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AOL relies on Harry Potter's magic
Potter, Lord of the Rings franchises a bright spot for troubled AOL Time Warner.
November 14, 2002: 3:29 PM EST
By Chris Isidore, CNN/Money Staff Writer

NEW YORK (CNN/Money) - You can't blame AOL Time Warner shareholders for wanting a little escapism, and starting this Friday, they'll get it.

For a company dogged by declining revenue at its Internet service provider, questions about its accounting and a tumbling stock price, AOL Time Warner two movie studios have been an almost unique success story for the company, led by the hit Harry Potter and Lord of the Rings movies released last year.

The new Harry Potter and Lord of the Rings movies are a  bright spot in the outlook of troubled studio parent AOL Time Warner.  
The new Harry Potter and Lord of the Rings movies are a bright spot in the outlook of troubled studio parent AOL Time Warner.

Warner Brothers has its newest entry in the series -- "Harry Potter and the Chamber of Secrets" -- opening in the United States Friday. The original Harry Potter movie took in nearly $1 billion at the box office worldwide -- not counting video and DVD sales -- making it the most successful film in the studio's history and the second-best all-time behind the 1997 hit "Titanic" from Fox and Paramount.

On Dec. 18, another blockbuster sequel -- "Lord of the Rings, The Two Towers" will be released by AOL Time Warner's other big studio, New Line Cinema. Last year's first film in that fantasy trilogy took in an estimated $860 million in worldwide box office, good enough for fifth all time.

The huge numbers that those movies and others produced have made the filmed entertainment division at AOL Time Warner (AOL: Research, Estimates) the largest revenue driver at the company, even though the profit contribution trails units such as cable television, television networks and the troubled America Online unit. Filmed Entertainment revenue came to $8.8 billion in 2001, edging the $8.7 billion from AOL.

That gap is only going to grow as AOL tries to stem the decline in online revenue, with the first three quarters of the year seeing the studios book $7.2 billion, up 15 percent from the year-earlier period, while AOL revenue slipped 3 percent to $6.8 billion. AOL is set to announce its plans to solve problems in the Internet unit Dec. 3.

So the studios are an important success story for the company, which hasn't had much to cheer about lately. CNN/Money also is a unit of the company.

With the help of the Harry Potter and Lord of the Rings series, the studios have been able to break the typical cycle in the industry, in which a studio will have a big revenue decline the year following a hit.

"They've lucked into a situation for the two movie studios where they have two franchises that came custom ready for serial year rollouts," said Greg Kilday, reporter for the Hollywood Reporter, who covers the studios. "The pattern with most movies is it comes out, and if it's a hit, they'll make a decision to do a sequel. That takes several years. Here they knew going in that there would be sequels."

In fact, New Line took an unprecedented gamble to shoot the three Lord or the Rings movies simultaneously, committing itself to most of the production costs for all three before the first movie debut. If it had been a bomb, some speculated the decision could have sunk New Line. Instead, it produced a hit that was nominated for an Academy Award for best picture last year.

"They've done a good job of managing the release schedule," said Tom Wolzien, a Sanford Bernstein analyst. "What the company has done is balance it out very nicely so you don't have a huge hit to earnings from the fall off in revenue following a blockbuster. The year after Fox had Titanic, it had nothing. We'll see how long AOL can keep this going. Nobody's ever done it forever."

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The studios also are helped by the growing importance of DVD and video sales to the movies' total revenue potential. The box office numbers do not include those sales, and the studios will not disclose them. But AOL said Warner Home Video had $1 billion in revenue in the second quarter, when the Harry Potter video and DVD were released. And that revenue is growing rapidly -- the company said its third-quarter worldwide DVD revenue doubled over the previous quarter for the second straight period.

But there are some dark clouds on the studios' horizon -- the company's television studio soon will lose its "Friends" franchise, as that long-running hit is expected to end its run at the end of the current television season. "ER" also is seen as nearing the end of its run.

But the company's pipeline of high-profile movie sequels to past fantasy blockbusters is full going through next year and into at least 2004.

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Warner Brothers has not one but two sequels to the movie "The Matrix" due out next year -- "Matrix Reloaded" on May 15 and "Matrix Revolutions" on Nov. 7. The original did worldwide box office of $456 million. It also has "Terminator 3," out July 2, with Arnold Schwarzenegger reprising the role he played in Sony's $516 million hit in 1991.

New Line has the third and final Lord of the Rings movie, "Return of the King" due out just before Christmas next year, as well as a prequel to "Dumb and Dumber," the 1994 Jim Carey movie that did $244 million in domestic box office.

At Easter of 2004 comes the third Harry Potter movie from Warner Brothers, and that year also is expected to bring a new Superman movie as well as a sequel to the Scooby Doo movie, "Scooby Deux."

While the slate of sequels gives the company a strong revenue outlook, there are some who suggest that it could come a cost.

"The emphasis on franchises makes sense. You're not starting from scratch in marketing as people know what you're talking about," said Kilday. "Whether turning out a second, third or fourth sequel pays off remains to be seen. Sooner or later franchises burn out. If you're not developing original proprieties, you're going to lose the audience."  Top of page

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