After producing big-budget epics with mixed results, Time Warner (NYSE:TWX) is pulling a page out of the Disney (NYSE:DIS) playbook, launching a studio division geared toward producing low-budget films that will skip the multiplex altogether.
Warner Premiere will aim for roughly 15 "direct to video" releases a year. There is nothing wrong with the bunt single when it comes to celluloid. Time Warner has prided itself on costly "tentpole" productions that often dictate rival studios' release schedules. When the studio hits -- as it has with the Harry Potter films or with Superman Returns this summer -- it's great.
However, when the studio flops, as it did earlier this year with Poseidon and The Ant Bully, Time Warner pays the price. As a theatrical partner, Motley Fool Rule Breakers newsletter recommendation IMAX (NASDAQ:IMAX) also shares the pain of some of the Time Warner misses.
It's not just the pricey production that weighs on a disappointing film. Studios spend tens of millions in distribution and marketing for every new movie they put out. The home market can be kinder, as even a mild hit on a shoestring budget can be a bottom-line winner.
Disney discovered that in the early 1990s. Michael Eisner once pointed out that The Return of Jafar -- Disney's direct-to-video sequel to Aladdin -- proved to be more lucrative for the studio than its hit live-action comedy Pretty Woman.
Unfortunately, Disney bought into the process without considering the quality of its direct releases. Poorly reviewed sequels to its animated classics eventually turned the consumer against the allure of the Disney brand in family animation. Pixar and DreamWorks Animation (NYSE:DWA) became the new leaders, culminating in Disney's $7.4 billion purchase of Pixar earlier this year. Sometimes being cheap can cost a lot of money.
Hopefully Time Warner won't duplicate Disney's mistakes. It may be inevitable, though. The instinctive reaction is to turn to existing properties that may not fare well at the corner multiplex. It may not be long before we see Snakes on Another Plane or Lady in the Water 2: The Resurfacing.
If it can avoid the likely pitfalls, Time Warner may find a hungry market, since retail shelves are no longer the only destination for films that skip the cinemas. Digital distribution is growing more viable with every passing year, and Netflix (NASDAQ:NFLX) has provided a convenient source for studios to generate some extra mileage on older or obscure titles that wouldn't normally line the "New Releases" rack at a video rental chain near you.
IMAX was recommended last year to Motley Fool Rule Breakers newsletter subscribers. Time Warner, Disney, Netflix, and DreamWorks Animation are Motley Fool Stock Advisor picks.
Longtime Fool contributor Rick Munarriz is many things, including an investor in both Disney and Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
