Hollywood Delivers Another Record Year at the U.S. Box Office

Industry Focusis ready to ring in the new year!

For the first episode of 2017, Vincent Shen welcomes Fool.com contributor Daniel Kline to grab some popcorn, take a seat, and discuss the record-setting box office results from last year. Across the entertainment industry, major studios appear to have found the winning formula needed to draw massive audiences as sequels, franchises, and animated films top the charts.

Tune in to find out which companies had the most success and the major trends to watch this year.

A full transcript follows the video.

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This podcast was recorded on Jan. 3, 2017.

Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market everyday. I'm your host, Vincent Shen, andit is Tuesday, January 3rd. First things first, Happy New Year, Fools!I hope everyone tuning in was able to enjoy their holidays, eat well,spend time with friends and family. I think I can speak for the entire Industry Focus crewwhen I say that we are ready to be back in the studio and very excited for 2017. Joining me today via Skype to kick off thefirst show of the year is Fool.com contributor Mr. Daniel Kline. Happy New Year, Dan! How are you doing?

Daniel Kline: Happy New Year, Vince! How are you?

Shen: Prettygood. Did you get everything that you wanted on your wishlist?

Kline: Let's see,I got a plumbing disaster, and my car is in the shop, so perhapsnot the Christmas I was hoping for. But,pretty much, 5:00 a.m. tomorrow, I head off to CES, so maybeI'll get a little bit of a belated present.

Shen: Absolutely. I spent the past week, week and a half zipping around between my hometown back in Jersey -- I was in New York City for a few days, and then Annapolis, and then here in D.C. So,I had a great time all around. But one of the highlights, I have to say, even though it might be a little bit silly, was, very recently, I finally had the chance to see Rogue One.

Kline: I saw it, too.I thought you were going to say the Rockettes [laughs]. Now,I loved it. It was basically a Magnificent Seven remake. What did you think of it?

Shen: I really was impressed. It wassomething I was going to see opening weekend, but plans fell through. I ended up seeing it in a theater I'd never been to before, with a huge screen; it's a one-screen theater but really well done. The ending and everything, I think they did a great job. I don't want to give anything away for people who haven't seen it yet, because I know it's still building up quite a bit of momentum, or maintaining that momentum, at the box office. I think three weekends now, it has topped the chart.

But overall, after seeing the movie and talking to you, it got me thinking about the past year in terms of Hollywood and the movie industry. So 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?

Kline: It was a yearbased on blockbusters and franchises. If you look at the top 20 films,Disney(NYSE: DIS) has four of the five, and Rogue One is No. 2, though it willeventually make more money than Finding 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 is Central Intelligence at 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 from Alice 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 see Assassin'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 like Rogue One or Finding Dory or, 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 see Assassin's Creed with 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 no Juno, 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.

Shen: OK. So, I want to get to some ofthe other things you mentioned specifically, like that$16 ticket price, the reclining seats that you mentioned, as some of the trendsI think we'll see more and more of, especially in 2017. Butlet's go back to Disney for a little bit. As of right now, for this past year, Disney has been theundisputed king of the box office. Over $3 billion in ticket sales across about 16 titles. It blew me awaywhen I was looking at this top 100 listing, how many of the biggest movies came from Disney. Half of their releases managed to break the $200 million benchmark. Their top five titles put up anywhere from $350 to almost $500 million each, which is incredible.

Kline: Disney has an amazing formula. Everyone questioned, when they boughtPixar, when they bought Marvel, when they boughtLucasfilm, I believe it was $7 billion, $4 billion, $4 billion, for those. But what they have isguaranteed success. The Pixar animated name, whether it's a sequel likeFinding Dory or new film, parents are going to see that. It's just a brand that,to a certain age group, is going to appeal, and if it breaks out to adults, you'll go from a $500 million film to a $1 billion film, like Finding Dory was globally. Then you have at least two Marvel movies every year. Those are going to be hits. TheAvengers will betop tier, $1.5 to $2 billion globally. Maybe your Doctor Strange will only be $700 to $800 million. Then you have one Star Wars film a year. Rogue One, we're not there yet, is probably going to do about $1.25 billion globally, down from Force Awakens at a little over $2 billion but still a very profitable movie, about $300 to $400 million profitable. It's just a formula. Then you have things coming up in 2017, like live-action Beauty and the Beast, and more sequels, eventually that Frozen sequel. And you see that Disney has taken a lot of the risk out of making movies.

Whereas, if you put out a movie, and it's a big blockbuster, say, Avatar, before it came out -- you put that out, and nobody knows the property, it's a huge risk. It could just as easily be a John Carter, which was a huge bomb, based on a literary property. It could just as easily be that as it could be a hit. But Disney has absolutely eliminated that risk. And they own enough franchises that they can do it year after year after year.

Shen: So, Disney, if we see them as the big winner this year in terms of studios, one studio that I want to look at really quick as being on the opposite side of that and dropping quite a bit wasUniversal, and how they struggled to maintain momentum. They were the major leading studio in 2015. They set their own record for the annual box office. But then they fell three spots this year, to No. 4.

Kline: Yeah.Universal has a cyclical problem. They don't have enough franchises toguarantee being at the top of the box office every year. They'll come back next year,because they will have Fast & Furious 8,I'm not sure when the next Jurassic Park sequel comes out, they'll have aFifty Shades of Grey sequel. The problem is, and it's part ofwhy they boughtDreamWorks, is they can't put out a Minions movie every year. They can't put out a Fast and the Furious every year. They don't have the big universes that Disney has. They do have the hit properties. But they need,probably, three or four more of them to have consistency. So, Comcast (NASDAQ: CMCSA) had warned that this was going to be a down year, year-over-year. It had to be. They just didn't have the pipeline. Next year will be a big comeback.

I think the real loser isFox, which has reallystumbled with its superhero movies, aside from Deadpool, which was a surprise,out-of-nowhere hit thatcovered a lot of mistakes. ButX-Men: Apocalypse didn't do very well, you have a very questionable Spider-Man reboot coming up, Logan is a very dicey prospect coming up; it's a very dark, R-rated superhero movie. Fox had a down year,and I don't necessarily see them having a comeback. But Universal is going to crush it next year.

Shen: Yeah, they definitely have a much stronger slate for 2017. Keep in mind, they had a slightly smaller number of releases. But, they also had, with just one film, which really surprised me, afterlooking at the lineup that Disney put out,they only had one film, which wasThe Secret Life of Pets, which managed to cross the $200 million mark during the year. If youlook at the 2015 average takeacross all their releases, it was well over $100 million, almost $110 million. For 2016, it was only $70 million. So,the cycle that you mentioned, that is a verysubstantial margin.

Kline: Jurassic World and Fast and Furious were a big part of that last year. They just didn't have the releases. But to go over the overall box office, you remember when $100 million domestically made a hit? Well, the No. 19 domestic film this year was Ghostbusters. AndGhostbusters was a flop. It did not make money. And that's a film that took in $128 million at thedomestic box office. Now, it didn't play that well globally,and it didn't play at all in China, so that hurt it. Butyou can see that for these blockbusters, thestandards have gotten very high,and it almost doesn't make sense to release something unless you think it has franchise potential. Now, two years from now, Universal has The Secret Life of Pets 2 -- I assume. I haven't seen The Secret Life of Pets, maybe they all die, but probably not [laughs]. So,they have that sequel, and they can pump out of franchise, and maybe then they could spin off one of the dogs or the cat or the bird,or whatever other animals are going on there.

Shen: OK.I did want to spend a little bit of timetalking also aboutthe theater operators themselves.AMC(NYSE: AMC) hasdefinitely been the busiest of the bunch for 2016. They acquired bothCarmike Cinemasand Odeon& UCI, which is the biggest European theater operator, all in 2016. I think just within three or four months of each other. After closing them, AMC will be the largest theater operator in the world. They'll have 900 theaters, 10,000 screens. The Carmike deal cost about $1.1 billion. This is mostly a domestic operation. It's going to complement AMC's existing market penetration in the U.S., whereas Odeon, the largest operator in Europe, a similar purchase price, about $1.2 billion. That gives AMC a strong position in markets like the U.K., Spain, Italy, Austria, and Portugal.

With the first three quarters of results available that I have here for 2016, the company reported record revenue for both their admissions and food and beverage. So,getting a little bit to what you had talked about previously,in terms of making that theater experienceas welcoming as possible. People are paying more for each ticket, obviously an effect of some of the formats, like IMAX and 3D. But they're also buying more at the concession stand. The average ticket is now, like, $4.80 in terms of food and beverages and snacks. And with the amenities, in terms of theater renovations, reclining seating, seat reservations -- do you feel like that's just going to be the way they can constantly keep the price up?

Kline: They have to up the movie experience. That's going to mean things like beer and wine service in theaters, you're going to see more AMC theaters that actually have food beyond nachos and chicken fingers. You're going to see higher-end candy. You're seeing coffee bars likeStarbucks, or Starbucks, but in a lot of cases, faux Starbucks coffee bars. And if I'm going to spend the money -- $16 to see Assassin's Creed, which, I cannot tell you how terrible that was -- it'd better have a good snack and a comfortable chair. This theater had reclining chairs. It had reserved seating. Andreserved seating is nice because you don't have to get therea half hour early and sit through all the terrible commercials they're playing for you. So, I see this as a time for theaters as, they'regoing to have to lose some screens, they'regoing to have to build some megascreens todeliver that experience, they're going to have to build some tiny screens to show arthouse stuff.

And you'realso starting to see some of the theaters branch way beyond movies. In Boston, you can watcha lot of home Red Sox games in movie theaters. You're seeingoperas and concerts and one-off events,UFC, other things, in theaters. It's, really,you have this real estate,and there's only a certain level of movie, maybe 10 or 15 movies a year, that might getpeople out of the house,so you need to make that experience great. Then, maybe, on aSaturday at a matinee price, I'm going to go see, I don't know, theHarry Potter movie or something I don't really want to see, butI know I'm going to get some great snacks and a beer, or whatever it might be.

Shen: Yeah. Takeaways, then, for our investors who are listening, for thehandful of companies that we've discussed, a few things I wanted to point out. For Disney, as the king of the box office, as we've described it, keep in mind, the Studio Entertainment segment makes up about 17% of their revenue and operating income. But, on that note, for its most recent fiscal year, which ended back in October, on the 1st, Disney Studio Entertainment revenue was up 20%, operating income up 37%. That's the highest growth shown, by far, of the four major segments of the company. The main thing that I'm looking at for Disney is, each box office win translates, for them, to new characters, new heroes, new toys, new TV shows, new rides for the parks. I think the fact that the company is able to deliver one blockbuster after another is a really important signal to any shareholder that management definitely has its fingers on the pulse in terms of what its target customers and movie viewers want.

And I would also add, for its top three films of 2016, which happened to also top the overall box office, all three titles were the product of acquisitions. Finding Dory from Pixar, Rogue One from Lucasfilm, and Captain America: Civil War, of course, from Marvel. I think it's no coincidence that CEO Bob Iger held the reigns for all three of those deals when he acquired those properties. His leadership abilities have come up again and again on the show. What happens, then -- something else to watch, if you're an investor -- when he officially retires in 2018,I think the new leadership will have a pretty well-oiledmachine for most parts of the business, but there's still the issue, forESPN, for example, and the influence that it holds in the changing landscape of cable and television. We've also, Dan and I, discussed that on this show.

Kline: Here's the thing. Disney is a cash machine. And I'm not 100% sure -- I don't buy that Iger is going to retire in 2018. I don't see why you would change captains on that ship. Disney, and Comcast to a lesser extent, can take a property like Star Wars and get everything out of it. So, not only are there Star Warslicensing,I believe I read aVanity Fairarticle this morning that said that Force Awakens made $500 million inlicensing fees for Disney in the first year. So, not only is there that army that gets you toys, andStar Wars sheets, and lunch boxes, and all that stuff, but they also threw together someStar Wars events at the theme parks that draw people while they're building Star Wars Land, which isprobably going to be the next major theme park driver in both Florida and California. And, they're advertising a one-day Disney Star Wars cruise in Florida, where I live. Basically, if there's anything Star Wars -- I mean, I'm literally wearing Star Wars boxers shorts while I do this show -- if there's anything Star Wars, Disney can exploit it. Comcast can do the same thing with its theme parks andlicensing, maybe not as well.

And absolutely, ESPN is going to keep taking haircuts. But as rights deals come up, they can push thatback to the sports. They don't have to pay $1 billion forNFL rights. They could go to the NFL and say, "Hey,it's a changing market." And if they lose some rights,that's probably not going to change very much. So, you're going to see some economy change inthe next few years. But for the film economy,it's a machine. They're going to have five or sixguaranteed hits every year. If they can find another Frozen, another animated property that can spin off and become a bunch of movies, it'sonly going to get better for Disney,because I don't see Star Wars, or Marvel, or Pixar petering out anytime soon.

Shen: Fair enough. For Universal, then, aspart of Comcast,keep in mind, this film entertainment segment is just 8% of the top line. Even at theNBC Universal division, which is, in my view, much morecomparable to Disneyif you look at them one-to-one,the cable networks and television businesses are still the lion's share of revenue, similar to Disney. Even with filmed entertainment, for Universal, it's down 20% year-ove- year for these first three quarters of 2016. It's really not, in my view, a huge blow, if you're a Comcast shareholder. I think, we talked about it earlier, 2017, the cycle returns to its favor with some really big, established franchises coming out.

Kline: And they bought DreamWorks, so they got a few properties that can bolster their slate. They had this hit with The Secret Life of Pets. So, I would look. Maybe they're an acquirer. There's not a ton out there,in terms of franchises that are available. ButComcast only needs maybe two or three more properties. Maybe Kung Fu Panda has tired out. Maybe they can get another Shrek movie out. But Jurassic World has a ways to go, and the Fast and the Furious, it seems like they could be doing 12 Fast 12 Furious and people will still see it [laughs].

So, Comcast isn't Disney, but they're getting close. It wouldn't shock me if they were to maybe buy some rights fromSony, or do something like that. But, this is becoming a business where it's all aboutguaranteed hits, where you're just not going to see a lot of Passengers, or Lone Ranger, or movies that are sold based on stars or premise. You're going to see franchises and things that can be franchises. It's why they're already planning at least two more Fantastic Beasts spinoffs. You know the audience, you can build it, you can see the market, you can sell the books, all the other stuff. And Comcast isn't there, but they're going to get there.

Shen: All right. Last point before we wrap up this episode, in my view, for 2017 and beyond, frankly, is that the biggest winner for all of this, beyond Disney, is actually probably going to be China. The Chinese government has been quite public, I think, in its desire over the past several years to export more culture and influence as an established superpower. Film and television are obviously a huge part of these efforts. Keep in mind, theWanda Group is a massive Chinese conglomerate; they own AMC, they own other theater chains, they're the biggest operator in the world. They own a whole host of media companies, likeLegendary Entertainment. Youcombine all that with theimportance that the Chinese market has to most majorHollywood releases at this point, andit should be the biggest box-office market starting this year in 2017. And we're going to only see more and more movies and TV shows cater to this market. The deal might be undernegotiation, and the authorities only allow 34 foreign film releases per year in China. Studios fightreally hard for those slots.Ghostbusters, for example, did not get that, and we saw their international take really struggle. What do you think, in terms of the place that China plays in terms of their audience and everything?

Kline: It'sunbelievably huge,because there's a way to get around those 34 slots, and that's to have a co-production company in China. The upcoming Matt Damon movieabout the Great Wall of China, I think it's called The Great Wall,that movie takes place in China,it's made in conjunction with Chinese companies, so it gives it access to that market. We did see some movies this year, likeWorld of Warcraft, which bombed in the U.S. but made their budget back -- or at least did very well -- in China. But this is a case whereChina has a lot of cards. When Hollywood is saying, "I want you to release Rogue One," they can say, "There's only so many slots, and here's what we want you to do. We want more character representation. We want product kickbacks," or whatever it is. Hollywood, with these big-budget movies, is very muchbeholden to the Chinese market.

Now, that changes a little bit when China has seen Rogue One, and they're looking forward to Rogue Two, though we both know Rogue Two isnot likely to happen. But when they're looking forward to the next Star Wars movie, then maybe the audiences start demanding what they want. But for the next few years, China is sitting in a position where it can demand concessions from Hollywood, and it's been able to get them. Some of these movies -- I don't think you see a movie like Moana, the Disney movie (and I apologize if I'm not pronouncing that correctly), that had a much more diverse cast than the traditional, very white Disney princess movies, if you don't have a global influence led by China. And I know it wasn't a Chinese character, but it wasn't the typical Ariel Disney princess. So, absolutely, everything is different. You're not going to see your very smart talk-yBen Affleck movie play in China. That's influencing what gets made.

Shen: Yep. Any other final thoughts orpredictions that you have for 2017? Like I said for mine, the growing influence in that market. Also,I'm very curiousto see what happens for Disneyin terms of its succession plan.I know you're doubtful about 2018. Iger has been pretty set about that timeline,because he has already postponed it three or four times at this point. But overall, it's always a cycle, how the studios rank. They always fluctuate depending on the release schedules. I'mvery curious to see what this year is going to be like. What about you?

Kline: I think there's only one thing you can be really sure of in the coming year, and that's whatthe biggest movie of 2017 is going to be.

Shen: Yes, that's fair.

Kline: It is going to be Star Wars: Episode VIII. Perhaps we'll have to do a show from waiting in line to go see Star Wars: Episode VIII, because we'll probably have to do that two or three days in advance to get into a big screening. But there are a handful of movies coming out this year. This trend we've talked about all episode is only going to get stronger. We're going to see aDespicable Me sequel,we're going to see the next Fast and the Furious,all of these big movies are going to be big. And if you look at the slates, or you even watch thepreviews that I saw at the movies yesterday, other than low-budget horror films, you're not going to see a ton of original swings from the fences. It's going to be more of the same,as long as the audience keeps buying. If they keep making Star Wars films and Marvelsuperhero movies, I think people are going to to keep buying.

Shen: So,just like 2016, more franchises, more sequels, more animated movies --that's what it sounds like to me.

Kline: Betterpopcorn and craft beer [laughs].

Shen: Thank you, Dan, for joining me. Remember, listeners, that you can always reach out to the entire Industry Focus crew via Twitter @MFIndustryFocus. Yousend us any questions via email at industryfocus@fool.com. Go to fool.com/podcasts to check out our otherawesome shows, and please rate us on iTunes. Peopleon the program may own companies discussed on the show,and The Motley Fool may have formal recommendationsfor or against stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Thanks for listening, and Fool on!

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 Starbucks and Walt Disney. The Motley Fool has a disclosure policy.