UBS Warburg Analyst Makes Blockbuster Calls: Buy Fox, Hold Disney

Two days before what threatened to be the biggest Memorial Day box-office weekend ever-bigger than the same four days in 1997 that included the $90 million opener for The Lost World: Jurassic Park-Christopher Dixon was sussing out the film studios’ offerings.

There was Pearl Harbor: too violent, maybe, for the repeat viewings of that crucial audience, teenage girls; also, its high cost and appeal to the Japanese, the largest foreign market, are iffy.

There was Shrek: “A couple of weeks ago, I was talking to Jeffrey Katzenberg,” Mr. Dixon said, “and I said to him, ‘Jeffrey, how do you think Shrek is going to open?’ And he said, ‘I don’t have a clue.’”

There was A Knight’s Tale. “I saw the picture three weeks before it opened, and I walked out of the theater and said, ‘This one is really odd-it could work.’”

And there was Moulin Rouge: “This one’s going to be over the top!” he said. He happened to be walking up 54th Street, in sight of the marquee at the Ziegfeld Theater, where the hyped period musical was to open, in limited distribution, the next day (in deference to Pearl Harbor, its studio, 20th Century Fox, had pulled its punches and decided to wait until June 1 to open widely). His eyes lit up. Moulin Rouge, he said, like A Knight’s Tale, “was one of those oddballs that just might work.”

Or not, as the Memorial Day receipts showed. Pearl Harbor did $75.1 million, short of the $100 million many had projected for it; Shrek, at $54.2 million, managed to beat its opening weekend, and has grossed more than $110 million to date; The Mummy Returns, weeks out of the box, did a respectable $19.1 million; and A Knight’s Tale, sinking quickly, did $9.3 million.

All of which goes to show that predicting film hits-particularly in the pressurized atmosphere surrounding Memorial Day weekend-may very well be the ultimate fool’s game.

Yet Mr. Dixon makes his living reading the tarot cards on the movies. The head of UBS Warburg’s Media Equity Research Group, Mr. Dixon recommends stocks based on the financial prospects of films and the companies that make them. Also among his responsibilities: network and cable television, software and publishing concerns-a total of 160 companies constituting $1.2 trillion in market capitalization, which are monitored by 35 analysts under his supervision.

Along with Jessica Reif-Cohen at Merrill Lynch and the independent David Londoner, Mr. Dixon is one of a handful of oft-quoted Wall Street media analysts who wield market-moving influence, whose favor is curried by media executives-and whose opinions on the film industry are especially in demand in the weeks around Memorial Day, one of two sweeps-like periods (the other being the stretch between Thanksgiving and Christmas) that make or break studios for the year.

It’s a high-stakes version of Pick the Oscars-with a lot more to consider than whether an actress had the performance of her career or whether the special effects were transporting. Mr. Dixon not only has to find the hits; he has to find the ones that are going to affect a studio’s and its parent company’s bottom line and maybe put its stock on the move.

There’s no formula. “When a studio is making a movie,” said Mr. Dixon, “they are basically committing dollars today for a product which will be sold in a very short window two years from now. Anybody who tells you that they have a clue as to how a movie that they’re putting $50 million in the next week is going to open in Memorial Day 2003 is lying.” He let out a quick laugh-snort, as he often does, to emphasize his point.

In other words, he said, speaking of Shrek: “As an analyst, I don’t know any better than Jeffrey Katzenberg how his movie’s going to do.”

But once it’s out, he can issue the recommendation: buy or sell.

Mr. Dixon has been recommending AOL Time Warner for the long term. Its subsidiary company, Warner Brothers, has one potential blockbuster this summer-Steven Spielberg’s A.I.-but at Christmas it will release the Harry Potter film, while AOL Time Warner’s New Line Cinema will release the first of its Lord of the Ring trilogy. Short-term, he likes Universal because of one word: Mummy. He’s not so hot on Sony, which he says “continues to not have the breakout exposure” it needs, or on Disney, which he thinks lacks direction (and Pearl Harbor, despite its boffo weekend, is fraught with overseas perils and has to recoup enormously to cover its high costs).

But he knows he could be wrong. In 1998, he recommended Disney, partly based on his expectations for the animated feature Mulan, which he thought was perfectly positioned to clean up. It didn’t, and Disney stock that year was down 10 percent, partly because it lacked a blockbuster.

Two years later, after seeing How the Grinch Stole Christmas in pre-release, he cooled on Universal Pictures. But it turned out to be the highest-grossing film of the year.

Which just goes to show there’s a lot more to this game than being a film critic. Still, Mr. Dixon is highly regarded among the handful of analysts who cover his turf. Other media analysts told The Observer that Mr. Dixon is among the most well- regarded when it comes to the film industry-although one, comparing him to Merrill’s Jessica Reif-Cohen, said, “There’s a big difference in quality between Dixon and Jessica. It’s like comparing Yale to the University of Alaska.”

More important, though, is his standing with institutional investors themselves, the people buying his research: He’s been on Institutional Investor’s list of top analysts 8 of the last 12 years.

Grab a Tentpole

Mr. Dixon, 53, was sitting in the UBS office, discussing how he does what he does. He was wearing a tie with floating Mickey Mouse body parts, but he discounted its signifigance. Gruff but affable, he keeps steering the conversation to sweeping discourses on the film industry. He saw it all coming, he said, punctuating his points with that laugh-snort, sometimes even underscoring them with an excited “Okay?”

His influence has been enormous, if he does say so himself.

“I was one of the first analysts to talk about the fact that the entertainment industry was a real business,” he asserted. “That it was not just made up of a lot of guys in gold chains, hanging out in Hollywood lots, and that entertainment was the No. 1 source of U.S. export dollars.”

Later: “I was one of the first analysts to talk about how it was inevitable that the industry would consolidate to become truly global.”

And after that: “I was one of the first analysts to take a look and say, ‘Wow, I can develop the Walt Disney Company’s entire business model with Lotus on my laptop.’”

Given the stakes-that studios are increasingly cost-and-profit centers for large multimedia corporations-Wall Street and the studios themselves want to know what Mr. Dixon thinks. So he studies each studio’s financial history, its strategies, its strengths and weaknesses and its balance sheets, down to the last dollar. He builds and runs detailed models, reads the most obscure trade publications, consults with everyone from Mr. Katzenberg at DreamWorks SKG to Ron Meyer at Universal, and finally says what he thinks the stock is worth. (And in a splurge of self-promotion, on Monday mornings he sends out a fax to 1,400 Wall Street and Hollywood recipients, comparing the weekend’s box-office receipts to those of the previous year and making predictions for the coming week. He’s the only big-name media analyst who does this.)

Besides the lucre in this-Mr. Dixon would not say how much he earns, but his counterparts are said to make anywhere from $2 million to $5 million a year-he gets to indulge in his first love, movies. Mr. Dixon, who is married and lives in Manhattan, was born in Switzerland, raised in Montreal and moved to Connecticut as a teenager. He studied English at the University of Pennsylvania, then spent the first 18 years of his work life as a producer and director-beginning as a freelance assistant on the Martin Scorsese–edited 1970 film Woodstock-making short films for everyone from Chevrolet to the New York Shakespeare Festival, directing the “Bloodhound Gang” segments on the PBS children’s program 3-2-1 Contact, and finally ending up as a film editor for commercials (including the “Thanks, I needed that!” campaign for Mennen Skin Bracer Aftershave).

A lot of what he learned back in his pre-analyst days now gets factored into his recommendations, he said. For instance, Mr. Dixon recalled seeing The Cable Guy a few years ago. The film was expected to be a summer smash for Columbia Pictures, and another notch on the belt for Jim Carrey. But Mr. Dixon knew within minutes that, in the annals of bad-moviedom, it was going to end right up there with Ishtar.

“The lighting was terrible!” he declared. “You can’t have that many shadows in a comedy. Nobody wants to see that.”

In 1987, Mr. Dixon decided to go back to school. He enrolled at New York University’s Stern School of Business, and when he emerged two years later, at the age of 38, he went directly to work for Kidder Peabody as a media analyst. Mr. Dixon made a name for himself there-in part working with NBC, which was owned, as was Kidder Peabody, by General Electric-and in 1991 moved to PaineWebber, which was bought by UBS Warburg last year.

Mr. Dixon said that he tracks films-and their studios-according to three categories: tentpoles, generics and oddballs. Out of the 20 or so films each studio releases every year, most have at best two or three tentpoles-the potential moneymakers that cost anywhere from $75 million to $150 million to produce and are put out during those crucial Christmas and early-summer periods.

This summer’s tentpoles include Pearl Harbor (Disney), Tomb Raider (Paramount), A.I. (Warner Bros. and DreamWorks) and Planet of the Apes (Fox).

With tentpoles, Mr. Dixon explains, it’s a winner-take-all scenario. If a big-budget film opens strongly-a $30 million opening weekend or more, and a healthy second weekend with a drop-off of less than 40 percent-the studios will keep it alive in theaters through ongoing promotion. That’s when Mr. Dixon grabs his calculator to assess the effect on the studio.

Shrek, for example, which opened on May 18 and grossed $42 million in its first weekend, is typical of tentpoles, he said: “If a picture has a $50 million opening weekend, and makes $30 million its second weekend, then I can extrapolate that it will generate $85 [million] to $90 million overall in the U.S. theatrical release. Given what we’ve seen at this studio, the $90 million will translate to $45 million in domestic film rental, or D.F.R., and will generate a total of four times that in all its distribution platforms. So I’m looking at a picture that will generate $180 million over its life, which includes domestic and international theatrical release, video and DVD, cable and television, and licensing.”

“At the end of the day, the real value of a movie to a company is the ability to re-release that movie, as Warner Bros. does regularly with Casablanca [his all-time favorite film], and generate incremental cash flows,” Mr. Dixon continued. “Disney is going to make more money off the re-release of Snow White on DVD than it will off of Pearl Harbor.”

And as for the highly vaunted opening-weekend receipts: “For a picture to take on the characteristics of an E.T. or a Titanic, it’s all about the repeat business. You have to get the kids to say, ‘I want to go back and see it again.’”

Tentpoles cost the most and provide the highest visibility, but studios also rely on what Mr. Dixon calls generics: less expensive films with a specific audience that are expected to bring in $40 million to $50 million in domestic box-office receipts, and $80 million to $100 million over their lives. Examples are Clint Eastwood or Adam Sandler movies, which bank on actors with dependable followings, and modish fare such as American Pie (the mode being teens, sex and scatological humor).

Then there are the oddballs: relatively inexpensive films that usually disappear unnoticed, but occasionally find a market and take off. “It’s the oddballs that can make a studio,” Mr. Dixon said, citing two famous examples: Sex, Lies and Videotape, which put Miramax, its U.S. distributor, on the map, and The Blair Witch Project, which made Artisan. “The oddballs I find most interesting,” Mr. Dixon said-which explains his hopes for Moulin Rouge and A Knight’s Tale.

Hits and Misses

In the end, though, it’s hard to tell how a film will do. Occasionally, he said, “you’ll see a picture that’s just abysmal and you know it’s going to fail”-like the Geena Davis pirate picture Cutthroat Island (1995), which he called “one of the great turkeys of all time.”

But usually, Mr. Dixon admits, you just don’t know. “If I were to offer you a $30 million stake in a film,” he asked, “which involved animation and live action, had either Steven Spielberg or George Lucas producing it, and either Universal or Disney [to] release it, would you take it?”

Of course, he’s told.

“Great,” he said. “You just put $30 million into Howard the Duck. And if you turned to me and said, ‘No, I don’t want to do it’-well, you just missed Roger Rabbit. There’s no difference in the elements.”

All of these concerns make Mr. Dixon’s life harder, and discussing Pearl Harbor puts him in a critical mood. He loves movies, but in the day when even subway clerks can recite a film’s opening-weekend gross, something is wrong.

“People now go to see movies based on how much money it grossed last weekend,” he laments. “What I’d like to see happen is a return to those happy days in the 40′s, when people went to movies based on stories and how wonderful they may or may not have been.”

That’s the movie fan in him talking-not the businessman.