There is no denial that Warner Bros. Entertainment Inc. has been one of Time Warner’s most valuable assets after the merger of Time Inc. and Warner Communications in 1990 (New York Times, 1989). Since its inception in 1923 (Warner Bros., 2014), the company has always been one of the most innovative and productive creators of films, television, music and even video games. So, it is definitely not surprising that Warner Bros. is the largest global Film and TV studio, has been in first or second place in the international box office in 9 out the last 10 years and moreover, it has been the number one home entertainment for seventeen straight years (Tsujihara, 2014, p.3-6).
However, if the organization is to remain successful and competitive in the future, it should have a clear strategy and the studio’s executives have tried to еnsure that this is the case. In order to analyze Warner Bros.’ strategy going forward, I plan to zoom in on the following points - industry analysis, strategy description, evaluation and issues and finally, strategy recommendation (Boulton, 2001). The studio’s main strategic goal is to maintain its lead in theatrical business and broadcast by dealing with the growing demand, while utilizing technology changes and new business models (Time Warner, 2014). Furthermore, the company plans to expand on its well-established global franchises in order to continue to improve margins (Tsujihara, 2014, p.11). In addition, the studio puts an emphasis on TV production and intends to double its pay and cable production by 2018/2019. (Tsujihara, 2014, p.11-13).
To begin with, the film industry is extremely volatile and competitive and yet stable. Despite the fact that, it originates from Europe, it has been dominated by Hollywood since the end of World War I (Pokorny, M. and Sedgwick, J., 2003, p.3) and there is no reason to believe why this will change. Besides, it is an oligopoly, core cultural and prototype industry characterized with high fixed costs, low reproduction costs, unpredictability of demand, economies of scale and portfolio approach (De Vinck and Lindmark, 2012, p.5). The value chain has three steps: production, distribution and exhibition and its largely dependent on technological advances (Eliashberg, Elberse and Leenders, 2005, p.2, p.42).
In addition, in the film industry product differentiation and marketing strategy are crucial. It is almost impossible to say what determines if a film will be a success in the box-office and it is unclear whether good screenwriting, solid directing, star power (Ravid, 1999) or a combination of these factors is the most vital in order for a motion picture to be lucrative. What we do know is that the industry is hit-driven (De Vinck and Lindmark, 2012, p.5) and it is a winner-takes-it-all market (Investopedia, 2015).
Next, lеt’s look at how the major players – 20th Century Fox, Paramount, Columbia, Walt Disney Studios, Universal, Sony and Warner performed in the last 20 years. Warner Bros. leads the pack with a total gross revenue of over 26 billion dollars, accumulated by 595 films and an average gross of 44 million topped off by a 15 percent market share (Nash Information Services, 2014). Warner is followed by Disney with close to 25 billion dollars and Sony with 23 billion dollars gross revenue (Nash Information Services, 2015). The only other studios that were able to break the barrier of 20 billion dollars in this period are Paramount Pictures and 20th Century Fox (Nash Information Services, 2014).
In the last 20 years, the annual ticket sales have been varying slightly, peaking in 2002 when 1.55 billion tickets were sold (Nash Information Services, 2014). The interesting thing is that, while in 1995 1.22 billion tickets were sold, in 2014 the number was about the same (Nash Information Services, 2014), which means that last year marked the lowest box-office attendance for about 20 years (it also means that technology has allowed customers to get access to creative content in new ways). At the same time, revenue from tickets has doubled (Nash Information Services, 2014), which clearly shows that some of them are charged at a premium price.
On a different note, it should be disconcerting to Warner that their main rival Disney has produced the highest grossing film of the year, based on ticket sales, in 5 of the last 11 years and also the last two years – “Iron Man 3” and “Guardians of The Galaxy” (Nash Information Services, 2014). It is also clear that more cheerful and family-oriented genres have the upper hand and this is why comedy and adventure are the highest grossing genres of the last 20 years (Nash Information Services, 2014).
Nevertheless, looking upon those 20 years WB should not be disappointed; after all they produced the highest grossing franchise of all time (unadjusted for inflation) – Harry Potter, which, earned over 7.7 billion dollars in total (Nash Information Services, 2015; Box Office Mojo, 2015). Also, the numbers have remained consistent to this day. For instance, 2013 was another profitable year, in which the studio notched up revenues of $12.312 billion (39% of Time Warner’s total revenue) and operating income of $1.324 billion (Time Warner, 2013, p.25).
In order to properly analyze what makes Warner Bros. prosperous and to evaluate their strategy for the future adequately, we need to know how the company makes and plans to continue to generate revenue. The business is balanced between theatrical releases (40%), television (49%), consumer products and games (11%) (Tsujihara, 2014, p.8). Theatrical product revenues are generated via rental fees from the exhibition of motion pictures and subsequently through licensing fees received from the distribution of films on television networks and premium pay television services (Form 10-K, 2013, p.47). Additionally, some of the studio’s films are available in 3D, IMAX screens or are shown in high-frame rate and the tickets for these screenings are charged at a premium price (Form 10-K, 2013, p.47).
Television product revenues are generated from the licensing of programs to television networks and premium pay television services (Form 10-K, p.47). Expanding TV production beyond broadcast is one of Warner’s top priorities. As a result, only for the 2013-2014 season the studio produced over 50 TV series, many of which were licensed internationally (Time Warner, 2013, p.26). Moreover, the 5 billion investment in television networks only in 2013 (Time Warner, 2014), shows how valuable is this part of the business to the executives.
When it comes to DVDs, it should be noted that physical sales have been steadily declining in recent years, whereas digital purchases have been increasing swiftly (Financial Times, 2014). The downturn of DVD sales can be explained by several factors such as internet piracy, increasing digitalization and rental subscription by customers (Form 10-K, 2013, p.47). The company plans to prevent a further downtrend in DVD sales by making the digital ownership of creative content more appealing (Time Warner, 2013, p.26). This will be achieved by focusing more on Blu-ray Disc sales and introducing later rental windows (Time Warner, 2013, p.26).
Now that we know how Warner Bros. plans to continue to make revenue, it is time to look at their unique strategic position in the market. For the greatest academic in the field of strategy - Michael Porter, what the term actually means is making decisions to chase goals that the firm is interested in and abandon matters that it is not interested in (Porter, 2008). This creates a sense of uniqueness and differentiation from the other players in the market. No matter how competitive an industry is, a firm can shape both industry attractiveness and competitive position (Porter, 2008, p.2). Moreover, companies should strive to obtain competitive advantage, which is created and controlled by the entity and not comparative advantage, which is dependent on the availability of factors of production (natural or cheap resources) and this is why it is mainly inherited. Securing a competitive advantage allows you to successfully cope with the five forces and secure sustainability for your business (Porter, 2008). According to Porter (2008) competitive advantage can be achieved through three generic strategies: cost leadership, differentiation or focus (Porter, 1980, p.35). In a creative industry that makes products of cultural value like the film industry, it is hardly a surprise that Warner puts an emphasis on the differentiation aspect. As far as focus is concerned, the organization is targeting and separating different buyer groups through its subsidiaries (Warner Bros., 2013). Consequently, the studio achieves differentiation through meeting the needs of particular targets (Porter, 1980, p.38).
Additionally, to expand on the product differentiation aspect, Warner has always tried to distance itself from its main rivals, especially The Walt Disney Studios. For example, while Disney tries to be family friendly, WB’s motion pictures and TV series are usually darker and grimmer. The perfect proof for this statement is the studios’ extremely profitable subsidiaries DC Entertainment and Marvel Studios (Wall St. Cheat Sheet, 2014).
To return to the previous point, obtaining a unique position in the market allows you to make your business truly sustainable because having only operational effectiveness is not enough to achieve that purpose (Porter, 1996, p.10). The studio’s position is to serve broad needs of a lot of customers in a market that is everything, but narrow (Porter, 2008). It is not trying to make sudden turns in its strategy or take too many risks. The organization wants to build on what has already been established, while adapting to technology advancements and competing with rivals. That is why it is producing follow-ups to some of its most well-received products. For example, “Fantastic Beasts and Where to Find Them” (a prequel trilogy to Harry Potter), sequels to “The Lego Movie” and an array of DC Comics films (Tsujihara, p.42-53). In conjunction with this fact, it is sensible to assume that all of them will be available on 3D and/or IMAX. Regarding television, the studio’s most successful shows are going to benefit from the emergence of new services like Netflix, SVOD and Tencent (Tsujihara, p.27-34).
Another source of competitive advantage can be the firm’s resources. They can include assets, capabilities and knowledge among others. (Barney, 1991). For Warner Bros. these resources involve the experience gained from more than 91 years of existence (Warner Bros., 2014) and the ownership of subsidiaries, including Warner Bros. Pictures, Warner Bros. Interactive Entertainment, Warner Bros. Television, Warner Bros. Animation, Warner Home Video, New Line Cinema, Castle Rock Entertainment, DC Entertainment (Warner Bros., 2014).
On the other hand, although, Warner Bros.’ strategy looks solid on paper, there are several risk factors associated with it. For instance, the company must adapt to changes in technology very quickly and the path that the studio’s executives have taken might not suit these changes (Time Warner, 2013, p.14). Likewise, the success of the company’s products can be fluctuating because of downturn in demand or if the company is not able to cover its high production costs (Form 10-K, 2013, p.31). Due to the fact that, in the film industry margin is achieved through the successful reception of creative content by the public, a downturn in demand may lead to a loss of revenue. (Time Warner, 2013, p.14-15).
Also, the studio is exposed to risks associated with weak domestic and global economic conditions and increased volatility and disruption in the financial markets (Time Warner, 2013, p.17). If the costs of producing and marketing feature films continue to increase, it may be more difficult for feature films to generate profits (Form 10-K, 2013, p.31). Finally, other miscellaneous concerns such as: licensing, advertising, piracy, labor or service interruption and the renewal of affiliate agreements (Time Warner, 2013, p.15-20) can also prove to be detrimental for the future prosperity of the organization.
All things considered, it is unlikely that Warner Bros. Entertainment is going to experience considerable downturns and hits in the near future. Despite the fact that, recent movie flops (The Telegraph, 2014) and the notorious hacking of Sony (Business Insider, 2014) proved that the industry can be fragile, I am of the firm belief that WB will remain strong in the market and the company will continue to be the leader in storytelling and carry on the legacy of its prominent founders. (Sperling, Cass, Millner, Cork, 1999). Ultimately, if the organization does not continue to follow its core values (striving for innovation and excellence in storytelling, while displaying grit and resilience in difficult situations) (Warner Bros., 2014; Sperling, Cass, Millner, Cork, 1999) in the future, what will be the point of Warner Bros.’ existence at all?
Thank you for taking the time to read this post! I hope you enjoyed it!
P.S. Most of the images are courtesy of Time Warner and appear in the CEO of Warner Bros. - Kevin Tsujihara's report during the investor meeting of Time Warner in October. The sources for the other images are also provided, as I do not own any of the images in this post.
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