Teenage Mutant Ninja Turtles: Out of the Shadows grossed $35.3 million domestic sales (U.S. and Canada) during its opening weekend. For many movies, this would be a strong result. Unfortunately for the film's distributor, Paramount, and Paramount's owner, Viacom (NASDAQ:VIA) (NASDAQ:VIAB), this is a rather soft opening for a film with a $135 million production budget.
Even worse, the opening-weekend haul for Out of the Shadows is barely half of the $65.6 million the first Paramount TMNT film grossed. In response, Guggenheim Partners analyst Michael Morris lowered his estimates of Viacom's operating profit. It's not just Paramount-distributed sequels that are underperforming at the box office. The Wall Street Journal [subscription required] reports that Twenty-First Century Fox's (NASDAQ:FOXA) X-Men: Apocalypse, Universal Studios' Neighbors 2: Sorority Rising, and The Walt Disney Company's (NYSE:DIS) Alice Through the Looking Glass are all sequels underperforming prior films.
The fear for investors is that this is the beginning of sequel/franchise fatigue. For Viacom and Disney, sequel fatigue is a huge concern, as they have slowing-growth core businesses.
Motion pictures are growing increasingly important for Disney and Viacom
Disney and Viacom are counting on filmed entertainment for growth. Currently, both companies count on media networks or TV for much of their revenue. Viacom's young-adult-friendly programming networks like Comedy Central, MTV, and Spike, and Disney's ESPN and ABC networks, were responsible for 79% and 44%, respectively, of total revenue last fiscal year.
How the greater TV ecosystem is performing is a source of intense dispute: On one hand, many observers, most notably BTIG analyst Richard Greenfield, feel TV is in the initial stages of totally unraveling due to streaming-delivery formats. On the other hand, many feel cord-cutting does exist, but its effects are overexaggerated.
What both sides generally agree upon, however, is that the growth rates of yesteryear will most likely be curbed under pressure from advertisers shifting money to digital formats and price-sensitive customers choosing smaller channel packages. By 2019, analyst firm Gartner expects subscription growth in mature markets to slow to 0.2% due to market saturation and cord-cutting.
For these diversified entertainment companies, filmed entertainment is a way to continue to grow. Although a smaller part of each company's revenue haul, a blockbuster hit can show up quickly in results. However, unlike TV, which has predictable billing, movie profits are highly dependent upon fickle consumer tastes, and a bomb can equally hurt results. Disney and Twenty-First Century Fox have embraced sequels and snapped up comic-book franchises as a way to grow audiences and limit box-office variability as a result of a developing a built-in audience.
Fatigue of fatigue talk
It's true that Disney and Twenty-First Century Fox have a great deal riding on sequels and franchises. After buying an X-Men-film-less Marvel Entertainment for $4 billion in 2009, Disney paid an additional $4 billion for Lucasfilm in 2012, nearly 5% of its market cap at the time. Even after nine movies over the span of nearly 20 years, Twenty-First Century Fox continues to churn out sequels and adjacent storylines to the X-Men franchise.
Disney's first Star Wars installment was a box-office success, grossing $2 billion worldwide with its $937 million haul the largest domestic gross ever. Fatigue could be a real issue for this series, but Disney stands to gain in the future as the international audience, particularly in China, becomes better acquainted with the franchise.
For Twenty-First Century Fox, X-Men: Apocalypse is currently the lowest-grossing film of the franchise and appears unlikely to match 2014's X-Men: Days of Future Past. However, the highest-grossing film in the franchise was 2016's earlier Deadpool, with its $363 million box-office gross. Perhaps the reason for underperforming sequels is a lack of creative, compelling films at the moment, rather than audiences experiencing sequel fatigue.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gartner and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.