Batman v Superman: Dawn of Justice opens on March 25, the biggest bet in a make-or-break year.
In 2016, two movies will go a long way toward determining the future for Time Warner (TWX) stock: Batman v Superman: Dawn of Justice, due in March, and Suicide Squad, due in August. Both movies feature characters from Warner's DC Comics subsidiary.
For investors, the question is how big a risk -- and correspondingly, how big a potential reward -- do these films represent? The answer requires a bit of digging into Warner's business, starting with how it's organized.
The Big Three
No, I'm not talking about the Big Three of Batman, Superman, and Wonder Woman, but rather Turner, HBO, and Warner Bros., which are the principal reporting divisions of Time Warner.
All three are significant in their own way. Warner Bros. carries the most heft, accounting for the majority of revenue, and racking up more expenses than the two other divisions combined -- specifically, $8.9 billion for fiscal 2014, the last full year for which results are available versus $7.8 billion for the other two over the same period. As Warner Bros. goes, so goes Time Warner.
Now, if only the division's results were moving in the right direction:
| Metric (in millions, except where noted) | 2014 | 2013 | 2012 |
|---|---|---|---|
| Theatrical revenue | $5,839 | $6,119 | $6,042 |
| Television revenue | $5,099 | $4,690 | $4,832 |
| Video game revenue | $1,588 | $1,503 | $1,144 |
| TOTAL REVENUE | $12,526 | $12,312 | $12,018 |
| Movie revenue as a % of total | 46.6% | 49.7% | 50.3% |
| No. of movies produced or distributed | 23 | 25 | 24 |
| Film and TV production costs | $5,924 | $5,620 | $5,598 |
| Prints and advertising costs | $1,907 | $1,935 | $1,854 |
| Other costs | $1,075 | $1,119 | $1,051 |
| TOTAL COSTS | $8,906 | $8,674 | $8,503 |
| OPERATING INCOME | $3,620 | $3,638 | $3,515 |
| OPERATING MARGIN | 28.9% | 29.5% | 29.2% |
Sources: SEC filings, Box Office Mojo.
See the pattern? Higher expenses are crimping margins, creating even more pressure to find new blockbusters.
To be fair, the results of Warner Bros. improved nicely in the first three quarters of 2015, but that's only because of a 67% boost in revenue from video games. Theatrical products were down 5% over the same period. Higher-ups expect studio boss Kevin Tsujihara to leverage DC properties to reverse the trend. He admitted as much in an interview with The Hollywood Reporter from last summer.
"Having seen [Batman v Superman] multiple times, and again last night, I'm extremely confident it was the right decision to make the movie better [and move it to 2016]. And it's so important for the studio to get the foundation right on DC," Tsujihara told THR at the time.
Investors should cheer that thinking. Warner Bros. has produced higher operating margin in years when it had a DC Comics film to screen for fans. (The Dark Knight Rises earned $1.08 billion following its 2012 debut, Man of Steel drummed up $668 million at the global box office the very next year.)
Suicide Mission?
Can Suicide Squad be for DC what Guardians of the Galaxy was for Marvel? We'll find out in August.
The difference here is that The Dark Knight Rises and Man of Steel featured two of DC's most iconic characters: Batman and Superman. August's Suicide Squad is headlined by Deadshot (played by Will Smith), Harley Quinn (played by Margot Robbie), Killer Croc (played by Adewale Akinnuoye-Agbaje), Katana (played by Karen Fukuhara), Captain Boomerang (played by Jai Courtney), Diablo (played by Jay Hernandez), Enchantress (played by Cara Delevingne), Slipknot (played by Adam Beach), Col. Rick Flagg (played by Joel Kinnaman), and The Joker (played by Jared Leto). Think of the film as DC's answer to Guardians of the Galaxy.
We don't yet know how much the studio is spending on the project, but rumors put the total budget for Batman v Superman at north of $400 million while Suicide Squad will likely cost at least half that when you factor in marketing and distribution. Either way, Warner is going to have to invest heavily in order to bring the DC universe to life for moviegoers. In 2016, we get to find out if that bet is actually worth it.
