Things have been moving over here at EntStrategyGuy headquarters. (More to come in the future.) As such, I skipped last week’s strategy column. There were a few interesting stories over the last two weeks—a new FCC commissioner, another check in on box office, earnings season—but I’m going to check in on arguably the biggest independent film producer out there instead, because it ties together a few themes.
Before that, though, I should mention the biggest story looming over all of Hollywood. As likely every reader knows, there was a tragic shooting death of cinematographer Halyna Hutchins on the set of Rust, a low budget film starring Alec Baldwin. While the Rust tragedy is revealing—autocorrect initially typed in revolting, and honestly it’s that too—about the state of low budget film making, in itself it probably doesn’t change the entertainment business landscape.
Most Important Story of the Week – After Dune, What Happens to Legendary?
If there is a bright side in the Hollywood universe to distract us from the Rust tragedy, it’s that everyone is buzzing about Dune. Here’s some headlines about how its “success” immediately translated to “Will Dune 2 happen?!?!?”
Well, Matt Yglesias can rest assured the sequel is happening. The turnaround for Dune is genuinely surprising to me. A year or so ago, I think most folks thought this was on its way to becoming another Alita, John Carter from Mars or even a Blade Runner 2049; a sci-fi epic that failed to become a franchise. Covid-19 delays didn’t help.
Yet it did aggressively fine at the box office given the pandemic-reduced totals, the highest three day weekend for Warner Bros since Godzilla vs Kong. It also had 1.9 million households tune in, good for the sixth highest HBO Max total this year. (I’m still sorting out what numbers mean what from Samba TV.) Simply judging by the narrative, it seems to be a success.
Dune isn’t the only film this year to have on-paper grosses that felt bigger in the moment. Specifically, I’m thinking of when Godzilla vs Kong opened well to launch the new pandemic box office. It also had 3.6 million households tune on HBO Max, second place after Mortal Kombat. Like Dune, the media observers seem to have considered Godzilla vs Kong a big success, all things considered.
What do Dune and Godzilla vs Kong have in common?
That’s right, the film production/financing company that focuses on big budget pictures. And is mostly known, if they are known, by customers for their title card before a lot of big budget films.
Maybe Legendary has some really sharp PR folks working behind the scenes because, again, they’ve convinced me (and most of us) that the current 9th and 17th biggest films of the year (though Dune has room to grow) were big hits. Those films are good reminders that Legendary is still out there. Historically I’ve admired Legendary’s strategy, but it has a lot of questions as it tries to sell itself to some buyer in the 2020s.
Legendary’s “Moneyball” History
Let’s start with “moneyball”, a term many of us use, but few use correctly. So much so that I wrote an entire article back in my early days explaining out how I use the term.
Essentially, “moneyball” is about using data. Specifically leveraging data to optimize buying assets. That’s right, a moneyball strategy brings financial analysis to other industries, like sports or film-making. Some folks thought this meant buying only small or distressed assets with the hopes to spin them into bigger things. Like Billy Beane of the Oakland As, the star of Moneyball, the book and film. And yes, if you’re a small firm with limited resources, that is the strategy. Blumhouse started by running this strategy for small horror films.
If you’re a big firm with lots of money, though, you can use this strategy too. That’s what the Boston Red Sox did, after importing a lot of Billy Beane’s ideas. They outbid everyone for the top players in the early 2000s, and used data to improve their hit rate…and finally win a World Series.
Legendary played the role of the Boston Red Sox in this analogy. They—meaning their initial CEO Thomas Tull and his private equity backers—noticed the downward trend in mid-budget films, so they set up a film financing group that only funded large, blockbuster type films. The hit rate was higher, and thus they had a less risky strategy than most of the studios, though it cost a lot more money up front. This is still a “moneyball”-style approach, which means recognizing a market inefficiency and stepping into exploit it. And for the record, I loved this strategy when I first realized it.
This brings up the first of three questions that impact on Legendary’s future:
Does Legendary still have a moneyball-style advantage in a theatrical world dominated only by big budget films? Or in a streaming world where you can’t have as high of a return on investment?
Legendary’s Distribution and Financing Strategy
Note, I don’t call Legendary a distributor. Because while they are lots of things—financier, producer, marketer, comics creator—they don’t do the messy work of distributing films. Instead, they work with studios who help finance or produce the film for them to distribute.
Legendary started funding Warner Bros films like Inception, The Dark Knight and The Hangover. (A great run really.) Then they moved over to Universal, funding films like Jurassic World, Skyscraper, The Great Wall and Warcraft. (Not as great.) Recently, they moved back to Warner Bros, funding Pokemon Detective Pikachu and the monster films like Godzilla vs Kong. (Returns remain to be seen.)
And like any company taking advantage of the moment, they’ve started selling films to Netflix too. Including Enola Holmes (though I believe Warner Bros. owns a piece of that too) and the Texas Chainsaw Massacre.
This leads to our second question:
As the studios look to own the films on their streamers, do they still need a third-party financier complicating the distribution decisions?
Legendary’s Complicated Ownership History
The last thing to note is that Legendary isn’t exactly a free agent either. In fact, they’re the poster child for the other big trend in Hollywood in the 2010s, which was the beginning influx of Chinese money into Hollywood. They were purchased by The Wanda Group for $3.5 billion, who also purchased theater chains, as part of a foray into Hollywood. And like most forays into Hollywood, it stalled out there. And also like most forays into Hollywood, Wanda likely drastically overpaid.
Given that Wanda Group is “refocusing on the Chinese market” presumably a sale is definitely on the table. So our last question:
How easy will it be to pry Legendary from The Wanda Group? And at what price?
So What’s Next?
A potential sale. But to whom and for what?
Let’s start with the price. According to the L.A. Times, Legendary has only had two consecutive profitable years once since 2011. Last year they made $1000 million and the year before that $50 million. Meaning the typical prices being floated for a current sale are closer to $2 billion than the $3.5 Wanda paid. But if MGM can sell for $9 billion, who knows what the ceiling could be here?
Further, Legendary doesn’t quite have the assets the streamers crave. They crave IP to turn into multiple TV shows and films. From what I can tell, the best franchises Legendary controls are Dune and Warcraft, neither of which supremely move the needle. Legendary has a great stream of profits coming from a lot of big films in the past. But that doesn’t mean they own or control most of them.
Overall, it would surprise me more that Legendary doesn’t get sold—or at least divested from The Wanda Group—but like MGM, I’m not sure what the assets are really worth. Thus I’m not really sure that this really helps any streamer/studio. And as the questions above imply, I’m not bullish about buying into their strategy. Legendary had a great strategy in the 2000s, and I’m not sure they have one in the 2020s.
Other Contenders for Most Important Story
Netflix Provides Clarity on Video Game Strategy…and I Love the Pitch
We haven’t gotten to the deluge of earnings reports yet. (Next week, fingers crossed for my high level take.) But I want to call out this sentence in Netflix’s earnings report on their pitch for video games:
As a reminder, games on Netflix will be included in members’ subscriptions and will not have advertisements or in-app purchases so game play is purely focused on enjoyment versus monetization.
In other words, Netflix identified one of the biggest two pain points for the current state of mobile gaming and basically promises to solve them. As someone who has recently looked for games to play with my daughter, this is a brilliant strategy since so many are polluted by freemium models. Which I definitely understand make more money—because a small percentage overpay—but that leaves a niche untapped niche for Netflix to take advantage of. Are there other issues? For sure. Integrating the video games for one and also picking the right games. (The initial four for Android only leave me underwhelmed.) But like Apple Arcade, I can say I see the pitch.
Amazon: Setting a four week window for Bollywood films
Amazon has its sites set on the Indian market for a few years now, and has broken the “window” of theatrical over there somewhat. I like this move—again depending on the price they paid—with the caveat that I don’t think these films will move the needle in the U.S. (For American readers, can you name the biggest Amazon Original Movie from India? Didn’t think so.)
Bobby Flay ls Leaving The Food Network
Bobby Flay is right on the invisible line between being big enough to warrant a spot in this column and not. Between him and Guy Fieri, we know top talent at The Food Network demands pay checks in the tens of millions of dollars. But as The Food Network continues to push live cooking shows for their talent, Bobby Flay didn’t want the extra time commitment. So he’ll be an interesting free agent. (Would be surprised if a major streamer didn’t snap him up soon.)
M&A Updates – LeBron James’ Springhill Media Valued at $750 Million
Pair this M&A news with the Legendary article above. Again, LeBron James’ production company has from what I can tell 12 projects across both TV and film to its name, either produced or in development. Legendary has 27 just in development. And released 14 films since 2017. And they have TV projects on top of that.
So yeah, the market is hot for production companies. I would clarify that technically no one paid LeBron James and crew an entire $750 million. Instead, outside investors bought equity that brings the whole value to $750 million total. A small, but significant difference. Because it is one thing to pay a lot to own the entire thing, and another to overpay a little for a piece of LeBron James.
Lots of News with No News – Alan Horn is Retiring
I can see this section making folks mad. Since 2012, Alan Horn oversaw the rise of Disney from a “just fine” studio—in the 2000s animation was fine and Pirates of the Caribbean was the biggest hit franchise—to a monster studio that was number one at the domestic box office from 2016 to 2019 with unheard of market share. Here’s the Numbers look at it:
And sure that’s true. Though, for me, it’s a matter of assigning credit. Do you credit Alan Horn for shepherding the MCU to its peaks…or Kevin Feige? Do you give Horn credit for Star Wars…or Kevin Mayer for buying it? Same for Pixar and Lasseter. Indeed, stripping out Pixar, Marvel and Star Wars his box office record looks…fine? Maybe even bad?
Yet, he did navigate that amazing swath of personalities, keeping the film trains running on time. So no this isn’t the end of the Disney film world yet. I’m not willing to call it the end of an era yet either. Though, it also doesn’t help that John Lasseter left Pixar, the Star Wars films haven’t performed to expectations and Disney+ demands lots more content.
Other Things to Listen or Read – Emily Oster Says School Quarantines Should End
This Emily Oster piece analyzing the evidence on whether school districts should quarantine students after a “close contact” with a confirmed Covid-19 case is priceless. TLDR? No, not at all.