Source: Disney via Image.net
Film

The Two Scariest Words for Hollywood Studios in 2016: Animated Movie

The genre offers the largest risks and rewards in the rush to find the next Frozen.

It’s a good year to be a kid at the movies—and a dangerous year to be a producer trying to turn a profit from Hollywood's animation-industrial complex. It's not that there isn't demand; it's just that there's an awful lot of supply.

The cartoon machine is buzzing like a server farm, with every studio queuing up at least one major release. “There’s a glut of these types of films at the moment,” said Cowen and Co. analyst Doug Creutz. “It’s highly unlikely they’re all going to work.”

Moana, from Disney.
Moana, from Disney.
Source: Disney via Image.net

Zootopia, from Walt Disney Co., got things started earlier this month with a booming $75 million box office debut. The Little Prince, from Viacom's Paramount Pictures, hits theaters on Tuesday. Sony’s Angry Birds Movie will launch in May, just before Disney's Pixar studio offers up Finding Dory, a follow-up to the smash hit Finding Nemo. Moana, another oceanic epic from Walt Disney Animation Studios, will arrive around Thanksgiving. 20th Century Fox is sliding out a new Ice Age in July. DreamWorks will also bring out Trolls, a vehicle for those wispy-haired toys from the 1990s, in November.

All told, 16 major animated titles are on this year's calendar, according to comScore, three more than in 2015. This is clearly a high point for the genre. 

Predictably, the supply boom comes down to economics. Animated films still offer the largest risk/reward equation in the movie business. It's the most profitable movie genre, averaging a 36 percent return over the past decade, according to analysis by SNL Kagan. Science fiction and fantasy films, with a 26 percent profit margin, took a distant second place, while dramas and comedies barely broke even.

Yet animation is also the most expensive genre. Software engineers and CGI artists don’t come cheap, and the sticky fingered masses demand A-list actors in animated fare, if only for their voices. Piper Jaffray analyst Stan Meyers said animated films generally cost about $100 million to make, as well as an additional $150 million to promote.

An executive producer who wants to drastically cut costs traditionally has two choices: water and hair. Those are the most expensive things to replicate accurately via animation. It's no mistake that the characters in Minions, the most profitable movie ever made by Universal, are virtually bald and don't seem to spend much time in the ocean.

Animation, as with all formulaic and saccharine film genres, tends to bring out Hollywood's blockbuster gambling addiction. The perverse incentives of the format means that fortune favors the spendthrift—the bigger the budget, the bigger the windfall. “In some ways, a $90 million movie is more risky than a $150 million one,” Creutz said.

Mr. Peabody and Sherman.
Mr. Peabody and Sherman.
Source: DreamWorks Animation

This means that when animated films flop, they flop hard. In fourth quarter 2013, DreamWorks took an $87 million write-down on Rise of the Guardians. Without the charge, the studio would have posted a small profit in the period, rather than an $83 million loss. A few months later, it had to take a $57 million write-down on Mr. Peabody and Sherman, a film that cost $145 million to make and far more to market.

Perhaps because of its Peabody drubbing, DreamWorks is one of the only studios showing some restraint on animation this year, cutting budgets and dialing output down from three movies a year to two. "It is a far, far more competitive marketplace now than it was three years, four years, five years, six years ago," DreamWorks Chief Executive Officer Jeffrey Katzenberg said at a conference on March 1.

Most of the industry is going the other direction. Its financiers have been emboldened recently by the potential for fat returns outside of theaters. Frozen's massive $1.3 billion in ticket sales was dwarfed by an estimated $6 billion in ancillary product revenue. (Perhaps you've heard the soundtrack?) Analysts predict that only about a quarter of the total revenue for the Star Wars: The Force Awakens will have flowed through the box office.

“Producers are almost thinking more about that side of the business and certainly earlier than ever before,” Meyers said. “It’s gone from toys to food and clothes and a bunch of other categories." Later this year, Trolls fans will be able to approximately replicate the movie characters' garish hair atop their own heads with a new line of dyes from DreamWorks.

Still, there’s a limit to how many action figures and movie tickets kids can whine out of their parents. And many of this year’s characters will be unfamiliar to today’s youths. Nemo and the Ice Age gang are the only franchises in the bunch. The Angry Birds may have helped avert road-trip meltdowns when encountered on an iPhone, but it remains to be seen whether they can topple a box office. And The Little Prince will finally answer a nagging question: Does French existentialism really have a place next to the Disney princesses and Shrek?

Those watching the industry will have a particularly difficult time this year separating the flops from the blockbuster franchises of the future. So far, the only clear winner is Zootopia, one of the least-anticipated movies on the calendar. Its massive debut set a record among Disney animated films in chalking up the eighth-largest haul for the genre, according to IMDb statistics. Not even Frozen put up those kind of numbers.

(Corrects the studio releasing the animated film Moana in the third paragraph.)
Before it's here, it's on the Bloomberg Terminal. LEARN MORE