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This summer’s blockbuster: A potential studio merger

'Avatar' Hot Showing In China'Avatar' Hot Showing In China

While a potential Twenty-First Century Fox $80 billion takeover of Time Warner has been rebuffed by Warner Bros’ owner, this is an industry that thrives on a good sequel.

Warner Bros parent Time Warner (TWX) has declined a takeover offer by Twenty-First Century Fox (FOXA), citing regulatory and operational risks. But Rupert Murdoch’s media empire is expected to continue to pursue a deal, and a successful bid would rattle Hollywood by combining two of the largest Hollywood studios that compete in a roughly $36 billion global business.

The possible consolidation in Hollywood comes as the industry faces problematic trends at the domestic box office. While the U.S./Canada box office grew 1% to $10.9 billion in 2013, according to the Motion Picture Association of America, the growth was due to an increase in higher average ticket prices, not because more people opted to go to the movies. In fact, movie admissions in those markets totaled 1.34 billion last year, down 1% from 2012 and far off the 1.5 billion tickets the industry sold in 2004.

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Audience attendance isn’t the only cause for concern. Home entertainment sales have languished and interest has cooled in the lucrative 3D business. That segment peaked domestically in 2010, when “Avatar” helped bolster 3D box office revenue to $2.2 billion, the MPAA said. Since then, 3D revenue has been stagnant at $1.8 billion annually.

Average ticket prices, meanwhile, have jumped from $6.21 in 2004 to $8.13 last year. The studios are also benefiting from strong demand abroad, particularly in the fast-growing Asia Pacific region and slower-but-steady growth in Latin America.

Though the industry is overall facing challenges at home, Twentieth Century Fox and Warner Bros are enjoying a stellar 2014. Their movies have grossed almost $2 billion out of the overall domestic box office’s $5.67 billion performance from January 1 through July 13, according to website tracker Box Office Mojo. The studios, which combined release roughly 40 films a year in the U.S., hold the top two positions so far this year and command a combined 32% of the domestic box office market share so far in 2014.

Warner Bros was the top performer in 2013, bolstered by “Man of Steel” and “Gravity,” among other blockbuster hits. Twentieth Century Fox ranked fourth last year among the major studios.

Fox’s strongest performers this year are mostly sequels: “X-Men: Days of Future Past” has the top gross among the films it released in 2014, followed by “How to Train Your Dragon 2” and “Rio 2.” Warner Bros’ top performing movie in the U.S. was “The LEGO Movie”–a film based on the popular toy line but an original idea. The rebooted “Godzilla” and “300: Rise of An Empire” have also performed well.

While the industry continues to churn out some major hits and establish new franchises, the fact remains there haven’t been a ton of deals among the major Hollywood players in recent years. Of late, the most notable takeover is Lions Gate Entertainment’s $412.5 million acquisition of “Twilight” producer Summit Entertainment LLC in 2012, a deal that united two of Hollywood’s largest independent studios.