Warner Bros. to Do Simultaneous Global Release for Batman 3

Case Type: operations strategy.
Consulting Firm: NERA Economic Consulting first round full time job interview.
Industry Coverage: entertainment; mass media.

Case Interview Question #00651: The client Warner Bros. Studios is an American producer of film, television, and music entertainment. The company is a subsidiary of media and entertainment conglomerate Time Warner (NYSE: TWX), with its headquarters in Burbank, California and New York City. As one of the major film studios, Warner Bros. develops and distributes full-length feature films for the U.S. and international markets.

Warner Bros. Studios is planning on releasing its big budget film of the year six months from now and is considering a new release strategy. The first component of the strategy is to release the movie in theaters on the same day around the world. The second component of the strategy is to release the DVD of the movie day-and-date, meaning globally releasing the DVD the same day as the theater release.

Warner Bros. is interested in knowing whether this is the best release strategy for this movie and, if not, Warner Bros. would then like to know what its release strategy should be. How would you go about analyzing this case and helping the client make a decision?

Additional Information provided upon request:

• Warner Bros. has done simultaneous global theater releases for other movies before, but never simultaneous with the DVD release.
• Only one movie has ever been simultaneously released theatrically and through DVD, and it was by a small, independent film company.
• The new film, “The Dark Knight Rises”, is the third movie of a superhero action series known as the “Batman Trilogy”. The previous two films were produced by another studio, so we have no financial data on them.
• The simultaneous theatrical and DVD release is expected to cause a 20% decrease in revenue from theater ticket sales and a 25% increase in DVD sales.
• The marketing campaign for the movie is expected to be $50 million, while the marketing campaign for the DVD is expected to be $5 million. With the simultaneous release, no DVD marketing campaign is required.
• Pirating movies accounts for a 20% loss in total theater revenue. A simultaneous global theater release will cut this down by 25%.

Additional Exhibits

1. Revenue from theatrical releases of big budget films (last year)

2. Revenue from theatrical releases of third sequels of action films (last 5 years)

3. Revenue breakdown of big budget films

Possible Solution:

The main question to answer is if the new strategy Warner Bros. is considering is better than the usual movie release strategy commonly used in the movie industry. To assess this we need to see which of the two release strategies brings more profits to the client Warner Bros.

• Regular Strategy: We need to estimate the revenues that could be generated and costs involved with this type of release (which is from my knowledge: theater release in the US followed by theater release internationally, then DVD release internationally). In order to estimate the expected revenues, I would look at similar type of movies and their economics.
• New strategy: I would start by checking if this new strategy has ever been used and the results it brought.

Then I would estimate the changes in revenues, costs of this new strategy versus the regular one.

Finally, I believe we need to check if there are any regulation regarding international theater release and how these regulations will affect our new strategy.

Essentially, it comes down to deciding between two options on two dimensions:

• Releasing the movie in the same day globally or first in the US and then around the world
• Releasing the DVD together with the movie or separately

The candidate should then calculate the expected revenue from the theater release and from the DVD release using second and third Exhibits and other information that he/she gathered.

• Estimated theater revenue = ($500M∗14 + $250M∗3 + $100M∗2 + $50M∗1) / (14 + 3 + 2 + 1) = $400 million
• Estimated DVD revenue = $400M * 30% / 60% = $200 million

To decide between going simultaneously with the theater and DVD release versus going separately, the candidate need to calculate the profits generated by the two strategies.

To decide if the client should go separately for the theater release or simultaneously, the candidate needs to calculate the impact on piracy too.

• $400M = revenue earned (80% of total possible revenue)
• Unearned revenues (losses due to piracy) in the regular release strategy (theater release in the US followed by theater release internationally): $400M / 80% – $400M = $100M
• Unearned revenues (losses due to piracy) in the new release strategy (simultaneous global theater release): $100M * (1 – 25%) = $75M

A good candidate will now make a Final Recommendation

I recommend that the client Warner Bros. should do a simultaneous global theater release but a delayed DVD release because:

• Delayed DVD release would generate $25M additional revenue
• Simultaneous global theater release will save $25M by decreasing piracy

However, there are some risks involved with this strategy. With global release we cannot reduce spending in case the movie fails in the US. There are also risks regarding the problems that may be caused by governments impeding or delaying the release in their respective countries. We need to investigate further these aspects before going forward with the plan.