Which Studio Is Most Profitable?

Time Warner and News Corp. run best-performing units as THR crunches the numbers.

Thank Harry Potter and the Na’vi warriors. Time Warner and News Corp., home to the Potter franchise and Avatar, respectively, ran the studio units with the highest operating profits in 2010. They also recorded the biggest filmed-entertainment revenue out of all the media conglomerates.

That’s according to a THR analysis of financial statements of the five publicly traded entertainment giants with filmed-entertainment operations. (Because NBCUniversal doesn’t break out this figure for its studio unit, the company is excluded here.)

In line with their size, the operating profits of Time Warner’s and News Corp.’s filmed-entertainment units also contributed a higher percentage to total company profit than their peers. Those contributions range from just a few percentage points in the case of Viacom and its Paramount Pictures to 23.9 percent in the case of News Corp. and Fox.

TIME WARNER The company’s filmed-entertainment unit, which CEO Jeff Bewkes has in recent years lauded for making a hit-and-miss business predictable and consistent, recorded operating profit for 2010 that was nearly unchanged from a record 2009 — down only 1 percent when using adjusted operating income.

NEWS CORP. Narrowly edged by Time Warner, News Corp.’s creative factory saw its operating profit drop 8 percent despite Avatar’s record-breaking box-office run, most of which fell into 2010. “Our film studio has not had a year to remember, but that’s the nature of the business,” News Corp.’s Chase Carey said during his company’s most recent earnings call about the performance of the Fox studio.

DISNEY Having posted declines in overall studio-unit profits for 2009, Disney was one of only two sector giants to record gains in the bottom line of its creative-output divisions last year. Not coincidentally, Disney released two billion-dollar grossing films in 2010: Alice in Wonderland and Toy Story 3.

SONY After Disney, Sony made the second-biggest gain with a 57% jump thanks to such hits as its top movie in 2010, The Karate Kid, and the highly profitable Resident Evil: Afterlife, which benefited from international demand for higher-priced 3D fare, as well as strength at international TV channels that are part of Sony’s film unit.

VIACOM After showing the biggest profitability improvement in 2009 in percentage terms, Viacom’s Paramount reported a 57 percent decrease in 2010 operating profits at the studio unit. The lower upside of its business distributing other studios’ titles has historically been a drag on the studio’s margins. Tony Wible, an analyst at Janney Montgomery Scott, believes Viacom might also be feeling the effects of not imposing a 28-day delay on delivering movies to Redbox and Netflix, even though management has said the decision has been good business.

Analysts cite weaker high-margin home-entertainment revenue — and a shift from DVD sales to lower-margin rentals — as one key factor in some studio units’ lower profitability last year.

Matthew Lieberman, a director in PricewaterhouseCoopers’ entertainment, media and communications practice, says 2010 “really was a mixed bag for studios,” with fewer franchise releases and flat theatrical attendance. The profit data doesn’t come as a surprise to Wall Street experts, who say that studio units tend to be among the least profitable businesses at media conglomerates and typically contribute less to overall profitability and valuation than cable-TV-networks divisions, which often contribute two-thirds of total profits.

The data also prove that U.S. box-office market-share rankings don’t say much about profitability. Case in point: Viacom’s Paramount came in second among owners of the big studios in market share but last in profit.