Harris/22/dp1st/mark2nd
KATHRYN HARRIS
Internet stocks aren’t the first to involve hype and volatility. Just look at the wacky world of “pure play” film companies, where Metro-Goldwyn-Mayer Inc. and Pixar have a combined stock market value of $4.6 billion on a trickle of movies.
In this illusory business, the stock price isn’t correlated to earnings or actual box-office revenue. What fun! Speculators move in and out of these stocks, pumping them up and taking them down.
But peek around the fun-house mirror. Children are in charge, or soon will be. To prosper, Pixar (a young studio) and MGM (very old) both need to attract more business from young children and teenagers. Teens, in particular, are the reckoning force, buying 25 percent of movie tickets while representing just 11 percent of the U.S. population.
For this crowd, MGM’s remake of “The Mod Squad” didn’t work, nor did the other five films released so far this year, for a cumulative gross of $66 million. The meager box-office revenue didn’t cover the $85 million in severance costs charged to second-quarter results for replacing managers with younger executives.
MGM’s new pledge to Wall Street: It will increase production of movies targeting the younger demographics of “Generation X” and “Generation Y.”
Meanwhile, Pixar, the Bay Area-based studio headed by Apple Computer co-founder Steve Jobs, is caught at the other end of the kid spectrum. It has produced two animated hits (“Toy Story” in 1995 and “A Bug’s Life” in 1990), but the pre-adolescent theater crowd doesn’t guarantee big profits. The windfalls come from video sales, merchandising and crossover appeal to another demographic group ideally, teenagers. Pixar will be looking for that teen audience when it releases “Toy Story II” in November.
The teen population, or Generation Y. has been growing for six years, and is expected to continue to swell until at least 2010, according to Teenage Research Unlimited. The Illinois firm estimates that U.S. teens spent $94 billion last year, up $10 billion from the previous year.
Kids rule in the “real” marketplace. Now the stock market just has to anticipate their tastes.
Volatility in small movie company stocks is already a given. Prices rise on the whiff of a hit. Pixar’s stock soared in mid-November on forecasts that its second feature, “A Bug’s Life,” would top $150 million at the U.S. box office.
The film met those expectations, and Pixar’s stock tumbled, partly under pressure from short-sellers who contended the shares were over-valued. (These investors sell borrowed shares, betting that they can replace them later at a cheaper price). The short-sellers’ interest in Pixar exceeds 21 percent of its public stock float.
Pixar took another hit last week, when it disclosed that home-video unit sales the biggest source of profits might be 25 percent below what several analysts were projecting. Pixar also said that merchandise sales will be lower than expected. The news has pushed Pixar shares down 22 percent in value.
There’s no single explanation for the slowdown in merchandise and video sales. Is it a fluke, or market saturation?
Or is it “age compression,” a term coined by researchers to describe children who are abandoning childhood toys and interests at an earlier age? What does this mean for video sales of animated features? Investors in Walt Disney Co. and Pixar are eager to know.
Alan S. Gould, an analyst at Gerard Klauer Mattison & Co., has mapped a decline in the ratio of video sales to domestic box-office revenue for Disney’s recent animated movies. “I think it’s saturation, and a competitive issue,” Gould said. “Disney no longer has the field to itself.”
For guidance, I consult my 10-year-old son. He enjoyed “A Bug’s Life” in the theater, but he hasn’t asked to rent or buy the video or any of its merchandise. In fact, he hasn’t asked to buy a video in several months. This is news. Good for my pocketbook; bad for animation studios.
Still, he and his 13-year-old sister have helped propel box-office revenue this summer to a record high. But it was the “Star Wars” prequel, not Disney’s animated “Tarzan,” that captured the dollars of the 10-year-olds.
Now, both kids are lobbying to see “The Blair Witch Project” horror flick, which is a runaway hit for tiny Artisan Entertainment. It’s the kind of box-office coup that MGM must hope to replicate.
MGM hasn’t reported an operating profit in the past 10 years. Last week the company announced second-quarter losses approaching $250 million. But guess what: The stock price has almost doubled since October.
Some speculators expect Kirk Kerkorian, the 82-year-old controlling shareholder, to sell or merge the company, which has a library of 5,000 films. Kerkorian has sold the studio twice in the past.
But there’s also been a Wall Street buzz created by new management. Alex Yemenidjian, 43, has replaced 65-year-old Frank Mancuso as chairman and chief executive. The new MGM team vows to invent fresh new ways of managing its movie business. Film projects will be selected by committee.
What will these new films be? Not Busbee Berkeley musicals, I’ll wager, or another remake like the current “Thomas Crown Affair.” Look for the promised Gen X and Gen Y films.
But skeptics aren’t waiting for the next slate. Short-sellers have already corralled more than 19 percent of the available MGM shares, betting the stock will fall.
Hype and volatility still define the game.
Kathryn Harris is a columnist with Bloomberg News.
