NY Post: “Another Film Fiasco at Disney”

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Disney has announced a $50M write-down write-down for scrapping an untitled stop-motion animation film from Henry Selick, who directed “Coraline” and “The Nightmare Before Christmas.   The story came out yesterday when Disney CFO Jay Rasulo talked about it at a Bank of America Media Conference.   This is very interesting because, like John Carter (and unlike almost every other action by every other studio), Disney announced this mid-quarter as a standalone announcement.  It thus reflects a “new pattern”, perhaps — one that started with John Carter.  What can be learned from it?  I do think there’s a little bit of corporate shell game financial disclosure going on here — and I think this sheds further light on why the John Carter announcement was made like it was.

First, read this full article from NY Post and pay particular attention to the paragraph at the end:

After the $200 million “John Carter” fiasco, Disney is set to take another mega-million dollar movie hit.

The media giant, led by CEO Robert Iger, will take a $50 million write-down for scrapping an untitled stop-motion animation film from Henry Selick, who directed “Coraline” and “The Nightmare Before Christmas.”

The move will cut quarterly earnings by two cents a share, Jay Rasulo, the company’s chief financial officer, said yesterday at a Bank of America media conference.

While Rasulo didn’t elaborate on the reasons, the project was cancelled after the arrival of new studio boss Alan Horn. The movie was slated for release in October 2013.

Disney’s former film boss, Rich Ross, was forced out shortly after the “John Carter” debacle, which ranks as one of the biggest flops in movie history.

Rasulo also said advertising wasn’t as strong as expected, although he predicted a better fourth quarter.

“We did not see the kind of rebound after the Olympics that we thought we’d see, when we gave our last view of advertising with our third-quarter results.”

Now….reading slightly between the lines, what I see is that they are making this untitled future film project take the fall not only for the write-down associated with that, which can be shrugged off as “cost of doing business” as a studio — but is it possible that they are burying some of the shortfall in advertising revenues in that figure as well?  On the one hand, when the quarterly financials  come out — it seems like the two would be bifurcated since “studio entertainment” is where the write-down would be lodged, and “media networks” is where the shortfall in ad revenue would be lodged .  But these both feed down to the same bottom line and that bottom line is what determines earnings per share, etc.   So by making this announcement and setting the write-down big enough to cover the impact of BOTH the film stop and the ad revenue shortfall, it effectively re-sets the “expectations bar” and minimizes the damage in terms of stock price, etc.     Interesting.  Certainly not illegal or even improper, but clearly there’s a strategy there.

I would be interested in hearing opinions from those who may be better experts at this sort of thing than I am.


  • From Henry Selick’s Wikipedia entry:

    “In 2010, Selick joined with Pixar and The Walt Disney Company in a long-term contract to exclusively produce stop-motion films. This not only returns Selick to his original roots, but also reunites Selick with numerous former friends and co-animators. His new studio, called “Cinderbiter Productions” is self described as “a new stop-motion company whose mandate is to make great, scary films for young ‘uns with a small, tight-knit crew who watch each other’s backs.”

    Selick and Cinderbiter’s first film under this deal, a currently film project called ShadeMaker, is set to be released on October 4th, 2013. In August of 2012 it was reported that Disney had stopped production on the project, saying that due to “a creative and scheduling standpoint, the pic wasn’t where it needed to be to meet its planned release date.” Selick now has the option to shop the project to another studio”

    So apparently this is not a preemptive announcement as with John Carter, if the project was indeed stopped by August 17th. I think the situations are different. The article cited as reference in the wiki entry:


    Oddly enough, Henry Selick still has another project planned with Disney!

  • The NY Post article sounds like good ol’ corporate blame game as much as a shell game. It’s easier to blame some creative director and his animated film for lost money than an advertising exec who’s supposed to be more of a steward of corporate funds. The CFO’s also more likely to be golfing buddies with an advertising VP than Henry Selick, director of stop-motion animation.

    I don’t know anything about movie budgets and their development costs. Would be interesting to see how much cash Disney actually spent on a proposed animated film that had no title. Anywhere near $50M?

  • It’s something I cover in a good bit of detail in JCGOH. Short answers – yes, the bad PR hurt JC. Could the statement have been delayed? Yes. Was there a legal requirement for the announcement to happen by that date? No. However, the “legal requirement” that can be cited to justify the announcement is that as a public company, they are required to promptly disclose any “material events” that are going to have a substantial effect on the bottom line. It’s a judgment call as to what constitutes such an event, and normally the judgment is no, just bury it in the next quarterly financials. That’s what they (Disney) did previously with other flops. The change started with JC. However, this new announcement could indicate a new policy that started with JC. It’s pretty clear they are playing to “please the analysts as best you can” game in an effort to minimize impact on the stock price. In the case of JC, they in essence sacrificed a film in release to please the analysts and minimize stock price impact. In the case of this one — there is no film in release and no literary property being damaged, so it’s ‘no harm no foul’ to the movie.

    Is there some info on total income?
    You’ve got most of it. There is info on global box office and domestic DVD/Blu-ray. Nothing on the rest.

    What happens with a write-down if the film income increases or reaches a profit level?
    A write-down is a little complicate to explain. In film accounting they are required to project the 10 year total earnings of a film, which they typically project at cost. Meaning if film cost 250m to produce, they project 250m in 10 year earnings. (Marketing costs come out before the producer/owner gets anything, so this is $250m in net earnings to the studio after the Distribution arm has gotten its share). That 250m is then charged to the film over the 10 years — analogous to the way you charge off the cost of a fixed asset over a lifetime of service. I.e. you buy a bus for 70,000 and it has a 7 year life span, you charge 10,000/year. Same with a film, although it may not be “straight line” — they use something called “income forecast method” which allows them to make a weighted scale that reflects the fact that more money is earned in the first years, and less in the later years.

    So….the long and short of it is, once they do the write-down, that means they take the “hit” in that quarter. Thereafter, they only have a lower number (what remained from the budget after the writedown) to write down over 10 years …. in this case, if they started at 250m and wrote down 200m, that means they are only expecting 50m in net income to the producer after distribution and marketing costs are taken out. So yes, they would start showing a profit if it performs better than anticipated, but not a “real” or “absolute” profit because they would have already written off $200m as a loss. And they won’t go back and do a re-adjustment of the write-down…there is no incentive to do that.

    As you can see it gets complicated and you have to keep in mind that Buena Vista Distribution and Disney Studios are two different entities. So for example — theatrical revenue flows from the consumer ($10) to the theater who keeps some of that and remits the rest to BVD (call it $5, it’s a lot more complicated than that because in the early weeks more goes to the studio, in later weeks less, but 50% is okay to illustrate)….from that $5 BVD gets to take 20% fee, so now that’s $4. that $4 goes to Disney Studios, the producer/owner…but wait, it doesn’t go just yet because BVD invested $100M in marketing and it gets to recoup that from the $4 until that $100m is fully paid. Only then does Disney Studios begin to get money.

    So with 282 in theatrical gross — under that model, it would flow more or less (and this is rough because each theater contract is different, foreign is different from domestic, etc) like this:

    282 M – theatrical gross
    141 M – Buena Vista Distribution Gross
    28 M — Buena Vista Distributin 20% fee
    113 M — Available to recoup marketing expense and pay producer
    (100m) — Recoupment of Marketing Expense
    13 M — Amount finally paid to Disney studios to go against its $250m production investment

    Now, that amount is probably overstated because BVD doesn’t really get 50% of worldwide gross. In China, for example, it’s only 20%. A better figure when taking into account the whole world is probably 35 or 40% of gross.

    If you run it at 40% then 141M becomes 112m and you can reduce everything accordingly.

    Then you have to go through the same kind of process for DVD/Blu-ray, etc.

    You can see how they end up with a write-down of $200M. That doesn’t mean that JC will really end up losing $200M over its life span, but that’s how it looked on March 19 and even if it does better than that, we’ll never hear about it, they’ll never change that figure, and forever JC will be branded as having lost $200m. In the end, it might only lose $150m — but it’s definitely not in a position to change it more than that.

    The other thing to keep in mind is that what makes the numbers so bad is the high cost of production. If you produce a sequel for $150m and it earns, say, $400m globally instead of $282m, then the numbers start to add up just fine.

  • I am still puzzled by Disney’s March announcement about the huge write-down, since that bad publicity no doubt helped deter some of “John Carter’s” potential viewers. Could the statement have been delayed to avoid hurting the box-office? Was there a legal requirement for the announcement to happen by that date? Further — is there any information available about the film’s total income thus far? According to some public numbers, the box office was $282 mil and the DVD/BluRay sales in the US were approximately $60 mil. Are there any figures on income the film earned from downloads, rentals, airlines, etc? And how about DVD/BluRay sales abroad (I know that the film had respectable rankings for sales on Amazon in France and Germany). What happens with a write-down if the film income increases or reaches a profit level?

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