kagan study.

When analyzing all films released on 1,000 or more screens from 2004 to 2008, Kagan found that 83 films with budgets greater than $100 million averaged $247.3 million in net profit under a major-studio distribution fee structure, followed by the $90 million-to-$100 million range with a $117.9 million average net profit.

Another 764 films in the study averaged $50.5 million in net profit.

Among the genres studied, including action, comedy, drama, family, horror, romance, sci-fi/fantasy and thriller, the Monterey, Calif.-based research firm found that animated films performed the best. The 50 top animated films averaged $220.5 million in net profit. Sci-fi/fantasy films were the runners-up at a $125.4 million average net profit.

While top box office titles typically generate commensurate DVD and Blu-ray Disc sales, Kagan warned that eroding DVD sales could put the studios’ largest revenue source in jeopardy.

Indeed, packaged-media sellthrough spending, the critical barometer by which studio executives as well as analysts measure the health of the home entertainment industry, was down 13.9% in the third quarter, with declines in DVD sales partially offset by the uptick in Blu-ray Disc sales, according to data released by DEG: The Digital Entertainment Group.

Consumer spending on disc rentals, thanks in large part to the proliferation of kiosks, rose 9.9% to $1.6 billion in the quarter that ended Sept. 30, according to Rentrak Corp.'s Home Video Essentials — with Blu-ray once again leading the charge with gains of 44.5%. As of Sept. 30, consumers have spent $5 billion on rentals this year, 8.2% more than in the first nine months of 2008.

 “Consumers are increasingly turning to Redbox’s $1 kiosk rentals and Netflix’s all-you-can-watch DVD and streaming services,” said SNL Kagan analyst Wade Holden. “Going forward, we expect the sellthrough industry will continue to decline despite growth in high-definition. We estimate video sellthrough revenue will drop 13% to $12.86 billion in 2009 as VOD technologies begin to erode market share.”

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