A Winning Formula Emerges on the Silver Screen

Walt Disney (NYSE: DIS) enjoyed an incredible year at the box office in 2016 as it delivered a line-up packed with sequels, animated films, and spin-offs from its successful franchises.

Across the industry, that was what worked for all studios last year. In fact, all but one of the top 20 highest grossing films at the domestic box office followed this formula. On this episode of Industry Focus: Consumer Goods,Vincent Shen and Daniel Kline talk about how the movie industry has evolved and what that means for studios and theater operators.

A full transcript follows the video.

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Vincent Shen: Today, I think we should take a look back at the 2016 box office, not just by film, but how the studios and theater operators performed during the year, and what you can expect to see in 2017 in terms of some trends, people to watch, studios to watch. Can you get us started here, Dan? How would you characterize the overall box office performance of 2016?

Dan Kline:It was a yearbased on blockbusters and franchises. If you look at the top 20 films,Disneyhas four of the five, andRogue Oneis No. 2, though it willeventually make more money thanFinding Dory, which is No. 1. Domestic box office, 19 of the top 20 films are either franchises, spinoffs,sequels, or animated movies. The only one that isn't isCentral Intelligenceat No. 20,and I would argue, because it has The Rock and Kevin Hart, it sort of feels like a spinoffeven though it is a stand-alone movie.

So, this was a year when you saw the Disney strategy come to life. Disney crushed a recordat the box office. And basically,aside fromAlice Through the Looking Glass, which was a sequel which kind of bombed,everything they did was pretty much aguaranteed hit. When you're at the point where Disney can put out Doctor Strange, a character that,as a comic book fangrowing up as a kid who read Marvel,I barely remembered, and make that a blockbuster, they have it working. And that bodesvery well for the next year for them.

Shen:Yeah. Big picture, I should note that the domestic box office, as you mentioned, it was record-setting in 2016. About $11.4 billion in total gross receipts. That's with 725 films. All these numbers, by the way,I'm pulling fromBox Office Mojo. That's the highest number of films and gross receipts for the domestic market. But,keep in mind this ongoing problem that we've hadfor about the past 15 years or so -- the number of tickets sold is still down about 16% from the peak reached in 2002. The total market for movie viewers, if you just look at population growth over those approximately 15 years or so, has gone up quite a bit. So, it's not just that 16% dip. I think, overall, average ticket prices have managed to make up for a lot of that falling volume. It helps to have releases coming out on IMAX, 3D releases as well. That's definitely boosting up your average ticket pricefor a lot of the theater operators, helping in terms of those box office ticket sales.

But, if we're going to dive into some of the big takeaways from 2016,you mentioned the animated franchise sequel strategy,and how that's really coming to light for Disney.

Kline:It's all about event pictures. I'll give you an idea. Yesterday,I went to seeAssassin's Creed. Now, this was a lousy movie byvideo game movie standards. I mean, it made me nostalgic forBob Hoskins'Super Mario. This was a bad movie.

Shen:[laughs] That's really bad.

Kline:But, you could see it was a movie meant for a global audience. There's not a lot of dialogue. The dialogue it has is stupid.I couldn't tell you the lead character's name, and I saw the movie [laughs]. But, it's this movie made so that you can see it in China, you can see it wherever, and it appeals to everybody. Now, this was a big misfire. But something likeRogue OneorFinding Doryor, coming up next year,Fast & Furious 8, these are action movies or animated kids' movies that pull in a big audience.

Where we're seeing the dip in attendance is, while I went to go seeAssassin's Creedwith my son, my wife and mother went to seeManchester by the Sea, a movie that is super-duper depressing. A film like that doesn't have much of a place in the box office anymore. If you look at even the top 30 films this year, there's noJuno, there's no movie jumping out that was an indie film that made $150 million. And that's because you can watch that movie on Netflix; you can watch that movie at home.

Home theater has gotten good enough. I think we're seeing a seismic shift in the theater business. Theaters are going to give you everything they can. The theater I was at last night had reclining seats, there was a little bench in front of my seat to eat snacks on, it was assigned seating. It was $16 a ticket, but it was a very inviting experience to see a would-be blockbuster. But it would not make as much sense to see an adult-themed indie film. And we're seeing a lot of adult movies doing better -- the Christopher Guest movie does better on Netflix than it would do in the theater, and I think that's where we're headed.

Daniel Kline has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.