Well that didn’t take long, did it? Much to the astonishment of industry analysts, the Disney-Fox merger sailed through the Department of Justice approval process like Aladdin and Jasmine on their magic carpet. The next several months will see a monumental change in the film industry as the number of major studios shrinks from six to five and the film business gets ready for the further escalation of takeover and merger rumors surrounding such prime studio targets as Paramount and Sony.
While the financial machinations of the merger play out on a larger stage, what’s happening below the surface is even more interesting. Both theater chains and moviegoers will be affected by the unification of Walt Disney DIS +1.19% and Fox .
First, a look at the overall studio landscape. Although they play in the same sandbox, Disney and Fox are two entirely different studios. Fox releases anywhere from 12 to 20 films a year, and they run the gamut from mega-budget tentpoles such as Deadpool and the X-Men franchise to, via its Fox Searchlight brand, Oscar-caliber dramas such as The Shape of Water and Three Billboards Outside Ebbing, Missouri.
Disney, on the other hand, seldom takes a chance on unproven concepts and rarely releases more than six to eight titles a year, concentrating on animated movies from Pixar, the latest offering in the Star Wars franchise and its own Disney Animation films. According to comScore, all five of the films that Disney has released in calendar year 2018 have topped $100 million at the domestic box office. Conversely, only one of the five titles that Fox has released in 2018 broke even the $60 million domestic barrier.
With this level of success, and with box-office success all but assured on its films, Disney has been able to charge theater owners film rental terms that are higher than industry norms on many of its titles. Furthermore, the studio doesn’t have those smaller, more intimate movies that exhibitors can balance their overall film rental with by negotiating favorable terms.
Fox doesn’t have that luxury. For every Deadpool and Logan it releases, there are films such as A Cure for Wellness, which grossed just $8 million domestic. While Fox would love to see its tent-pole terms mirror those of Disney, it knows it has to sell the lower-tier films it produces as well and would fear an exhibitor backlash against those smaller movies if it saddled exhibitors with Disney-like terms on its mega-budget films.
Disney released only eight films during the 2017 calendar year while Fox distributed 14, not counting its Fox Searchlight and Fox International Bollywood titles. If this merger is like most of the others that have occurred in the movie business, it’s doubtful that Disney has plans to absorb too many Fox distribution or marketing employees into its fold. From a manpower standpoint, it would be extremely difficult to distribute 22 films a year even if it wanted to. And what will happen to Fox’s Bollywood unit or Fox Searchlight with this merger? Those questions will be answered in the coming months.
Ultimately this Disney-Fox union is almost certain to result in fewer films available for cinema owners and moviegoers. Those bemoaning the lack of creativity in Hollywood would probably feel another shot across the bow if a combined Disney-Fox studio focused even more on tried-and-true franchises.
Furthermore, cinema owners who rely on studios such as Fox, Sony and Paramount to, in effect, balance out Disney’s high terms will now no longer have one of those outlets. That will drive the overall cost of film rental higher for exhibitors. Disney grossed $2.4 billion in 2017 while Fox grossed slightly over $1.3 billion. It doesn’t take a CPA to project that if Disney eliminates many of the smaller Fox titles, then exhibitors’ film rental costs head further northward, impacting their bottom lines.
Lastly, a look at 2018 studio market share clearly shows the grip that the combined studios will have on the marketplace. Through July 1, Disney represented slightly more than 36% of the domestic market while Fox accounted for 11.6%. Combining the two studios results in nearly 50% of the marketplace. The next highest studio is Warner Brothers, which stands at 11.4%. How Disney uses this 50% market share in its dealings with theater chains and other suppliers bears watching.
The realization of a combined Disney-Fox studio is undoubtedly keeping theater chain CFOs up at night, leaving them hoping that Disney 2.0 won’t send their overall film costs on a magic carpet ride to a whole new world.
All box-office grosses are courtesy of comScore.
(Photo by Drew Angerer/Getty Images)