Case study — Media & entertainment · 11 min read · 5 questions
Why there’s no money in making movies
The thesis
The Big Five do not survive on movies, they survive on everything else. Filmed entertainment is $3.7 billion inside Paramount against $21.4 billion of television; $13.8 billion inside Warner Bros. Discovery against $23.2 billion of television; $8.1 billion inside Disney against $28.7 billion of parks. Sony makes movies beside semiconductors and financial services. A flop is absorbed. Lionsgate has exactly two businesses — movies and television — so a flop is simply a loss.
That exposure is why the company's history reads as two jackpots and a long wait between them. Saw grossed $100 million on a $1 million budget and reset the trajectory; the Hunger Games and the Summit acquisition doubled revenue to $2.7 billion in a single year and lifted the motion picture division from $1,190 million to $2,329 million. But franchises end, and by 2016 the same division was falling while the majors kept releasing.
So Lionsgate bought its way out of being a supplier. It had made Mad Men for AMC and Orange Is the New Black for Netflix and captured none of the brand equity, so in 2016 it paid $4.4 billion for Starz to go direct-to-consumer. Starz is profitable — one of the very few streamers that is — but its operating income has fallen from $436 million to $107 million, it carries the highest churn of any service at 9.7%, and the whole of Lionsgate is now valued at around $2.1 billion. The parts are worth more than the whole.
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The statistics
By the numbers — swipe or use arrows
Segment revenue, operating margins, debt, net income and market capitalization from Lionsgate annual reports and filings for the years shown; box office, budget and territory figures as presented in the episode; comparator studio budgets, streaming subscriber counts, churn rates and acquisition prices from company disclosures and reported figures
Key takeaways
The Big Five take over 80% of the domestic box office, and none of them lives or dies on it. Paramount books $3,706 million of filmed entertainment against $21,372 million of television; Warner Bros. Discovery $13,798 million of studios against $23,186 million of television; Disney $8,146 million of movies and TV against $28,705 million of parks and cruises.
Lionsgate has two businesses and no cushion: $1,323 million of movies and $1,760 million of television. There is no cable division, no theme park and no consumer electronics arm to absorb a bad year, which is the single fact that shapes everything that follows.
And bad years are structural, not exceptional. Blade Runner 2049 spent $185 million and took $92 million domestically; Cloud Atlas $102 million against $27 million; Sunshine $178 million against $4 million; Edge of Tomorrow $178 million against $100 million. Good films flop routinely.
Which is why the majors have got conservative. Average production budgets run $229 million at the top of the range against $38 million at the bottom, and the studios release roughly 10 to 25 films a year. Fewer, larger, safer — superhero films, remakes and sequels where the ROI is knowable.
The economics are brutally front-loaded. Avengers: Endgame took $473 million in its opening week and $187 million in its second, then $81 million, $40 million and $26 million — down to $0 by week fifteen. The Batman went $173 million, $91 million, $48 million, $27 million. Everything after the first fortnight is a tail.
International is where the real money now sits. Avengers: Endgame took $858 million domestically and $1,930 million overseas against a $400 million budget; Top Gun: Maverick $718 million and $754 million on $180 million; Pirates of the Caribbean: At World's End $309 million and $652 million on $300 million.
That purchase was the smartest thing the company did. It brought a library of over 8,000 titles — Terminator 2, Total Recall, Basic Instinct, Reservoir Dogs — taking Lionsgate from 1,500 owned titles to 8,000 in a year. Old films earn through syndication indefinitely, which is recurring revenue in a business that has almost none.
Then the indie jackpot landed. Saw grossed $100 million on a $1 million budget, Fahrenheit 9/11 $220 million on $6 million, and Diary of a Mad Black Woman $50 million on $5 million. Revenue went from $376 million to $838 million in a single year and the motion picture division from $309 million to $755 million.
Indie was a real structural edge, not luck. The Passion of the Christ made $371 million domestically on a $30 million budget, My Big Fat Greek Wedding $241 million on $5 million, and The Blair Witch Project $140 million on $1 million. Lionsgate's films ran at a half to a third of major-studio budgets, so the hit rate needed to clear was far lower.
Chasing the majors undid that. Between 2007 and 2012 revenue grew from $977 million to $1,587 million while net income ran −$15 million, −$87 million, −$180 million, −$30 million, −$30 million and −$39 million — six consecutive losing years, because bigger films meant bigger flops in Conan the Barbarian, Gamer and Punisher: War Zone.
The Hunger Games rewrote the company in one year. It took $690 million worldwide on an $80 million budget, and combined with the $400 million Summit acquisition — which came with the Twilight franchise — total revenue nearly doubled to $2.7 billion and the motion picture division jumped from $1,190 million to $2,329 million.
Television was the quieter, better business. Mad Men made AMC a must-watch network at $2–3 million an episode, Orange Is the New Black did the same for Netflix, and the TV division grew from $100 million in 2007 to $500 million by 2015 — at operating margins that regularly beat the movie side.
But Lionsgate captured none of the brand. Nobody knew Mad Men was made by Lionsgate; the credit and the subscribers went to AMC and Netflix. That is the frustration the Starz deal was meant to solve — owning the customer instead of supplying the people who do.
So in 2016 Lionsgate paid $4.4 billion for Starz — roughly four times revenue. Set against the rest of the decade that is the outlier: MGM went to Amazon for $8.5 billion with James Bond attached, Pixar for $7.4 billion, Lucasfilm for $4.1 billion, Marvel for $4.0 billion, Dreamworks for $3.8 billion and Miramax for $0.8 billion.
Its structural weakness is being an add-on. Starz carries the highest monthly churn of any service at 9.7%, against 8.2% at Showtime, 7.1% at Apple TV, 6.5% at Max, 5.0% at Hulu and 3.4% at Netflix. A complementary subscription is the first thing canceled when discretionary spending tightens.
The market has repriced the whole thing. Lionsgate's market capitalization peaked at $6.1 billion in 2016 — the year of the Starz deal — and has since run $3.5 billion, $3.2 billion, $2.2 billion, $2.3 billion, $3.5 billion, $1.2 billion and $2.1 billion. The studio, the television business and Starz together are worth about half what Starz alone cost.
Common questions
Why do the big studios survive flops when smaller ones can't?
Because movies are one line item in a conglomerate. Filmed entertainment is $3.7 billion inside Paramount against $21.4 billion of television, $13.8 billion inside Warner Bros. Discovery against $23.2 billion of television, and $11.6 billion inside Comcast against $66.3 billion of cable. Disney's movie and TV business is $8.1 billion against $28.7 billion of parks. A $150 million write-off is absorbed by the rest of the business. Lionsgate has only movies and television, so the same write-off is simply a loss.
Why did Lionsgate buy Starz?
To stop being a supplier. Lionsgate made Mad Men for AMC and Orange Is the New Black for Netflix — both defining hits — and captured none of the brand equity or subscriber growth they generated. Buying Starz in 2016 for $4.4 billion was meant to fast-track it into direct-to-consumer without building a platform from scratch, so a hit show would bring subscribers rather than just a licensing fee. The logic was sound; the price was roughly four times revenue.
Was $4.4 billion too much for Starz?
By the standards of the decade around it, yes. Amazon paid $8.5 billion for MGM with James Bond, Vikings and The Handmaid's Tale attached. Disney paid $7.4 billion for Pixar, $4.1 billion for Lucasfilm and Star Wars, and $4.0 billion for Marvel. Starz cost $4.4 billion with Power and Outlander. The whole of Lionsgate — studio, television business and Starz combined — is now worth about $2.1 billion.
Is Starz actually a bad business?
No, and that is the awkward part. Starz is one of very few profitable streaming services, priced deliberately as a cheap complement rather than a Netflix replacement, with no sports, no kids programming and no news. The problems are that its profits are shrinking — operating income has fallen from $436 million to $107 million — and that being an add-on makes it the first subscription canceled, which shows up as the highest churn of any service at 9.7%.
How does a movie actually make money after theatres?
Through a sequence of windows, each cheaper and wider than the last. Theatrical comes first and is where the most is recouped — The Batman cleared its $200 million budget in two domestic weeks. Then home entertainment or TVOD, which is what DVD, Blu-ray and digital rental collapsed into. Then subscription streaming, often split into two or three sub-windows sold to the highest bidder first. Then cable television, and finally syndication, which runs indefinitely and is why old libraries are so valuable.
Why is a movie's opening weekend so important?
Because the drop-off is immediate and steep. Avengers: Endgame took $473 million in week one and $187 million in week two, then $81 million, $40 million and $26 million, reaching zero by week fifteen. The Batman went $173 million, $91 million, $48 million, $27 million. Roughly everything is decided in the first fortnight, which is why marketing spend is concentrated on a single weekend and why studios fight over holiday release dates.
What made Lionsgate successful in the 2000s?
Cheap films and an old library. Its movies were made on a half to a third of major-studio budgets, so the bar for profitability was much lower — Saw grossed $100 million on a $1 million budget, and the wider indie wave proved the point with The Passion of the Christ at $371 million on $30 million and The Blair Witch Project at $140 million on $1 million. Buying Artisan Entertainment for $220 million took the company from 1,500 to over 8,000 owned titles, and old films earn through syndication forever.
What was Lionsgate's 10/90 television model?
Skip the pilot: Lionsgate would produce ten episodes straight, and if those ten hit an agreed ratings or viewership target, the buyer was contractually obliged to order the remaining ninety. It gave Lionsgate predictable high-margin work and gave the network delivery certainty. It failed because it assumes audience interest is static when in practice most shows fade by their midpoint — FX ended up bound to ninety episodes of a Charlie Sheen sitcom whose ratings had collapsed.
What happens to Lionsgate now?
The company is separating Lionsgate and Starz into distinct entities, which is an admission that the 2016 combination destroyed rather than created value. Television is still the bright spot — it remains the leading independent supplier, with series running on HBO Max, Apple TV, Starz, Showtime, Netflix and Amazon. The real asset is the film and television library, and the plausible buyers are the tech companies with enough cash that several billion dollars is a rounding error.
Discussion
The Big Five absorb a flop because filmed entertainment is a fraction of their revenue — $8.1 billion of movies against $28.7 billion of parks at Disney. Lionsgate has only movies and television, so a flop is simply a loss. What does that do to which films get made?
No answers yet — be the firstSaw grossed $100 million on a $1 million budget and reset the company's trajectory. How should a business plan around outcomes it cannot manufacture on demand?
No answers yet — be the firstIf the majors' film divisions are effectively subsidized by television, parks or semiconductors, what is the film business actually for inside those companies?
No answers yet — be the firstLionsgate's history reads as two jackpots and a long wait between them. Is that a strategy problem or the nature of the industry — and how would you tell?
No answers yet — be the firstYou run Lionsgate. Do you seek the shelter of a larger portfolio, or is there a version of standalone that works? Argue the harder side.
No answers yet — be the first
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