Disney Mousy About Movies

I read a Reuters article last week that covered a conference between Disney (NYSE: DIS  ) executives and investors. CEO Michael Eisner, CFO Thomas Staggs, and COO Bob Iger held court and discussed a range of subjects. Here's the part that stuck out: Disney apparently wants to spend less money on celluloid projects and release a fixed amount of them in any given year going forward. Also, live-action films aren't necessarily looked upon with favor by Eisner, et. al., once again due to the costs implied by such undertakings.

The article piqued my interest, and I hopped over to the Disney investor relations page and listened to the conference. It's not easy to read between the lines of their statements. On one hand, the head honchos say they want to reduce capital expenditures allocated toward the production of negatives (i.e., movies). But they are quick to add that they will still be involved heavily in the movie business. I can understand the flip-floppy nature of their dilemma -- the movie business is a segment that oftentimes produces a low return on invested capital, or ROIC, for media companies.

I honestly couldn't tell you whether Disney will indeed stick to a movie slate consisting of approximately 13-16 films, as Staggs suggested. There was a time several years back when Disney was happy capturing as much market share as possible by releasing a maximum number of celluoiders to theaters. I can, however, suggest what should be done (and I am absolutely convinced of this): keep the capital expenditures the same to slightly rising, but generate a higher yield of films. In other words, if $500 million produced 10 films in the past, make that amount good for 12 films. Even more. It's not unlike using a discount broker to reduce the frictional costs of investing. I'd rather not see fewer movies made, as libraries are too valuable.

It can be done. In fact, this is something I think about a lot. Budgets for movies don't have to be so inflated. The problem lies in the profligate mindset that is deep-rooted in the collective consciousness of Hollywood. Executives at Fox (NYSE: FOX  ) , Time Warner (NYSE: TWX  ) , Sony (NYSE: SNE  ) , Viacom (NYSE: VIA  ) , and MGM (NYSE: MGM  ) love to throw big sums around; it makes them feel big and powerful. They'd vigorously disagree with my statement, and certainly it wouldn't apply all the time. But come on, we know it's true. Give Tom Cruise $20 million for this, Mel Gibson $25 million for that -- budgets are only going to get larger. So, what is my solution?

Stop overpaying for big names and work with unknown talent as much as possible. And change the underlying structure of movie deals. The way it works now, top talent can control a lot of the future cash flow of a project, receiving back-end deals that force a company such as Disney to sacrifice a lot of potential return. Staggs indicated that the prevailing empirical data show that no direct proportionality exists between a movie's budget and its chances for success. I would also infer from such data that if a movie has a huge star attached to it, there is not necessarily an improved potential profit picture.

Remember The Blair Witch Project? Remember The Ring? The latter cost almost $50 million to make, the former cost less than $1 million to make. Both did over $100 million. 'Nuff said.

Fool contributor Steven Mallas owns shares of Disney.


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