When Harry Potter glimpses a magical glass ball full of white smoke plummeting from the sky, the young hero in the movie races after it on his flying broomstick and catches it a moment before it would shatter.
AOL Time Warner Inc. executives know the feeling. As the producers of the upcoming movie "Harry Potter and the Sorcerer's Stone," they are attempting to capture their own crystal ball of financial magic -- without breaking the delicate chemistry within the story that has mesmerized tens of millions of readers worldwide.
If it were simply a single movie, Harry Potter wouldn't be such a big deal -- financially -- for AOL Time Warner. But the media giant is looking for a big score: seven Harry Potter movies from seven books over the next decade, which could bring in several billion dollars in revenue.
Studio executives hope the film will be an "event movie" on a par with their four studio-produced "Batman" movies, which have generated more than $2 billion, including sales from the box office, international releases, product tie-ins, DVDs and pay-per-view television.
"It's exceedingly important," said Richard D. Parsons, AOL Time Warner's co-chief operating officer. "It's more than just a movie. It's the beginning of a film franchise."
The buildup has already started for the movie, which debuts in North America on Nov. 16. But AOL Time Warner is trying to show some marketing restraint -- something that does not come naturally to a consumer-driven company, especially one that happens to be the world's largest media company.
The restraint -- insisted upon by the book's author -- means the company's film studio, Warner Bros. Pictures, has eschewed product placements, the Hollywood practice of charging companies a fee to feature their products as seamless film props. In addition, the studio's Harry Potter Web site (www.harrypotter.com) limits banner advertising and sponsorships to its Wizard's Shop page, where consumers can purchase movie merchandise.
For Harry Potter, the studio has a single global marketing partner, Coca-Cola Co., the only company that AOL Time Warner has allowed to use the Harry Potter image to build awareness of its own products.
The limits on marketing and merchandising are part of a long-term strategy: Don't oversell. Harry Potter already was a cultural phenomenon. Let the movie ride on the golden goose, the best-selling book.
"We don't want to overcommercialize and exploit the Harry Potter brand," said Diane W. Nelson, senior vice president of Warner Bros. Family Entertainment, a division of Warner Bros.
That's not to say AOL Time Warner will not try to hype the movie. Rather, the marketing of the film has unfolded as a slow build, based on a "less-is-more strategy," said Dawn Taubin, Warner Bros. Pictures' president for domestic marketing.
Marketing began in earnest in August 2000 when consumers encountered a smattering of Harry Potter book-related merchandise -- bookends, T-shirts, clocks -- in Warner Bros. stores. By the holiday season, from Thanksgiving through December, the studio was stocking higher-end products related to the book, such as games and puzzles, in department stores and specialty shops. And this spring, other book merchandise hit what the studio calls its "mid-tier distribution," which includes retailer Sears, Roebuck and Co. In the summer, Wal-Mart Stores Inc. and other mass merchants followed. Merchandise tied to the movie didn't begin appearing on store shelves until Oct. 1.
Warner Bros. has capitalized on its Internet brethren at AOL, kicking off its online initiatives in June, offering consumers online contests, movie trailers and film tickets. By the time the movie opens, the company expects it will have exposed AOL subscribers to 650 million impressions of Harry Potter on the online service in the United States in some form, whether it's a feature story, a banner advertisement or a movie clip.
After an initial burst of television advertisements in September featuring clips from the movie, a bigger round of TV spots is starting now, executives said, and the latest movie posters are going up in theaters, on billboards and in newspaper ads.
"I don't think you've even begun to see the hype," said analyst Henry Blodget of Merrill Lynch & Co. "We've got about a month to go. This is a powerful company with a lot of communications media, and I think they will employ all of them."
Studio executives are stepping gingerly to remain faithful to the story of a little orphaned boy who is invited to attend a school of witchcraft and wizardry and discovers he has a yen for swooping through the air on a broomstick and warding off the forces of evil.
Among the adherents is Harry Hawkings, 9, of Washington, who's read all four of the books at least twice each. "I really wish I could be in that wizarding world and be able to cast, like, a tickling spell on my friends, or knock a robber's weapons out of their hands," Hawkings said.
Warner Bros.' Nelson, whom some of her colleagues call the "Maven du Harry," has led the effort to keep the movie true to the book. There's a style guide for licensees to abide by, a "Consumer Products' Program of Witchcraft and Wizardry." Nothing is left to chance, not even the color palate of Harry's Nimbus 2000 broom handle, which comes in an earthy, PMS 484U hue.
To ensure fidelity to the book, Nelson said that every six weeks on average, she has visited the oracle herself -- Harry Potter author J.K. Rowling. "She helps fill in those gaps such that we are representing her vision in the best possible way," Nelson said.
Others, however, said that Rowling has imposed much of her will on the project, ruffling some corporate feathers. Rowling, through her agent, declined to comment. But Nelson, the studio executive, said, "She's not at all difficult. She wants to protect the property that she's created, that's absolutely true, but so does Warner Bros."
Viewing the relationship over the long run, AOL Time Warner surely wants to stay on Rowling's good side. But Nelson said that Rowling does not have approval power over its artistic decisions or business strategies. She declined to comment on Rowling's contract with the studio.
Overseers in AOL Time Warner's New York headquarters said they have taken a hands-off approach, letting the studio executives handle the project. And yet, AOL Time Warner officials are counting on Harry. The film represents the company's first real test to deliver a blockbuster, and fully use its media and Internet prowess, since AOL's merger with Time Warner in January.
Wall Street is expecting good things. "It will clearly add a lot of sizzle to the [upcoming financial] quarter," Blodget said. "Even if the movie is horrible, which I don't expect, it won't be a box office flop."
Warner Bros. isn't saying what it spent, but upfront costs were relatively low. When the studio bought the rights to the first Harry Potter book about four years ago -- everything from movies, merchandising, music and television, but not book publishing -- it paid about $500,000, according to sources. At the time, it seemed like a decent amount to pay for a children's book by an unknown author who had just been published in Britain but not yet in the United States.
Production costs, meanwhile, have run up to $125 million -- about the average price tag for big-budget flicks. But those costs already have been covered by fees collected from licensees, such as toymakers Mattel Inc. and Hasbro Inc., sources said.
The only other major cost is for marketing, which sources said falls in the range of $30 million to $40 million, also in line with other presumed blockbusters.
Those expenses will look paltry, analysts said, should Harry Potter top the billion-dollar mark in revenue, including box office receipts, merchandise and other ancillary sales. If that's the case, Harry Potter could go a long way toward restoring the momentum of the New York conglomerate, whose earnings have slipped in recent quarters amid a weakening advertising market.
In the short term, many analysts have done the math on what Harry Potter could mean to AOL Time Warner's balance sheet. Some are expecting roughly $100 million to $200 million in the current quarter, which includes only six weeks of the movie's release. That's out of a total of about $10 billion in quarterly revenue. In the following period, analysts are expecting another $200 million to $400 million.
Potter profits, though, are a murky question. In Wall Street's reckoning, movie earnings are hard to figure out because it depends on when and how expenses are allocated in a quarter, and what kinds of costs will arise from confidential contracts with the author, director and other talent. Harry Potter revenue will be reported under AOL Time Warner's filmed-entertainment unit, grouped with other movies, which makes it harder to get a read on the project's contribution to the bottom line.
Analysts say that Harry Potter won't make or break AOL Time Warner's stock, which is driven more by the company's core business units -- its Internet operations and cable network -- which account for about two-thirds of the company's earnings before interest, taxes, depreciation and amortization, or EBITDA, a common measure of profitability at a media concern. Filmed entertainment represents about 10 percent of EBITDA at AOL Time Warner.
Still, it would be folly to ignore a movie's potential impact. Studio executives cringe when they recall "Little Nicky." In December 2000, just before its merger with AOL was final, Time Warner warned that its quarterly earnings would be lower than expected, blaming its weak results, albeit from a small base, in part on the benighted Adam Sandler film, which lost tens of millions of dollars under its New Line Cinema brand.
"For every Harry Potter, you have a Little Nicky," said analyst Scott Reamer of SG Cowen Securities Corp.
Harry Potter, however, already has been put to the test, and the results are promising. Last Sunday's special screening of the two-hour-plus film in London drew a standing ovation from the invitation-only crowd throughout the eight-minute end credits.
Great expectations come at a time when the economy is in the doldrums, and the nation is still reeling from the Sept. 11 terrorist attacks. But many industry analysts say Warner Bros.' timing may nevertheless be fortuitous: A whimsical fairy tale in which good triumphs over evil resonates now.
"The film is perfectly positioned vis-a-vis the prevailing consumer sentiment," Reamer said. "Who doesn't want a fantastical and feel-good, otherworldly movie? On so many levels, it works. Having said that, to the degree consumers don't have disposable income in their pocket, no amount of feel-good is going to make them go to the movies."
AOL Time Warner is acquainted with setbacks. It has not been a smooth year for the company. Since AOL completed the Time Warner acquisition, the largest merger in U.S. history, the company's litany of woes includes the layoff of 2,400 employees, followed by the purging of 1,700 more -- several hundred of them in the Dulles corridor, home to its Internet operations.
Along the way, the company has shut down its sagging Warner Bros. retail chain, it has grappled with some high-level executive reshufflings, and its stock has been hovering near its 52-week low. In an embarrassing concession, the company recently lowered its financial goals, reducing its projected revenue growth this year, which it had estimated at 12 percent to 15 percent, to 5 percent to 7 percent. The company blamed not only the advertising market but also the terrorist attacks, after spending months crowing about the newly merged company's ability to weather an economic downturn.
With Harry, AOL Time Warner sees an opportunity to regain momentum.
"Obviously, Harry Potter is a huge brand for Warner Bros. and AOL Time Warner," Nelson said. "We're building the brand slowly and carefully so we don't blow it out."