Avatar lifts News Corp's bottom line

The runaway global success of James Cameron's 3-D spectacle, Avatar — his first feature film since the record-breaking Titanic in 1997 — has prompted analysts to lift earnings estimates for News Corp, the owner of movie studio 20th Century Fox.

It's fairly rare that a media conglomerate's bottom line is affected by a single movie, but with more than $1.1 billion (Dh4.04 billion) at box offices worldwide, partly boosted by higher 3-D ticket prices, Avatar has the potential to be the biggest of all time.

Avatar is the story of the Na'vi, tall blue creatures who must contend with humans who intend to grab resources from the moon the Na'vi live on. It was shot with special 3-D cameras and layered with breakthrough computer graphics, and cost an estimated $400 million to make and market. In fact, before it came out some analysts feared the other-worldly budget could drag News Corp down.

As a result, investors are now more focused on the fact that the movie didn't bomb than on how much profit it will make. News Corp's stock started climbing since positive reviews came out of sneak peak showings December 10, and it's now up about 12 per cent since then.

What you hear is a sigh of relief, not the triumphant cry of the Toruk Makto, the name bestowed upon hero Jake Sully after he tames a huge flying dragon in Avatar.

Although profits are accounted for over time, a write-off would have occurred quickly if the movie didn't wow audiences on its first weekend.

"It's more that results won't be impacted negatively as opposed to quantifying the upside right now," said analyst David Bank of RBC Capital Markets. "I think the success of the movie certainly is a catalyst for investors to get into the stock."

News Corp relies more heavily than its peers on the studio business for profits. Its wide range of other assets, including its Fox broadcast TV network and The Wall Street Journal, are largely dependent on advertising dollars that took a hit in the recession, while its studio has been a solid performer in the downturn with such hits as Ice Age: Dawn of the Dinosaurs and X-Men Origins: Wolverine.

But Fox won't be getting all of the box office proceeds from Avatar, just as it doesn't from other movies, either. Fox shared some of the risks — and thus the profits — with investors, who bore an estimated 60 per cent of the approximately $250 million production budget for Avatar.

And theatre owners get about half of the ticket sales, even before subtracting Fox's colossal marketing spending of around $150 million.

Fox receives fees for distributing the movie to theatres, and factoring in all that, the studio has probably brought in a profit of more than $80 million already, estimates Cowen & Co analyst Doug Creutz. To put that figure in perspective, News Corp's operating profit in the quarter through September was $1.04 billion.

Home entertainment

The home video release is still to come, potentially bringing in hundreds of millions of dollars more in revenue.

"I have to keep pinching myself," said James Clayton, chief executive of London-based Ingenious Media Investments, which put investors' and its own money into the movie and will share in the bounty. "For one director to be responsible for the No 1 and No 2 highest-grossing movies of all time is quite something."

Clayton said investors expect to get their financial statement on Avatar in about six months.

Movie economics are murky, and Fox and Clayton declined to comment on the specifics of their deals.

Factors affecting the ultimate bottom line include profit-sharing deals with the creative talent, including Lightstorm Entertainment, the production company owned by Cameron.

But combined with the better-than-expected success of Alvin and the Chipmunks: The Squeakquel, Avatar is expected to help News Corp's film division make $1.26 billion in operating profit in the fiscal year ending in June — about $160 million more than initially thought, according to Creutz.

That would mean the film division would have about a third of News Corp's operating profits for the full year. Generally it produces about one-fourth. The ride isn't over, either. "There's still a question of: How long is this thing going to go?" Creutz said.

Staying power

He noted that Avatar has shown even better staying power in theatres than Titanic, which went on to gross $1.8 billion worldwide, and is still the most successful film ever.

The outsized benefits, however, can be undone by studio missteps down the road.

It's difficult for movie executives to predict a home run, and for every movie that succeeds wildly, there are several that flop, including Babylon AD, a widely panned sci-fi thriller starring Vin Diesel that Fox released last year.

The company still has to contend with the piracy of its movies, the threat of cheap rentals, the high cost of production and the decline of DVD sales. Those challenges are bigger than a whole race of three-metre tall Na'vi.

Precisely because hit movies are tough to foresee, Wall Street tends not to rely on them to evaluate media companies, and Avatar isn't likely to change that. Movie profits have also been declining industry-wide as the parent companies have cut costs and reduced the number of movies released, making the studios a smaller part of their companies' future value.