The movie industry was once a creative stronghold, in which unique storylines and complex characters stood tall. While it can still be argued that the creativity of Hollywood is still intact, the corporate hand of influence has certainly changed the way in which it is presented. As bottom-line earnings become the sole (legal) goal of corporations, are industries evolving merely to meet the demands of shareholders? Perhaps a quick look at the movie industry can give some insight into the matter.

IN PICTURES: How To Make Your First $1 Million

Sequels, Prequels and Trilogies
Large conglomerates, such as General Electric (NYSE:GE) and Comcast (Nasdaq:CMCSA) (both significant owners of NBC Universal), and Viacom (NYSE:VIA), which owns Paramount Pictures, are required to obtain the highest possible return on equity (ROE) for their investors. As a result, taking DreamWorks as an example, blockbuster hits such as Shrek and Kung-Fu Panda must be followed with a sequel if those returns are expected to be higher than the next best alternative.

Movie viewers often complain that their favorite movie is often ruined by unnecessary sequels. However, if we think of entertainment as a business, it makes financial sense to indulge these practices. When an oil company encounters a successful well in a region, it is likely to increase production capacity on that field.

The "Little" Guy
One of the best examples to illustrate this concept is the Saw series. Saw 1 gave Twisted Pictures, Evolution Entertainment and Lions Gate Entertainment (NYSE:LGF) a greater than 10,000% return on the initial budget investment. In fact, shortly after the release of the movie, LGF shares appreciated by approximately 60%. Production and distribution companies aim to milk the series until it becomes unprofitable, and Saw 6 has seen a significant drop in return to 180%, although the picture was still slightly profitable. The Walt Disney Company (NYSE:DIS), Time Warner (NYSE:TWX) and Sony (NYSE:SNE), fall under the same corporate mandate of maximizing investors returns. Currently, the average expenditures for a film are over $100,000,000, with a large surge in the costs associated with marketing.

Quantity Over Quality
There has also been a steady rise in the number of pictures released per year, from 161 in 1980 and 173 in 1981 to 605 and 518 in 2008 and 2009 respectively. Like most industries, the film business suffered during the recession, but will surely rise as the economy turns the corner.

The Bottom Line
Despite the recent increase in movie production, 1939, 1941, 1967, 1974 and 2001 are often considered the best years for cinemas with such classics as The Wizard of Oz, Citizen Kane, Bonnie and Clyde, The Godfather Part 2 and Lord of the Rings: The Fellowship of the Ring respectively. Before the film industry became a corporate entity with bottom-line responsibilities similar to other major corporations, movies audiences were drawn to films due to their unique plots, rather than clever marketing campaigns.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  8. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  9. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  10. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center