Box office revenue outside of the North American market has become increasingly important, as that is where the growth in the industry is coming from. While the domestic market in the U.S. has broken records the last couple of years, it has been because of the increase in ticket prices, not an increase in the number of people going to theaters.
With that in mind, investors need to understand what it is that drives revenue outside of North America as that will determine the earnings success of the industry over time. Global film revenue is primarily driven by action films, stars (or combinations of stars), and the associated pre-sale value of these elements to some studios and/or distributors.
On the macro level, film revenue is driven by the boost in disposable income in China, and to a lesser extent, other countries with growing middle classes.
"The Expendables" is an international bellwether
One of the best franchises to show the elements of what drives the foreign box office is "The Expendables" from Lions Gate Entertainment (NYSE:LGF-A). It includes all of what it takes to be success at the international level, as is confirmed by the revenue generated by the film
With an $80 million production budget, The Expendables brought $103 million domestically and $171 million internationally for a total of $274 million, according to Box Office Mojo. The Expendables 2 had a production budget of $100 million, bringing $85 million in domestic sales and $220 million internationally, for a total of $305 million.
Probably the major catalyst generating the most revenue internationally is action films. "The Expendables" obviously has that as part of its attraction, as does Paramount's (NASDAQ:VIAB) "Transformers" franchise. The most recent installment, Dark of the Moon, had domestic ticket sales of $352 million, and global sales of $771 million, for a total of $1.1 billion.
A number of people wondered why the films have been so low on dialogue and big on action compared to the initial "Transformers" story. The answer is in the numbers, as international revenue soared while domestic revenue has bounced around.
Viacom and Paramount aren't going to change this because action sequences appeal to most nationalities. Too much dialogue risks limiting the appeal of a film because it may be construed as more nationalistic. Paramount will release the next film in the franchise, Transformers: Age of Extinction, on June 27, 2014.
Different type of star power
What drives the popularity of stars in North America isn't necessarily what drives the popularity of stars in other parts of the world. Most foreign buyers prefer proven stars, which means they gravitate toward more mature actors. This is another reason for the success of The Expendables franchise around the globe.
Also of value to foreign markets is the makeup of the team of actors in a film. It's the blend of actors and how they resonate with the particular market the film is being shown in. Again, this is why action films do so well, as it they include a generic element that caters to all types of people.
When an actor for a non-action film is being decided upon, it gets much more difficult to determine the best way to go, as that person may appeal to a certain part of the world, while not being that attractive to another. Interestingly, action star Jason Statham is one of the desirable of stars around the world, even though he isn't that strong in North America.
"Captain America" controversy
To show the difficulty and challenges related to a global market, the Captain America controversy in 2010 ended up being a nightmare for Disney's (NYSE:DIS) Buena Vista. Suggestions of the studio making him appear less patriotic caused an uproar.
Some attributed it to a conspiracy, but it's possible it may have been a nod toward making the film more palatable to global markets. The Walt Disney Company ended up making $177 million domestically and $194 million internationally, so it did do well for the company considering that there was a production budget of $140 million for the film.
This is a unique franchise and character, though, so it's unlikely this type of challenge will have to be faced often. The point is that investors need to look closely at these types of issues in light of the growing global market that has such a strong impact on revenue and earnings in the film industry.
This leads to the secondary importance of foreign markets, and that is the pre-sale value of films for some companies. For Lions Gate, this is very important as it attracts film financing up front in return for guaranteeing distribution rights for a certain country and/or region. This cuts back on borrowing and interest rates, helping to lower costs on both ends of the deal.
These types of deals will probably proliferate during tighter lending environments, which will help the industry during slow times.
Foreign demand for movies
The major catalyst for foreign films is demand driven by disposable income in some areas of the world that have never had it before. This trend is led by China.
That has resulted in the need to look at what attracts viewers to films around the world. At this time, the most desirable and profitable international projects are action films. Secondary catalysts that drive film performance include certain types of actors that appeal to these very different markets.
We must continue to closely watch and research this important part of media companies to see if this changes. For now, though, those going to movies in other countries like seasoned actors playing in action films.