Box-Office Picture Darkens Amid Focus on Tentpoles, Analyst Says

"Nearly identical film franchise strategies" at the studios risk "accelerating already-existing negative secular trends," warns Cowen's Doug Creutz who doesn't expect "significantly better" domestic performance this year.

"The box-office picture continues to get worse as studio strategies are clustering around tentpoles," Cowen analyst Doug Creutz said in a report entitled "Memo to Hollywood: You Can't All Be Successful Doing the Same Thing" on Monday.

"2014 is the fourth year in a row that box-office and film quality data suggests that a downward shift in theatrical demand curve has taken place," he argued. "Additionally, we are increasingly concerned that the convergence to nearly identical film franchise strategies at the major studios risks damaging the ecology of the business and accelerating already existing negative secular trends."

Creutz has been comparing domestic theatrical performance with the average quality of the 50 most widely released films. "We continue to believe the evidence suggests that domestic theatrical performance remains in secular decline," he concluded after his analysis of 2014.

Variations in average wide-release film quality accounted for nearly half of the variance in film attendance between 2000 and 2010, according to his research. However, beginning in 2011, "the relationship broke down, with a given level of film quality producing a much lower level of film attendance than the previous relationship would have implied," the analyst said. "2014 was even more of a negative outlier year than 2011-13 compared to the 2000-10 baseline, as the best average wide release film quality in the last 15 years was paired with the lowest domestic attendance."

Creutz also highlighted that the distribution of films continues to become "more barbell-shaped" as 2,500-plus theater launches accounted for 56 percent of all film releases in 2014, an all-time high. "Mid-sized launches (1,000 to 2,500 theaters) continue to get squeezed by the increasing prevalence of ultra-wides," he said.

Meanwhile, international box office growth, which was a significant growth driver during the 2000-2011 period appears to have slowed, according to Creutz. The average international to domestic box office ratio has grown at just a 1 percent rate over the last three years compared with a 5 percent rate during the earlier period.

"The prevailing narrative at the studios continues to be one of box-office fluctuations being driven primarily by release slate appeal. Last summer was by some measures the worst summer the industry has had since the original Star Wars came out in 1977, despite the fact that the summer saw launches in the Spider-Man, X-Men, Planet of the Apes, How to Train Your Dragon and Transformers franchises, several of which were very well-reviewed," Creutz said.

"We think this narrative is looking increasingly flawed," he said. "Moreover, we think there is cause for increasing concern that the major studios are all moving towards increasingly indistinguishable strategies, as they all put more and more eggs in the franchise picture basket."

In the superhero genre alone, the number of annual major releases is scheduled to double by 2016, Creutz pointed out. "History suggests — and we have ample evidence of this in the animation genre — that as the number of films in a given genre increases, the average per-film performance decreases, and that even the top-tier films in a genre are not immune to the phenomenon."

With Star Wars, Avatar and Harry Potter-related films also part of other franchises that will be returning to theaters over the next few years, Creutz raised concerns about the profitability of studios. "With these franchise films typically sporting $200 million-plus budgets, we think the risks at the major studios are going up," he wrote. "Additionally, as diversity in the industry film slate decreases, we think the risks of accelerating declines in overall attendance are also increasing."

How many superhero films are too many? "We suspect we will find out shortly," Creutz said. "In general, we think that the major studios are moving too far towards a reliance on film franchises in the action and animation genres. This is most obvious in the superhero genre where the number of major films per year will double from three to four in 2011-15 to seven to eight in 2016-17. Our experience with the animation genre suggests that this is very likely to lead to a decline in per-film box office due to competition."

Who will hurt most? "While we think that the studios with the least appealing content and lesser IP are likely to carry the most risk, we believe that even Disney, which has the most powerful-looking collection of IP, will probably see its film performance negatively impacted as all the other studios crowd into the same corner of the film universe," Creutz said.

Beyond franchises such as The Hunger Games, Lionsgate has "not competed in the major franchise arena, instead producing lower-budgeted films and often opting for a counter-programming approach," he said. "At times this has paid off handsomely with films like Now You See Me and the series of Tyler Perry films. Thus, we think Lionsgate’s broad slate could benefit from the decreasing diversity at other studios."

Discussing conclusions for the 2015 domestic box-office outlook, Creutz wrote: "2015 certainly appears to have several megablockbusters on tap, headlined by The Avengers 2 in May, the final Hunger Games movie in November and Star Wars VII in December. As things stand now, we tend to believe that we will see a bounce in box-office attendance off of 2014’s dismal levels," he said. "The question, however, is how much of a bounce. While we expect some outsized performances at the top end, the year also contains a lot of questions marks, with many film releases from aged and inconsistent franchises (Mad Max, Jurassic Park, Mission: Impossible, Terminator, James Bond)."

On a calendar-year basis, things have gotten off to "a strong start" with American Sniper. However, Creutz called it "the film equivalent of a unicorn," in terms of domestic box office it contributed to 2014’s results. "Fifty Shades of Grey had a big opening weekend but then collapsed, Jupiter Ascending was an enormous bomb, and Taken 3 will significantly underperform its two predecessors. SpongeBob: Sponge Out of Water and Kingsman have done well relative to expectations. However, overall we think the initial crop of 2015 releases is performing roughly on par with those of 2014."

He concluded: "While we do expect some significant strength in the top two to three spots in 2015, we are not convinced that the overall slate is going to drive performance that is significantly better than what we have generally seen over the past four years."

Email: Georg.Szalai@THR.com

Twitter: @georgszalai