Comcast’s ‘Super Mario’ Lesson: Increase Theatrical Investment

Summary:

• I offer a look at the success Comcast has had with its theatrical output following the release of the “Super Mario” film.
• Comcast will continue to use movies as a way of powering its ecosystem and offset (to some extent) its linear challenges.
• Movies will be important to streaming and even to Hulu, should Comcast decide to take that asset from Disney.
• The stock is a long-term dividend play that can provide income for a media-growth portfolio.

In light of Comcast’s (NASDAQ:CMCSA) success with the Super Mario film, I want to take a look at the company’s recent theatrical output.

To do so, I will utilize in part Deadline’s annual estimates of ultimate movie profit from all sources – this would include physical/digital transactions and streaming licensing in addition to theatrical split with the multiplex industry.

While Comcast is mostly known for its cable/broadband utilities, it is transitioning from an overreliance on the linear bundle to an ecosystem focusing on broadband/wireless and content production. That will take time, but the company still produced over $120 billion in full-year revenue for 2022, $26 billion in operating cash flow, over $12 billion in free cash, and, from the company’s content division, NBCUniversal, $39 billion in top-line sales from which adjusted EBITDA of just under $6 billion was generated. Of that latter nearly $6 billion, the movie division was responsible for a little over $900 million in adjusted earnings before interest, etc.

Wouldn’t mind seeing that go higher and become a larger part of the profit mix (NBCUni theme parks, as an example, generated $2.6 billion of adjusted EBITDA). We can look at it as an opportunity for the company to increase efficiencies in content production, thus perhaps allowing for an increase in content quantity.

But the company increased its yearly dividend over 7% to $1.16 per share per year, and repurchased $13 billion of stock. Comcast is an investment idea for a media portfolio that wants to add income to growth. If the company plays its cards correctly, it could increase growth through content ecosystems that replicate the Disney (DIS) model…and arguably, something like the Super Mario film helps it in that regard (although that is not a wholly-owned IP on Comcast’s side of the ledger). At a 3% yield, Comcast shares are a consideration for a dollar-cost-average, long-term play, especially on down-day pullbacks as SA currently rates the valuation as average. One risk to the story for me is debt of well over $90 billion, which could lead to the company looking at some deleveraging events (maybe even involving Sky at some point, but that’s a topic for another day).

Comcast Goes To The Movies

Movies have always been important to NBCUni, and therefore Comcast. The company has had several blockbuster hits over the last year. Let me take an informal survey of their potential long-term impact.

The latest Jurassic World extravaganza was released last summer, and according to this breakdown estimate, it ultimately earned-out $230 million. That would mean after everything, such as video streaming licensing (merchandise revenue is not included in any of these analyses according to the trade site, so the important overall synergistic impact can be considered additive).

I like to see if a movie is profitable before it hits ancillary channels, and what I do is back out costs to make the film plus profit participation from the top line. It’s a rare case when that happens, and World is no exception to that seeming rule. Production/marketing costs of well over $300 million, profit participation of $80 million, and residuals of $37 million wipe out the $430 million take for NBCUni from a worldwide gross of about a billion dollars (that’s the money left over after splitting with theaters, and since there is some revenue here from China, keep in mind that territory doesn’t pay out as much as other ones). Granted, the participation/residuals are most likely paid out over time and not upfront after theatrical and before ancillary, but it is nevertheless a key point to me: if a theatrical hit can take care of all that before video/streaming/pay-1/et cetera, then it is truly a powerhouse financial winner in my eyes. Like I say, though, most films tend to need the ancillary to perform such a feat.

Wish we had estimates on who got what in the participation column, and I expect Spielberg must have captured a lot of that surplus bonus, but there are other stars to consider (e.g., Jessica Chastain) as well as the director. Nevertheless, it’s a good showing for Comcast’s content division. (It would be great if, someday, media companies would have to report such information.)

Next up are a couple cartoons, including one from DreamWorks Animation, a company I was able to own through its acquisition by the cable concern. The latest Puss in Boots iteration held its own through the Avatar onslaught in the month of December 2022. Again, production costs plus marketing of $240 million wiped out the $210 million of gross money the studio snared from the silver screens, but ultimate profit still comes out to $120 million. Thankfully, presumably because this is a cartoon and not a live-action production, participation expenses were low at $20 million (residuals came in at the same number). I know that the theory of using stars for voice actors centers on their brand-equity value and, more importantly, their social-media value, but I think it’s a shame studios pay up for that when more inexpensive thespians could be cast for the same roles. Universal released this one with an excellent marketing program, and as noted in the article, Netflix (NFLX) also paid for a window in addition to the Peacock placement. And as these profit analyses have pointed out, media businesses generate intercompany eliminations when their vertically-integrated streaming units gain access to content from sister studios. That’s important to note because it is another consideration of context for overall profitability (and, in recent times, as Wall Street grows impatient with streaming results, it may stimulate a new discussion on increasing sales to competing platforms as opposed to investing in streaming exclusivity, which sometimes leads to arguable overpayments to avoid complaints from the talent pool and its reps).

Besides DreamWorks Animation, Comcast also counts Illumination in its portfolio (it is co-owned in partnership by NBCUni and founder Chris Meledandri), a computer-cartoon company that has a reputation for hit family features produced at a reasonable cost (DreamWorks Animation looks like it has taken some lessons here, as its own cartoon was similarly priced). The latest Despicable Me episode displays some welcome economics. Production of the film, called Minions: The Rise of Gru, along with selling expenses set Comcast back by $240 million. Adding profit participation, residuals, and even interest/overhead brought such costs to a total of roughly $330 million, which compared very favorably to the $420 million Comcast counted as its take of the worldwide box-office gross. Total profit was estimated to be about $380 million once all channels were evaluated, but again, Peacock licensed the film for its platform in addition to Netflix, so there is some elimination there for accounting purposes. Plus, I would love to know details on how exactly the Illumination founder is ultimately compensated and if that affects what shareholders can count as their own. Be that as it may, one thing is for certain: Illumination is definitely a secret weapon in the cartoon wars, of which Disney is king (and of which the latter perhaps should think about increasing its theatrical cartoon output to keep up).

Which segues right into the Super Mario picture. That film, also by Illumination, is the 800-pound gorilla in the auditoriums…well, in part, anyway, because Donkey Kong is also in it. But the Bros. have, at the time of this writing, grossed well north of $800 million at the worldwide box office, on its way to better than a billion. Nintendo (OTCPK:NTDOY) partnered with Illumination/Comcast to produce the kind of project that works extremely well in today’s multiplex marketplace: IP that has incubated and matured for decades, skillfully made by a power-player animation outfit in partnership with a giant media conglomerate that possesses an entertainment ecosystem able to promote it with excess capacity. Mario is also said to have a budget of $100 million, which should also make this one a highly-profitable affair, but it is a bit of a blurry profit picture insofar as Comcast is concerned since it most likely has to pay out monies (beyond upfront licensing) to Nintendo for the privilege of using its iconic set of characters. Fair enough, certainly, and I have not forgotten that the partnership with the video-game concern extends to the parks as well.

But I do enjoy wholly-owned IP, which brings me to the low-budget horror-film model. This is an area in which investment efforts should be redoubled. These films can generate nice ROIs while simultaneously synergizing with streaming services. They also can launch franchises all their own, without the assistance of a video-game company.

Comcast had exposure to this genre of filmmaking with two entries: Megan and The Black Phone. Both are part of the Blumhouse moviemaking model, with the former dancing away with just under $80 million in surplus while the latter called up just under $68 million. Annoyingly, we have no Illumination effect – i.e., theatrical revenue did not bring the movies to profit alone. In fact, the participations were relatively heavy given the box-office grosses – Megan paid out $35 million, as did Phone. Both had worldwide takes in the $170-million area. Streaming payments were high in both cases as well, with $100 million allocated for each, which probably means those backend payments helped to bring up the participation costs, and again, it’s a vertically-integrated company paying itself a premium to avoid sweetheart-deal appearances. This is the weakness of the Blumhouse model – high backends are promised in exchange for smaller upfront fees. Another weakness: marketing costs are high on lower-budgeted fare; it’s almost as if there is a profligate instinct in place since the production budget was kept in check (or perhaps something more insidious is going on: talent wants to make sure that the film is promoted at all costs to capture the downstream bonuses, so agents/managers start working their cells and lobby like heck). Still, I think it is worthwhile to invest in these kinds of pictures, even if they are more of a long-tail business versus the tentpole approach: the model just needs to be manipulated into a different set of spreadsheets. For one thing, keep those intercompany eliminations going by only using company-owned platforms for promotion – purchase ads on NBC instead of ABC, as an e.g. Social-media leveraging can also make for an efficient activation campaign. Plus, even though it’s pretty tough to come up with a solution for this, anything that can be done about the profit participation payouts would be welcome. Granted, Jason Blum would counter that his model is predicated on the profit-sharing line, so that line of argument would be a non-starter until some new compensation innovation comes along (in lieu of that, do as much limited-shooting-days slotting as possible for the major talent and have the smaller talent occupy most of the onscreen real estate).

Comcast has some major projects to come this year, including Fast X, which has a high probability of being a blockbuster, and a couple of Jason-Blum-produced horror features in time for Halloween: a new take on The Exorcist as well as an adaptation of the popular Five Nights at Freddy’s franchise (I like how both are being released in October, as the goal should be to capture as much market share as possible and not worry about cannibalization, especially given that the projects probably go after two separate demos in terms of age quadrants). Of course, as is to be expected in the movie industry, the company certainly will have its share of disappointments, as with the recent Renfield horror comedy, which unfortunately hasn’t made waves at the box office (an anemic $11 million at worldwide multiplexes so far as of this writing).

Yes, Comcast is a cable giant contending with cord-cutting, linear declines. This is why further optimization of NBCUni’s movie slate is crucial: the movie business is risky and expensive, but with the entertainment ecosystem at its disposal, Comcast has an opportunity to build its content division into an offsetting enterprise. Movies also may be of value if the company decides to shift its asset base around.

The Hulu Discussion (In Brief)

Everyone who follows the media space – and, for certain, shareholders of Comcast and Disney – know that Disney’s streaming unit Hulu will either become fully-owned by Disney or sold off to Comcast within a year or so. Bob Iger has hinted that he would like to transfer full ownership over to the cable concern; Comcast has indicated it wouldn’t mind receiving a bunch of money instead. And I myself have previously stated that Comcast should just take the money.

However, Comcast conceivably could want Hulu in its asset portfolio, so let me consider that other side here for a moment. And remember: a thriving theatrical-movie slate will help add value to the streamer, no matter who owns it.

Hulu might, as many have speculated, be used to give Peacock a new competitive strategy. The Hulu subscriber base could be brought over to Peacock, and the Hulu/Peacock combo would be more attractive to prospective subscribers.

But Comcast has, perhaps more aggressively than other streaming services, embraced to some extent the idea of near day-and-date programming of theatrical movies. This would be contrary to the current wisdom of theatrical having a solid, lengthy window before streaming. The reason that Peacock was able to perform experiments such as the one involving the Halloween films is because of the service’s scale – it was small enough at the time that such window-manipulation would generate a boost in subscribers and in brand equity for the service. Even now, with over 20 million subscribers who pay for the service (as opposed to it being a free bonus for the linear customer), and even if it combined the nearly 50 million subscribers of Hulu, Comcast could still use quick placement of theatrical product on streaming as a way of both enticing more subscribers and protecting the linear ecosystem.

Movies plus collapsed windows would be a way of catalyzing the scaling process. It is controversial – many industry observers, especially the ones over at Deadline, which published the profit estimates linked in this article, argue that, no matter how small the box office gross is, a movie that was first projected in a theater carries with it the brand equity of exhibition, and immediately differentiates the product from all other streaming content. There has to be a window in place to ensure such brand-equity value.

I can agree with that. But I can also agree with a variety of approaches. Some films could be day-and-date, some could be on streaming after seven days, some could be digital after seventy days; it depends on the product and the timing and the data.

But the marketing value of big swings with this technique is something that has always intrigued me, and I think Comcast would be wise to experience a similar fascination. I even would like to see previews of films placed on streaming before theatrical release as an experiment – or, more likely, premium-video-on-demand through streaming, as Disney did during the pandemic with D+ and what it called Premiere Access, which was a charge of $30 to see a film on its service instead of in theaters (the consumer also needed to subscribe for at least one payment cycle to D+ to use this service). Hulu under Comcast could certainly do that; imagine the next Fast film being available like that for five days before it opened in theaters, with the film disappearing from streaming after the normal theatrical window commenced.

Would it make sense to do? Why not try it, I say. If Iger can negotiate his way out of Hulu and the whole general-entertainment morass (to his way of thinking, anyway), then Comcast should try to think of all kinds of innovative ways to use Hulu to its advantage.

With Disney getting out of general entertainment (or so it seems for the most part), possibly signaling a shift in the industry for the big media concerns, another concept with the hypothetical transaction should be considered: that Hulu under Comcast ownership also offers the advantage of using it as a platform to quickly amortize costs for smaller pictures that don’t fit the commercial mandate that CEO Brian Roberts should demand of all theatrical product – in other words, only the tentpoles should apply for screen placement with sizable windows (I would still recommend short screening periods at the very least). In this way, Comcast can move into Disney territory, mapping out a strategy that focuses on IP and sequels and crowd-pleasing cartoon product. As I always say, that mindset has to come from the top, and it has to be consistently reinforced – otherwise, content production will have a mind of its own and stray from the commercial tendencies that will drive shareholder value.

Conclusion

Comcast is a long-term holding for me. It’s the dividend side of a media portfolio. As of this writing, it has a 3% yield. It tends to trade in a tight range (52-week measure is $28 versus $47), and right now, it’s in the middle at $37.

The SA quote system indicates it may be fairly-valued at the current price point, so those looking for a better margin of safety should wait for pullbacks, but to me, the yield at the moment is indicative of a green light for dollar-cost-average investors.

Comcast has a lot of assets and a lot of opportunities. It’s struggling to replace lost growth to cord-cutters, which is why I consistently champion the company’s content unit to step up to the plate and release more movies to theaters. Exhibitors want product on the screens, they want hits, and Comcast’s NBCUni can provide them – concentrate on tentpoles and low-budget horror, keep an eye on above-the-line costs, and let the profits pile up…

Post Script

After finishing up this article, news broke of NBCUni CEO Jeff Shell’s abrupt departure. I think this ultimately does not affect the thesis, and in fact, CEO changes can be opportunities for implementation of a new set of catalytic ideas. One thing I do wonder: is it possible this may change the Hulu/Disney scenario? I think it in fact might (i.e. – it may increase the possibility that Comcast takes Hulu off Iger’s hands)…

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of CMCSA, DIS, NFLX, NTDOY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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