Archives for October 2010

By Eugene Christiansen, Founder, Christiansen Capital Advisors, LLC, New York City

(Mr. Christiansen’s “Secretariat: Critics vs. Moviegoers” was published by Horse Racing Business on October 13, 2010 and can be accessed in the Archives.)

The New York Times weekly movie box office report employs data from Baseline, a widely used industry source that includes Canada and typically provides numbers that differ slightly from similarly defined statistics fromVariety and those posted on the Fandango website. Some observations about the most recent data:

1. Secretariat is on 3,072 screens. This constitutes a wide release but is considerably fewer than the saturation booking 4,500+ screen release a major studio/distributor would opt for if it believes, on the basis of pre-opening market research, that critical opinion and/or word-of-mouth is going to be poor. This was clearly not the case with Secretariat, but is not uncommon, even for a major investment ($100 million+ negative cost), which may test poorly and looks certain to garner bad reviews. In these circumstances the unhappy owner of a negative that may have cost more than $100 million to make and another $75 million (for prints and advertising) to bring to market tries to get the movie on as many screens as possible in its opening weekend. The premise is that the movie’s assets (stars or a pre-sold property such as a best-selling novel) will attract the maximum number of admissions before adverse critical opinion and bad word-of-mouth poison the box office. About 8 times out of 10, movies that fit this profile still lose money in large amounts on a current-accounting basis. Whether foreign and ancillary sales enable investors to ultimately recoup their investment is then very much a case-by-case situation. The studio/distributor, however, if it has been astute in laying off risk (remember always that movies are made with other peoples’ money), has a much better chance of emerging with a whole shirt than other investors do.

2. Secretariat dropped about 26% in its second weekend in domestic release. This isn’t great but it isn’t bad and is above average for all MPAA releases in a given year; it’s typical of a solid–but not a blockbuster– Disney family picture. For a movie to drop less than 10% in its second weekend is rare and means:

a) word-of-mouth is extremely favorable and is pushing the movie beyond its core audience (i.e., a breakout film);

b) unless the negative cost was way over budget, the movie is going to be profitable and maybe very profitable;

c) the movie’s director and star(s) move up the feeding chain, become players, earn a whole lot more on their next project, and may (if only temporarily) become sufficiently powerful to dictate their next project.

The movie The Social Network fits this description. Put this together with the fact that The Social Network was not a pre-sold property, did not fit any proven formula, had no major stars (other than its director, who is a name player), and must have been a marketing nightmare, and you will see just how unusual a movie it is.

The other and much more common side of this coin is box-office collapse: a movie drops 75% to 85% in its second weekend. This happens often. It happens particularly often with cookie-cutter, me-too mega-budget tentpoles–tentpoles like Pearl Harbor, representing negative costs north of $200 million, a lot of that going for digital fx, and above-the-line costs, such as for star salaries. (A tentpole film is intended to financially carry the other films on a studio’s agenda.) This was never going to happen with Secretariat, which is a rigidly controlled Disney in-house production ($35 million cost) and an example of one of the most tried-and-true products in the entire industry. Disney family pictures don’t encounter box-office collapse.

You may ask why cookie-cutter tentpoles like Pearl Harbor continue to get made. The answer is risk-aversion. Movies are insanely risky. A studio executive who greenlights or is in any way associated with a risky project like The Social Network that fails (as most such projects do fail) is making the career move equivalent of standing in front of a freight train. Mighty few executives who make this career move get to make another career move. On the other hand, no one can criticize a studio executive for supporting Toy Story 3. It’s probably going to work at least reasonably well and if it bombs he/she can point to Toy Story 2, a hit, and say something like all the signs were good and blame somebody else, like the director. Other reasons for making tentpoles are that they tend to perform globally better than they do domestically, and if the studio is careful with its contracts, it can make a bundle on domestic tentpole bombs.

The bottom line is track record. Studio/distributors make what has been proven in the marketplace to work. The Disney family picture is maybe the perfect example. Disney will be turning them out until the end of time.

Racing has nothing to do with it.

Copyright © 2010 Horse Racing Business

If you have ever worked in the world of publicly traded corporations, you will recognize the jockeying that just culminated at Churchill Downs, Inc. (CDI) with the abolishment of the company’s entertainment division (CDE) and the upcoming departure of the division’s president, Steven P. Sexton. This is a typical corporate scenario that plays out in countless companies and ends with such sugar coated exit templates as “I am leaving to pursue other interests” or “to spend more time with my family” and “We thank (fill in the blank) for his/her service and wish him/her all the best.”

Mr. Sexton started his career in racing as a sales promotion manager under the tutelage of the former renowned racetrack marketer Alan Balch at Santa Anita Park. His career took him to Canterbury Park, Golden Gates Field, Thistledown, Lone Star Park, Arlington Park, and Churchill Downs. Like any executive, Mr. Sexton made decisions over the years that angered some people, but overall his reputation has been one of a bright and capable racetrack manager on the way up. His rapid ascendency in the racing industry corroborates this evaluation.

Following is the timeline for Mr. Sexton’s tenure at CDI.

May 2001. Mr. Sexton resigned from Lone Star Park–where he had been a key player in its start-up stage—to become executive vice president of CDI’s Arlington Park in Chicago. Three months later, he was elevated to track president. In his continued rocket-like rise within CDI, in late 2002, he was named senior vice president of CDI’s Kentucky operations and president of two racetracks, Churchill Downs and Ellis Park.

July 2005. William C. Carstanjen, a racing outsider—an attorney from General Electric–was hired by CDI as executive vice president and chief development officer. Mr. Carstanjen quickly emerged as a competitor for Mr. Sexton for further promotion into the upper corporate ranks.

July 2006. Thomas Meeker, who hired both Mr. Sexton and Mr. Carstanjen, retired as CDI company president and CEO. He was replaced by Robert L. Evans, who still holds these positions. Mr. Evans had hard-to-find qualifications: an in-depth understanding of both the racing industry and high-technology business strategy.

January 2009. Mr. Carstanjen was named chief operating officer of CDI. This made him the highest ranking executive next to Mr. Evans. (Carl Pollard, the CDI chairman, is a non-executive chairman.) Clearly, the decision had been made as to who was the heir-apparent to Mr. Evans.

Not being privy to the thinking of Mr. Evans, the best estimate is that he created a position for Mr. Sexton instead of terminating his employment when Mr. Carstanjen was designated as COO. Mr. Sexton was given the title of president and chief executive officer of a brand-new CDI subsidiary, an entertainment division that would conceive and offer concerts and other events. This evidently was an effort to diversify CDI’s lines of business. In fact, the CDI press release referred to a revised strategic plan.

Mr. Evans said: “Our changes here…are about aligning the right leaders at CDI with the strategic growth opportunities we believe exist…Steve (Sexton) is uniquely qualified to take on this important new senior leadership role. He has managed six runnings of the Kentucky Derby and Kentucky Oaks, Breeders’ Cups at Arlington Park and Churchill Downs, concerts by The Rolling Stones and The Police, plus a myriad of other major racing and entertainment events.”

July 2010. The CDI entertainment division held concerts over a three-day period under the umbrella of HullabaLou. They took place in unusually hot conditions with heat indexes in excess of 105 degrees. Although approximately 80,000 people attended, HullabaLou reportedly lost about $5 million.

October. 2010. CDI announced that it was dissolving the entertainment division and that Mr. Sexton would be leaving the company in November 2010. Mr. Sexton said “I am looking forward to expanding my career in a new direction.” Mr. Evans commented: “It has become clear that launching new, upscale entertainment events in the current economy, particularly with the persistently high levels of unemployment, is extremely difficult. While we received exceptionally high marks from the nearly 80,000 people who attended our CDE events, we fell short of the attendance levels necessary to operate these events profitably. I would like to thank Steve (Sexton) for his many contributions to CDI’s success.”

While such maneuvers are not at all unusual in the culture of corporate America, it is perplexing that CDI abolished the entertainment division after one failed effort under extenuating circumstances. The vast majority of start-up ventures take time to become profitable. Nonetheless, CDI decided to cut its losses, as well as Mr. Sexton’s remuneration–Forbes listed Mr. Sexton’s total CDI compensation for 2009 at $500,474.

Whenever a major corporate initiative does not live up to expectations, the executive in direct charge almost always takes the hit, while his or her boss or bosses go unscathed. In this instance that was exactly what occurred. Several hours after the announcement that the entertainment division would be eliminated and Mr. Sexton would be leaving, another CDI press release revealed that the CDI board had given Mr. Evans a contract extension. Like Bill Gates has commented, “Life is not fair–get used to it”–which is sage advice for anyone employed in the executive ranks of a public company.

Mr. Sexton perhaps lost out to Mr. Carstanjen because Mr. Evans and the board of directors decided to select an executive with a non-racing background to assist in diversifying CDI. The conglomerate General Electric in Mr. Carstanjen’s past was likely viewed to be more appropriate to CDI’s planned diversification efforts than was the racetrack-centric resume of Mr. Sexton.

Look for a talented and personable 50-year-old executive like Mr. Sexton to surface soon at another racing company. Only time will tell whether the CDI choice of Mr. Carstanjen over Mr. Sexton will prove to be correct.

Just as I was finishing this article, I saw a headline: “Executives Resign Posts at Mountaineer Parent.” Then another announcement came along—“Roy Arnold Resigns as Arlington Park President.” One of New York Yankees legend Yogi Berra’s malapropisms sprang to mind: “It’s déjà vu all over again.”

Copyright © 2010 Horse Racing Business

By Eugene Christiansen, Founder, Christiansen Capital Advisors, LLC, New York City

Here are some numbers from Fandango:

Secretariat: average critics’ score = 61 (out of 100); average fan rating = Go (second-highest rating).

The Social Network: average critics’ score = 95; average fan rating = Go.

These numbers say Secretariat is much more popular with its audience than with critics; critics and the very different audience for The Social Network are in synch. Critical opinion is much less important for movies like Secretariat than for movies like The Social Network: Secretariat isn’t aimed at critics: there was absolutely no chance it would have opened the New York Film Festival, as The Social Network did.

Disney must be delighted. Secretariat is the other side of the diversification coin: a return by an old-media company to tried-and-true product after a series of costly bungled diversifications, of which buying Miramax was only the most visible example. Touchstone and Hollywood Pictures, two Disney non-family labels of that era, are shuttered; Steve Jobs is the company’s largest shareholder; Pixar has taken over the company’s animation operations, etc., etc. Diversification didn’t work for Disney. Pictures like Secretariat work for Disney. An iron hand on costs above the line (i.e., talent); one location; a story the company knows how to make and market cold–and Disney brings in a no. 3 box office movie for $35 million when the average MPAA negative cost $67 million last year and another $39 million to bring to market (prints & advertising). Ancillary (non-theatrical) earnings look bright: Secretariat should be a reliable library title for its copyright life, like an oil well. There was as little studio risk and as much upside potential in Secretariat as anything MPAA members will release this year. I’d be willing to bet that the pro-forma projections Disney made before the cameras rolled on Secretariat will tally with actual results plus or minus 10%. The company knew exactly what it was doing.

In contrast, The Social Network was an insanely risky proposition: a director’s film by a powerful, impossible-to-control director; an intricate screenplay, hard to bring off (it only works because the editors turned in a virtuoso, razor-sharp job); players at the beginning of their careers; an untried story that is hard for advertisers to explain: the odds against success were astronomical. Hard to make and harder to market, pre-opening critical buzz mattered a lot to The Social Network. Nothing at the racetrack is as much of a longshot as this movie was.

Copyright © 2010 Horse Racing Business