Why Cinema Will be Hot in 2015

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Why Cinema Will be Hot in 2015: Wible's Weekly

2015 is shaping up to be a landmark year for studios as a large number of major franchise films come to theaters. The top 10 films are poised to generate $3.5 billion of USBO on an inflation adjusted basis, which would imply we could see a record breaking $11.2 to $14.1 of total industry USBO in 2015 based on the historical 24.5% to 30.8% tied to the top 10 films.

However, not all studios are set to participate in the looming box office battle and some may see relative under-performance of their big films due to the intense competition. DIS and CMCSA's Universal are the biggest competitors in 2015 while TWX and SNE look to be avoiding the battle for market share with fewer films (some at lower relative budgets). The divergence in slate strategies will play a role in 2015/16 earnings numbers, as some like DIS will see a large uptick in studio revenue while others like TWX should see a YOY decline. This shift may also affect cost and competitive dynamics for Starz and TWX's HBO.

Busy Year – We currently see 35 tent pole films slated in 2015 that could amount to a staggering $6.6 billion of box office alone. Most of this will come from 22 sequels that could account for $4.6 billion of this amount. Major films include: Avengers 2, Star Wars, the final Hunger Games,Minions, James Bond, 24, Fast & Furious 7, Ted 2, Jurassic World, andMission Impossible 5. There are also some promising new titles like Pixar's Inside Out, Cinderella, and Fifty Shades of Grey. We will likely see some cannibalization of films' potential, but the slate is well balanced considering the amount of tent poles. Big films are spread across the year and there is a good mix of non-overlapping genres (e.g. The Conjuring 2 vs. Jungle Book or Fifty Shades vs. SpongeBob).

The Gladiators – We estimate CMCSA's and DIS's USBO from 2015 films will increase 64% and 54% YOY as they have the greatest number of major franchise films coming to market. Universal will have 7 major films including: Minions, Fast & Furious 7, Fifty Shades of Grey, Pitch Perfect 2, Jurassic World, Ted 2, and the 5th Bourne movie. These films have the potential to generate $1.4 billion of USBO for the studio. DIS could top that number with $2.2 billion from 8 major films that include: Cinderella, Avengers 2, Tomorrowland, Inside Out, Ant-Man, The Jungle Book, The Good Dinosaur, and Star Wars. Although VIA only has 4 tentpole films, this is a substantial number for a studio of its size and we note that its titles will face competition as Mission Impossible faces Star Wars, Terminator faces Ted 2, and Monster Trucks faces DWA's BOO.

The Bystanders – Sony and TWX seem to be avoiding the competition in 2015 with only 3 and 5 major films on our top list, respectively. Five films for a studio the size of Warner is relatively small, and some of the films look like they will be lower (relative) budget titles like the Conjuring 2 andEntourage. TWX has no major franchise films in 2015 but will look to play off of established IP with reboots of Mad Max, Peter Pan, and Point Break, while also testing new IP (that did not make our list) San Andreas and Jupiter Ascending. We estimate the USBO tied to TWX's 2015 films will be down 21% YOY.

The Pay TV Derivative - The shift in USBO has the potential to also affect margins and competitive dynamics for Pay TV platforms. While caps will limit the amount paid for the titles, there may be more titles hitting caps in 2015/16. STRZA will pick up the incremental cost on the DIS films but also gets the benefit of showing these titles into 2016, which can help counter attrition risk associated with NFLX gaining rights to DIS's subsequent films. HBO may pay more for Universal but this may be mitigated by a relatively lighter slate at Warner. While originals are important, we believe big movies are equally important for the liner channels and aid marketing efforts.

Tony Wible can be reached at twible@janney.com.Tony Wible

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I, Tony Wible, the Primarily Responsible Analyst for this research report, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers. No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views I expressed in this research report.
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