..Gary Dretzka
..Noah Forrest
..Leonard Klady
..R.J. Matson
..David Poland
..Douglas Pratt
..Ray Pride
..Michael Wilmington

We’re losing $1 a unit but making it up in volume
(and other Hollywood financial myths)

The first time I can recall a picture costing so much money it had to be financed by two studios was roughly three decades ago. The film was The Towering Inferno and its budget was something like $40 million when most movies cost about $5 million. Producer Irwin Allen was coming off the incredible success of The Poseidon Adventure but despite Allen’s intention of using the biggest stars in the world - Steve McQueen and Paul Newman - 20^th Century Fox didn’t want to shoulder the expense alone and worked out an arrangement with Warner Bros. to handle the film internationally.

Whether the two majors split all costs and revenues or had a 60%/40% arrangement ultimately was of little concern as it was a blazing success. The film grossed close to $300 million worldwide, a sum comparable today to the global box office of The Lord of the Rings or Harry Potter.

The financial arrangement of splitting costs and rights - an anomaly in 1974 - is today commonplace. Gangs of New York, The Hours and Adaptation were produced in joint partnerships, while The Pianist was financed largely via pre-sales, a more venerable method of securing funding that’s been a staple of European producers that lack the infrastructure of the Hollywood majors’ worldwide distribution network.

There are obvious differences between the sort of cost sharing that goes on when Universal and Miramax divvy up a property such as Shakespeare in Love and the efforts of a sales agent/production company such as Capitol Films that goes out and secures guarantees from distributors in Italy, Japan and 50 other territories to finance Gosford Park. In the former situation, the issue of reaching the marketplace is not an issue.

The question that’s repeatedly asked is: Why does Warner Bros. need to share the monetary “risk” of making Harry Potter? Well, the studio doesn’t have partners on the Harry Potter series but it does on The Matrix and Ocean’s 11. The official line is that the majors seek out partners to limit up front exposure. However, I’ve never heard anyone state that this practice is employed to reduce back end profits, something which goes hand in glove with carving up the ownership of a movie.

Ideally, a company like Disney will retain all rights on its animated features and perceived major releases and share the risk on projects that outwardly appear to have iffier commercial prospects. However, the same people that green light these movies have only the vaguest notion of what makes a hit. Universal, for instance, off loaded international rights on American Pie, a movie it deemed would gross $60 million domestically and perhaps $20 million overseas. No doubt abetted by the film’s notoriety and success in North America, Summit sold the film well and still garnered overage payments from an international box office of more than $100 million.

Now if the studios had a crystal ball, they would never relinquish a big hit; they would only give up the likes of Pluto Nash and The New Guy. But by the same token, if they only ceded their dross, companies such as Village Roadshow, Lakeshore and Mutual would be ought of business in two to three years depending on the size of their initial war chest.

What’s not being addressed in this on-going debate is how radically the nature and thinking of studio operations has changed in the past decade. When Sumner Redstone took the helm at Paramount, he instructed the film division to release more movies but was unwilling to appreciably increase monies allocated to production. The only way to implement that dictum was to find financial partners, and almost a decade later most of Paramount’s slate is co-ventured with the exception of its MTV, Nickelodeon and Tom Cruise projects.

Paramount also evolved into a company that developed fewer and fewer films in-house and in many ways took on the trappings of a bank. It’s a very bottom line company and other senior decision makers began to get nervous, thinking that they were running behind the latest financing curve. There’s no question that sharing costs will reduce 10s of millions of dollars in up front expenses. However, as yet, there’s no tangible evidence that studio overhead has been cut or operations streamlined.

Studios continue to be in the business of manufacturing popular movies. However, their internal development machinery makes fewer decisions leading up to what gets a green light. More often than not companies including Revolution at Sony or Universal’s Working Title have taken over the responsibility of development or a talent agency will package something with a marquee value client and present it for approval. In the current environment, it’s easy to understand how senior management can become divorced from popular taste and the ineffable emotional component that goes into producing successful pictures as they attempt to quantify elements, primarily financial, that are common among recent hit pictures. It has proven to be even less successful that a bygone studio mogul’s twitching kiester.

In the past 10 years what’s emerged is an anecdotal history of knucklehead studio decisions that have sometimes benefited the canny independent producer. The most extreme case of misjudgment could well be The Sixth Sense, a 1999 release Disney was eager to divest that went on to gross $650 million in worldwide theatrical exploitation. At the time, studio chief Joe Roth had been given marching orders to find financial partners and approached the fledgling Spyglass Films. Roth put the best face on the project. It was budgeted at less than $50 million and headliner Bruce Willis’ recent track record suggested at least a $40 million domestic box office. Spyglass would be off and running with a high profile studio release and the worst case scenario was that the film would break even.

Spyglass agreed to come in on an equal basis though it had no part in the development, casting or production logistics. Then, just prior to filming, Roth returned with a new proposition. If the company would cough up all production costs, Disney would reduce its distribution fee (rumored to be 12% rather than 30%) and the company would own the picture. Now, no one should begrudge a $50 million plus profit but obviously had the studio retained some or all rights, it would have had a much larger pay day.

- by Leonard Klady