It’s a Horror Show at Lions Gate as Flops Frighten Investors

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Lions Gate Entertainment Corp. had high hopes for two horror movies, but they scared up next to nothing at the box office recently.


Also scary: The independent studio last week reported a net loss worse than expected on revenues smaller than expected.


It’s not all painful news, though.


The Santa Monica film maker has seen its digital download business begin to flourish. Lions Gate has sold more than 1.4 million digital downloads through partnerships with Apple’s iTunes, Amazon’s Unbox and CinemaNow and has sold more than 150,000 downloads of 15 films through Microsoft’s Xbox Live Marketplace.


The performance boosted digital revenues in the last quarter of 2006 for Lions Gate by 50 percent over the previous year, and analysts say they expect that performance to continue.


Video-on-demand sales for the film “Employee of the Month,” for example, were north of $3 million, an impressive performance for a movie that pulled in $27 million at the box office. Lions Gate had two movies (“Crank” and “Employee of the Month”) in the top five downloads on the Microsoft site.


The studio’s determination to get ahead in the digital distribution game is shown by its recent $21 million equity investment in Break.com. That move gave Lions Gate a 42 percent stake in the Beverly Hills-based video Web site that is focused on user-generated videos and shorts, and executives have said the plan is to continue to use the site as a promotional and distribution platform for its film, TV and DVD releases.


The studio already owns a 20 percent stake in online movie download site CinemaNow and has programming deals with NBC Digital Studios and Endemol for Web series.


Getting in the game early doesn’t guarantee Lions Gate will be able to maintain market share once everyone else gets on the bandwagon, but it won’t hurt.


“Once other studios get on board it could certainly dilute Lions Gates market share in the digital arena, but I think it’s more likely to be a ‘rising tide lifts all boats’ sort of thing,” said Michael Kelman, an analyst with Susquehanna Financial Group. “At the end of the day this is all still in its infancy. The total market will grow and their share could diminish but absolute number can still be high.”



Looking to fall

The good news on the digital side comes in the wake of a disastrous box office run for “Captivity,” which grossed an anemic $1.6 million its opening weekend, despite months of publicity generated by a flap over the film’s gruesome billboard ad campaign.


“Captivity’s” weak showing came on the heels of “Hostel: Part II,” which opened wide, on more than 2,300 screens, but managed just $8.7 million over its opening weekend. The first “Hostel” film made $47 million at the domestic box office.


Lions Gate has traditionally done well with the horror genre; the films are inexpensive to make and offer huge potential upside. The first two films in the “Saw” franchise, for example, brought in more than $250 million at the domestic box office.


The studio has a number of releases on the way this year, including another installment in the “Saw” series and the classic Western remake “3:10 to Yuma,” financed through a deal with Relativity Media LLC, and analysts expect the films to do well when out of the competitive summer time frame.


“Despite the big summer blockbuster numbers, there hasn’t been much spillover effect for the general market, and a lot of that has a lot to do with the over-saturation of screens,” Kelman said. “‘Spiderman 3’ and ‘Pirates 3’ opened on about 10,000 screens that’s 4,000 theaters, a third of the domestic market.”


In its earnings report, the studio reported its first quarter net loss ballooned to $53.1 million, or 45 cents per share, compared with a loss of $3.6 million, or 3 cents per share, in the year-ago period.


Revenue increased to $199 million from $173 million due to gains in motion picture, television and international sales, while total expenses jumped to $250 million from $175 million.


Analysts had expected smaller losses of 23 cents per share and greater revenue of $208 million.


“The first quarter reflects our usual frontloaded costs and is in line with our expectations,” said Lions Gate Co-Chairman and Chief Executive Officer Jon Feltheimer. “Although we are disappointed in the weakness of the early part of our theatrical slate, this performance is offset by our diversification and the over performance of our other businesses as well as the recognition that the strongest part of our slate is still ahead.”

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