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How do the largest studios make money in motion pictures?

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Film studios

In the last part of this series, we learned about production and distribution of motion pictures by media companies such as The Walt Disney Company (DIS). In this part of the series, we’ll see how film studios make money in motion pictures.

Film studios make money by revenues generated from a variety of sources in the motion picture industry. These sources include exhibition of movies in theaters, selling and renting movies on physical and other storage media, and offering movies on the Internet. Film studios also get licensing fees for the content from aggregators such as cable and broadcast networks.

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Now let’s look at the box office, a significant contributor to these studios’ motion picture revenues. The performance of a motion picture in the box office is particularly important for film studios. It plays a key role in these studios’ pricing negotiations with distribution channels such as cable and satellite television providers.

Box office growth from international markets

A significant portion of film studios’ revenues comes from theatrical exhibition of motion pictures in domestic and international markets. The domestic markets are the United States and Canada, which contribute a large portion of the film industry’s revenues.

As you can see in the above chart, the domestic box office generated $10.9 billion in 2013, while international markets brought in $25 billion that year.

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However, domestic markets have reached saturation in terms of theatrical exhibition of motion pictures. The growth of theatrical exhibition of films originates largely from international markets. International box office grew an annual average of ~7% from 2009 to 2013. Domestic box office grew by a marginal average annual growth rate of ~1% during the same period.

The largest studios

Some of the largest studios are owned by media conglomerates such as 21st Century Fox (FOXA), Time Warner Cable (TWX), and Comcast (CMCSA). According to Box Office Mojo, 21st Century Fox’s 20th Century Fox studio had the largest market share in domestic box office receipts in 2014. Time Warner’s Warner Bros. studio and Comcast’s Universal Pictures studios were also among the top five film studios in the market.

If you want to participate in the growth of the film studios of these three media companies, you can invest in the Consumer Discretionary Select Sector SPDR Fund (XLY). The ETF held ~12% in these companies as of March 2, 2015.

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