Meet the Big, Successful Movie Studio Without a Blockbuster

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Glen Wilson/Universal Pictures/AP"Neighbors," which stars Zac Efron, was Universal's highest-grossing movie in 2014.
It's an article of faith that the big Hollywood movie studios spend much of their capital and energy making huge, bloated tentpole films. By and large that's still true, but last year there was one notable exception.

Comcast's (CMCSA) Universal, one of the oldest of the old-line Hollywood movie houses, didn't have a single monster-budget film in release in its fiscal 2014, which traditionally runs from January to December. In spite of that, Comcast says the division is on track to record its most profitable year ever.

Once in a Century

It's quite a feat to claim that all-time record. That's because, in one form or another, Universal has been in the film business for over a century.

Comcast's definition of "profitability" is a bit loose -- specifically, it's referring to operating cash flow (i.e., the money generated by its normal business activity). On a year-over-year basis, that metric more than doubled in the first nine months of last year, rising to $634 million from the previous $291 million.

Regardless, that winning effort helped lift Comcast's adjusted net profit by 11 percent to $1.9 billion. More impressively, the film unit's win also came in a down year for movies generally, with total annual domestic gross ticket sales coming in at $10.4 billion for the industry. That was down by 5 percent from the previous year's figure, and represented the lowest level since 2011.

Cheap and Cheerful

None of Universal's 2014 releases made it on the list of top 10 domestic box office grossers for the year. In fact, the studio barely made the top 20, with the comedies "Neighbors" and "Ride Along" coming in at No. 19 and 20, respectively.

Comparing the gross of the former with the year's No. 1 -- Lions Gate's (LGF) release "The Hunger Games: Mockingjay -- Part 1" -- is almost unfair. "The Hunger Games" inhaled over $333 million in U.S. ticket sales, while "Neighbors" rang up $150 million. Considering that, if even a few of the 14 movies Universal released last year had had tentpole budgets, the unit very likely would have ended up in the red. That it didn't is, to a great extent, due to cost savings.

Comedies (since they rely on laughs rather than bang-bang action or special effects) are typically cheaper to produce than other types of films. The two aforementioned studio offerings were both inexpensive relative to their grosses; "Neighbors" cost about $18 million to make to earn that $150 million, while the numbers for "Ride Along" were a respective (and very respectful) $25 million and $135 million.

In fact, only two of Universal's 2014 releases crossed above the $50 million budget mark -- the Angelina Jolie-directed World War II drama "Unbroken," a clear hit, and the rather unsuccessful vampire saga "Dracula Untold."

Those were small change in terms of budget compared to the tentpoles released by others. "Guardians of the Galaxy," from Walt Disney's (DIS) Buena Vista, had a budget of around $170 million. And that was a relative bargain: "The Hobbit: The Battle of the Five Armies," from Time Warner (TWX) unit Warner Bros., cost around $250 million.

By Design or Accident?

At first blush, it seems like a clever, basic strategy from Universal -- film low and sell high. But its non-tentpole 2014 might be due more to timing than anything else.

That's because it fell between major tentpole release years for the studio. In 2015, it will unspool a big-budget sequel, "Jurassic World." Ditto for two other follow-ons, "Furious 7" (the latest in the apparently endless "Fast & Furious" car-thief franchise) and "Minions," the new offering in the "Despicable Me" series. The previous installments of the former two films were both released in 2013.

No matter: Going the modest route worked for the studio last year, better than a traditional tentpole approach did for certain rivals. Viacom (VIA), the parent company of Paramount, saw a 12 percent year-over-year decline in operating income for the filmed entertainment segment in its fiscal 2014. Meanwhile Lions Gate eked out gross income growth of only 6 percent across that same time span.

A Sturdy Structure

But we shouldn't expect the death of the tentpole. There are still truckloads of money to be made from big bets, after all. Exhibit A: Disney, which in its fiscal 2014 released a hard-to-believe four high-budget box-office champions (although it should be kept in mind that Disney's fiscal year ends Sept. 30, as opposed to Comcast's January-December time frame). Among these was "Frozen," grossing over $1 billion in global ticket sales.

That sort of number, plus Hollywood's tendency to hew to tradition and not change particularly quickly with the times, will ensure that the tentpole status quo remains. But if one or several studios ever face a lean period, perhaps they'll take heart from Universal's quirky 2014 and realize they can live without those king-size budgets they love so much.

Motley Fool contributor Eric Volkman not only owns shares of Lions Gate Entertainment and Walt Disney, and he also lives in Hollywood. The Motley Fool recommends and owns shares of both Lions Gate Entertainment and Walt Disney. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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