Commentary: Boxoffice success offers intriguing twist, but the ending could be a letdown

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NEW YORK -- Sure, the boxoffice went gangbusters during the first quarter of 2009, but don't be fooled as earnings season approaches for media and entertainment conglomerates. Instead, brace yourself for weaker film-unit profits.

Slower momentum in high-margin DVD sales because of the recession and a maturing business are affecting the bottom line -- Miller Tabak analyst David Joyce recently lowered his quarterly film-unit estimates for News Corp. and Time Warner because of "continued secular and cyclical declines in home entertainment sales as DVD sales are challenged by greater rental and downloading activity" -- as are marketing costs for key releases, some of which underperformed.

Here's a look at what to expect from film divisions in the quarter.

Time Warner

Key theatricals in quarter: "Watchmen," "Gran Torino," "He's Just Not That Into You"

Key DVDs: "The Dark Knight," "Body of Lies"

Key year-ago theatricals: "10,000 BC," "The Bucket List"

Key year-ago DVDs: "I Am Legend," "Michael Clayton"

Bottom line: "Watchmen," with its huge marketing budget, did well but underperformed expectations, and "Dark Knight" DVD sales look weaker than hoped entering 2009.

Sanford C. Bernstein analyst Michael Nathanson predicts a film-revenue decline of 10% for the first quarter but looks for film profit to drop an enormous 49%. Joyce recently reduced his TW estimates in part because of "DVD sales weakness from secular, cyclical and tough year-over-year comps challenges." For the first quarter, he cut his film-revenue estimate from $2.86 billion to $2.06 billion and his operating income before depreciation and amortization estimate from $419 million to $275 million.

Disney

Key theatricals in quarter: "Race to Witch Mountain," "Bedtime Stories," "Confessions of a Shopaholic," "Jonas Brothers: The 3D Concert Experience"

Key DVDs: "Pinocchio," "Beverly Hills Chihuahua," "High School Musical 3: Senior Year"

Key year-ago theatricals: "Hannah Montana and Miley Cyrus: Best of Both Worlds Concert," "National Treasure 2: Book of Secrets"

Key year-ago DVDs: "Enchanted," "No Country for Old Men"

Bottom line:  "Witch Mountain" entertained audiences, but its opening "performed somewhat below expectations as the film was broadly targeted and family-friendly and had received significant advertising support," Barclays Capital analyst Anthony DiClemente says. "Jonas Brothers 3D" disappointed many as well.

Some analysts not only predict a weaker film performance in the latest quarter but also argue that boxoffice and DVD trends suggest underlying challenges.

"2009 is shaping up to be a very challenging year," Pali Research analyst Richard Greenfield said in a recent report. " 'Bolt' was disappointing, and we are skeptical of 'Up's' prospects this summer."

News Corp.

Key theatricals in quarter: "Slumdog Millionaire," "Taken"

Key DVDs: "Australia," "Max Payne"

Key year-ago theatricals: "Dr. Seuss' Horton Hears a Who!" "Juno," "Alvin and the Chipmunks"

Key year-ago DVDs: "The Simpsons Movie," "Live Free or Die Hard"

Bottom line:  "Taken" was one of the upside surprises of first-quarter 2009, and "Slumdog" benefited from Oscar buzz and the related marketing campaign. But promotions increased costs, and the strength of year-ago theatricals and concerns about recent DVD sales should drag down the bottom line. Nathanson expects News Corp. could be a rare revenue gainer on the film side when it reports, though its film profits will be down.

Viacom

Key theatricals in quarter: "Monsters vs. Aliens," "I Love You, Man," "Hotel for Dogs"

Key DVDs: "Eagle Eye," "Madagascar: Escape 2 Africa"

Key year-ago theatricals: "Cloverfield," "The Spiderwick Chronicles"

Key year-ago DVDs: "Beowulf"

Bottom line:  "Monsters," which Paramount distributes under a deal with DreamWorks Animation, came out so late in the quarter that while most of the advertising costs will be in the period's numbers, most of the revenue benefit won't. Also, the company received a $29 million payment during the year-ago quarter, which didn't recur this year.

UBS analyst Michael Morris recently predicted a "sizable operating loss" for Viacom's film segment in the quarter and cut his full-year operating profit estimate by $10 million to

$70 million. "Despite a promising slate for the balance of 2009, we believe that a weak first quarter puts the segment in a significant hole that will be difficult to overcome," he said.

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