Chapter 22

Hollywood’s Big Comeback

Only a little while ago, motion picture stocks were one of the most unpopular security groups. Today, brokerage houses are talking in glowing terms about the hidden asset values of these stocks.

By hidden asset value, Wall Streeters mean, among other things, the film libraries of post-1948 features which movie makers had already written off the books. For instance, Metro-Goldwyn-Mayer's unreleased feature films which are being carried on the books at only a nominal value, are estimated to have a market value in excess of $25 million. Or, in the case of Columbia Pictures, it has about 275-300 post-1948 feature films available for television. At an estimated average price of $100,000 per film, a total of $27.5 million to $30 million can be realized from them.

Or take Warner Brothers Pictures which in mid-July 1960 licensed Creative Telefilms to distribute 110 pictures from its post-1948 feature library which was expected to bring in about $10 million, with another estimated $10 million to come after Creative Telefilms recaptures its initial cost.

Another kind of hidden asset value is the valuable real estate holdings of most picture companies, some of which are located right in the heart of the movie capital.

In October 1960, for instance, Twentieth Century-Fox Film Corporation completed the sale of its 265-acre studio property in Los Angeles to Webb & Knapp for $43 million, equal to almost $20 a common share in the Fox stock. (Webb & Knapp plans to develop this site into an ultramodern community.) The funds thus realized by Twentieth Century-Fox were used for the purchase of company shares in the open market which should mean increased per-share earnings. Per-share asset value of the Fox stock was estimated at over $70 as of September 15, 1960, against only $37.69 at the 1959 year-end.

Solid Asset Value

Quite a few other movie makers, including Warner Brothers and Metro-Goldwyn-Mayer, have bought their own stocks on the open market to increase the value behind each of its shares. In the case of Warner Brothers, asset value per common share rose from $23.36 in fiscal 1958 to fiscal 1959's $31.80. Since the fiscal-1959 year end, the company has bought more of its stock, which should further increase its per-common-share book value.

Solid asset values are also found behind most theater companies' shares. For instance, as of August 31, 1959, the fixed assets of Loew's Theaters, Inc., which was spun off from the moviemaking Metro-Goldwyn-Mayer arm of now-extinct Loew's, Inc., amounted to $59.8 million, less depreciation. However, the market value of these assets is estimated at $80 million. At fiscal-1959 year end, value per common share stood at $22.54, as compared to a considerably lower market price for its stock during that fiscal year.

Though a company's book value or asset value has become less and less a factor in determining the market value of its stock, assets are important if they are relatively liquid in content.

L. F. Rothschild & Co. found that to be the case with Paramount Pictures. Paramount's "other asset" value per common share alone was estimated at between $50.85 and $60.20 against the stock price then, approximately $52.50. Not accounted for, according to the Rothschild study, were Paramount's "basic earning asset" (motion picture production), the "growth possibilities" in its Automatic Division which has developed new techniques in data storage and retrieval believed to have interesting military potential and whose sales have increased at an annual rate of over 100 per cent in each of the last few years, or "the tremendous potential" of both its Chromatic and International Telemeter Divisions.

As leader in the current drive to subscription TV, International Telemeter could have a good share of a market believed to be Staggering in potential. Equally tremendous is the potential of the Chromatic Division whose Lawrence color television tube may well hold the key to success in low-cost color television!

What's Behind the Strong Earnings Comeback?

The current attraction of the leading motion picture stocks is, of course, not just due to their high asset values or even the extraordinary potential in some special division like Paramount's Chromatic and International Telemeter Divisions. It is due more to the strong earnings comeback in their basic operations of motion picture production.

The earnings of movie shares have indeed been impressive following a decade which many believed to mean the end of Hollywood. First in 1950, each major studio signed a consent decree to divest itself of interests in domestic theater chains which precluded the benefits inherent in the integration of movie making and distribution. Then, the emergence of television as an overwhelmingly competitive entertainment medium in the early 1950's was believed by many to mean the beginning of Hollywood's end. "The result," said L. F. Rothschild, "when combined with tremendous fixed studio overhead and rising labor and promotion costs, was a period of difficult times, falling profits, and declining investment status for the motion picture industry."

What, then, are the factors which have contributed to the current resurgence of motion picture stocks? First of all, the industry has done quite a bit of cost cutting by paring overhead and selling unnecessary facilities. Second, it has increasingly emphasized its foreign market which now accounts for half its gross. Most important of all, the industry has ungraded its product both by reducing the number of second-rate pictures and by concentrating on fewer but much costlier pictures (the so-called blockbuster type) to counteract audience decline.

A blockbuster is a picture based upon a well-known literary or dramatic property with a star-studded cast. It is believed that the public will only pay to see something different from what they can see free on television, something lavishly made with a luxurious cast, preferably spectaculars such as Paramount's "The Ten Commandments," United Artists' "South Pacific," Metro-Goldwyn-Mayer's "Ben Hur," Twentieth Century-Fox's "Can-Can," the United Artists-Paul Douglas production of "Spartacus," etc. The growing trend toward quality production can be further seen from United Artists' "Exodus," and "By Love Possessed," to mention but a couple.

The motion picture industry appears to have been very successful in luring moviegoers back to theaters by what they called "better-than-ever" movies made with ever-increasing innovations such as stereophonic sound, Cinemascope, Cinerama, Todd AO, etc. Though theater attendance probably will never be as big as it was before TV emerged as a major entertainment medium, the current pick-up in movie audience is real, and is expected to be stimulated further by the upsurge in the moviegoing population. The fastest growing age bracket is the group under 30, which constitutes over 70 per cent of movie patronage. By 1965, another 16 million potential ticket buyers will be added to this group.

The rapid increase in this segment of the population is also evidenced by the rise of drive-in theaters from 820 in 1958 to 4,200 in 1959 which at least partially offset the reduction of uneconomical theater units in the cities; they declined from 17,575 to 11,400 in the same period.

The earnings comeback of movie shares is indeed impressive. Metro-Goldwyn-Mayer, for instance, was still in the red in the first half of fiscal 1960; but by the end of that fiscal, it was able to report a profit of $3.75 despite an actors' strike that closed the studio for part of the third quarter.

Diversification in Hollywod

Diversification also helps Hollywood, primarily in such fields as oil, real estate, phonograph records, television and electronics. The same game of "to diversify and to be diversified" that is sweeping West Coast electronics is also going full swing in Hollywood.

While movie makers are digging oil on their studio properties, makers of phonograph records (Decca Records, Inc.) are making movies (Universal Pictures). Decca Records owns 87.6 per cent of the common stock of Universal Pictures which was described as the "most valuable asset and greatest source of its income" by Milton R. Rackmil, president of both companies.

On the other hand, Loew's Theaters, Inc., uses real estate for diversification. It announced plans to build two big hotels in downtown Manhattan. While some theater-real estate properties are uneconomical for movie exhibition, they become most valuable in development into offices, stores and similar income-producing installations at strategic downtown areas.

A Miami-based theater operation, Womentco Enterprises, Inc., has substantial stakes in television, radio and automatic vending. Republic Corp. (formerly Republic Pictures) is said to be "studying acquisitions that can add sales, additional facilities and, above all, greater profits."

Independent Production

These days, Hollywood is very business-minded. There are few screen stars who are not producers. More actors are said to be producing movies than acting, primarily for reduced income taxes as independent producers. No wonder that United Artists is getting so big!

United Artists originated the concept of independent movie production, which has become an industry-wide trend for the sake of more economical production. United Artists is the leading distributor and financier of motion pictures made by independent producers. It has compete freedom as to format and subject matter. It has no high studio expenses since it owns no production facilities—no fixed payroll of stars-under-contract. It has diversified into music publishing, phonograph recording, and then TV production-distribution fields. Its recent acquisition of Ziv Television Programs, Inc., has considerably broadened its telefilm operations.

Extending the Hollywood Frontiers

Though Hollywood was a little slow in learning to live with its new competitor, television, it embraced its new rival passionately once it realized there was no alternative. Increasingly, every major movie studio has gotten into telefilms. In some cases, profitable operations of a television subsidiary, like Columbia Pictures' Screen Gems, were responsible for the over-all profitable earnings picture. For instance, while Columbia Pictures has a loss of $1,237,830 in the fiscal year ended June 30, 1960, its Screen Gems television subsidiary had pre-tax earnings of $3,142,417. In the preceding fiscal year, Screen Gems had pre-tax profits of $1,973,757 while Columbia lost $4,419,142. Screen Gems was one of the first companies to enter television activities and is one of the major producers of television film series, distributors of feature motion pictures and producers of commercials.

In January 1961, Columbia Pictures made Screen Gems a separate company by offering 11 per cent of the subsidiary's stock to the public, which was believed advantageous to the parent concern in placing a public price on Screen Gems and in giving both companies greater flexibility in financing capital requirements. After the separation, Columbia retained 89 per cent interest or 1.8 shares of Screen Gems for each share of Columbia outstanding, giving stockholders that equity plus full participation in Columbia's motion picture activities.

Growth in Nontheatrical Films

Actually theatrical films account for a small percentage of total films produced. In recent years there has been a tremendous demand for specialized films by business and industry, governmerit, education, religion, medicine and health, and civic and social welfare. The growing resort to visual presentation in education has created a specialized film industry which turns out in a single week more nontheatrical films (for which no admission is charged) than Hollywood produces in a year for showing in movie houses.

Involved in the production of the estimated 7,300 nontheatrical films produced in U.S. in 1958 (the latest year for which figures are available) were major movie studios, television networks, book and magazine publishers and numerous specialist firms which produce almost exclusively for nontheatrical performance.

This tendency toward educational films has greatly extended the frontiers of the entertainment industry and is expected eventually to blend entertainment, education and communications in the manner of such complexes as aggressively managed American Broadcasting-Paramount Theaters, Inc.

While operating one of the largest theater chains, American Broadcasting—Paramount expects its basic growth in television as an advertising medium. ABC network television gross billings could double over the next five years. This rate of growth, equal to roughly 15 per cent per annum, would be more than twice the expectation for the industry as a whole and possibly four times a liberal estimate of the increase in Gross National Product.

Pay TV

Perhaps the most exciting things on entertainment horizons are pay and color TV. Despite the current controversy, pay TV or subscription TV, will undoubtedly become a primary entertainment medium because of its inherent flexibility and convenience. It is expected to add another dimension to television which itself constitutes a new dimension in entertainment. Leading the field are Paramount Pictures and Zenith Radio.

Early in 1960, Paramount's International Telemeter division launched its first test in Etobicoke, Canada, to explore and develop subscription television systems using both wire and over-the-air techniques. As a result of its studies, International Telemeter chose to exploit the wire technique by which the signal is transmitted over coaxial cable and tapped off directly into the house where a metering and selection unit with coin input is attached to the antenna lead of the subscriber's set. It will, of course, take much broader programming experiments by Paramount to check the economic feasibility of such a system and to test anticipated legislative roadblocks resulting from the announced opposition of such strong sources as national television networks and movie distributors who view emerging pay TV as a threat.

The same problems of economic feasibility and legislative roadblocks are facing the other pay TV system advocated by Zenith Radio Corporation. It is an over-the-air system of transmitting signals without the use of coaxial cable as in the case of Paramount's wire technique. Early in January 1961, the Federal Communications Commission gave temporary approval to Zenith's Phonevision pay-TV system. The system is so called because Zenith has been associated in this project with Hartford Phone-vision Co., a subsidiary of RKO-General. Zenith will manufacture special attachments for regular TV receivers which would be leased to the public of the Hartford, Connecticut, testing area during the subscription TV experiments.

The Home Box-Office

While it is impossible to estimate the percentage of the approximately 50 million TV homes that will eventually use pay TV or what system (over-the-air or wire), the market potential should indeed be startling, even assuming a comparatively low penetration, in view of the estimated $1.3 billion spent by Americans for motion picture admissions in 1959 alone. "Even without balance sheets or earnings records," said Donald I. Rogers, business and financial editor of the New York Herald Tribune, "pay TV has allure for hard-headed investors, primarily because the potential, viewed against the broad background of the television industry, literally staggers the imagination."

As for a comparison of the two potential rival systems, Mr. Rogers considered using the airways as far more economical. "To wire entire streets or communities," said Mr. Rogers, "could cost up to $150 a home and call for great capital investment. Maintenance costs on cabled systems are also high." Both Zenith and International Telemeter are relying on what Mr. Rogers termed the "home box-office concept." Their picture is scrambled when transmitted and the subscriber uses a special decoder to get the picture. No such decoder would be needed in still another pay-TV system developed by Teleglobe; this one does not use scrambling. It withholds the sound reaching the subscriber via a Teleglobe speaker-amplifier attached to telephone-type wires.

Irrespective of which subscription-TV system eventually prevails, the reward for investing in the right medium company should be high. "If only half of the nation's viewers, or 25,000,000 homes," said Mr. Rogers, "were to spend but $2 weekly for quality programs for the whole family, the annual gross would be in excess of $2,500,000,000—double that grossed last year by the entire industry from advertisers."

Low-Cost Color TV

A huge, though perhaps less-startling, market potential exists for low-cost color TV, to which Paramount's Lawrence color TV tube might well be the answer. The tube was originally developed in 1950 by Dr. Ernest O. Lawrence, one of the foremost authorities in nuclear physics. According to L. F. Rothschild analysts, the Lawrence tube works on an entirely different principle from the RCA shadow mask. The Lawrence tube reportedly contains "a single gun and is operated by standard television circuitry, in contrast to the RCA tube which requires extensive decoding networks." Paramount claimed to have readied the tube for commercial television use, though the company is exceedingly secretive about its negotiations for commercial exploitation. The reason for this secrecy was said to be that when the tubes are available anyone will be capable of manufacturing this set and that the key to success in color television will be in merchandising. It takes little imagination to visualize the potential demand for a color TV set priced only 25 per cent higher than a comparable black-and-white receiver in a similar cabinet!

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