Hit-Driven Film Business Getting "Very Ugly," Wall Street Analyst Says

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Analyst Doug Creutz says Disney "remains the lead dog" while he is most bearish on DreamWorks Animation.

"The dynamics of the film business now look very ugly," an influential Wall Street analyst said in his fifth annual "memo to Hollywood," which he distributed on Friday.

In his research note, Doug Creutz of Cowen & Co. says the market "appears to be condensing into fewer, but bigger, hits."

This phenomenon, he says, is leading to an expanding supply of expensive films — he predicts 30 films will carry production budgets north of $100 million this year, compared to 22 last year — and he warns that a similar situation in the video game industry ended with many players going out of business (Midway, Acclaim, Atari, LucasArts and THQ).

Consolidation is one "obvious" solution to the problem, he writes, though he adds that "a real move towards consolidation is not likely to happed until well past any normal economic pain."

Of course, Lionsgate is already talking about merging with Starz, while Viacom is seeking to sell an equity stake in Paramount.

About the latter, Creutz writes: "We think Viacom would be best served by simply selling Paramount to anyone willing to take it off their hands."

Here's what Creutz has to say about each of the primary studios specifically:

•  Disney "remains the lead dog" and will make nine movies this year with budgets of at least $100 million, up from six last year. While Captain America: Civil War, Finding Dory and Rogue One: A Star Wars Story are likely to be "outsized hits," he's skeptical of The Jungle Book, Dr. Strange, the animated Moana and Steven Spielberg's The BFG.

•  Warner Bros. will be the only studio to make fewer movies for more than $100 million this year than last (four, down from six). Nevertheless, the studio "runs one of the broadest slates in the industry, with 18 wide-release films coming to market in 2016," says Creutz. Fantastic Beasts and Where to Find Them, Batman Vs. Superman and Suicide Squad could be dragged down by Tarzan, Nice Guys, Central Intelligence, Sully, Storks, The Accountant and Collateral Beauty, according to the analyst.

•  Fox will release four $100 million-plus movies, up from two. "Deadpool was more luck than skill," says the analyst, but he still says it "could be quite a good year" for the studio with X-Men Apocalypse, Independence Day: Resurgence and Ice Age: Collision Course. He hedges his bet, though, by writing that the Ice Age franchise is looking "fairly long in the (saber)tooth" and wondering if the new Independence Day might be more Terminator: Genisys than Jurassic World

•  Paramount will have two films costing $100 million or more in 2016, same as last year. While Mission Impossible, Star Trek and Transformers are strong franchises, "We expect more Zoolander 2s in the company's future." That film made just $49 million worldwide in its first three weeks. Suffice it to say, Creutz is bearish on Paramount. "We think any prospective investment partner would be well-advised to stand aside for the time being," he writes.

•  Lionsgate will have three movies costing $100 million-plus this year, up from two last year, and "faces an uphill climb to get to more profitable levels," says Creutz. Gods of Egypt is a flop, and Divergent: Allegiant and Now You See Me Two "could struggle against increased high-end competition."

•  DreamWorks Animation will have two $100 million films up from one, and Creutz is more bearish on this stock than any of the others he lists in his "studio-by-studio" view (which excludes Sony and Comcast's Universal). While listing competitors Disney Feature Animation, Pixar, Illumination, Blue Sky and Warner Bros., he writes: "Being the fourth or fifth or sixth best animated studio is not a good place to be." Neither DWA's upcoming Trolls or Boss Baby impresses Creutz.

Email: Paul.Bond@THR.com

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