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

The Incredible
Shrinking Profit Margin

It was around the time that Mel Brooks was making Silent Movie that he went into see then Fox studio president Alan Ladd, Jr. about hammering out a new contract. The funnyman already had a sweet deal as a result of the success of Blazing Saddles at Warners and Young Frankenstein at Fox. Ladd undoubtedly greeted the idea of an even richer contract with extreme trepidation. Besides, he was already in the process of exiting the studio to set up an independent production company and didn't have the attention to go through a protracted contract negotiation.

The two men - who also enjoyed an amicable off campus relationship - began to bandy around figures and deal points. Brooks made proposal after proposal that Ladd felt he couldn't in all good conscience accept. The exec's counter offers were also met with indifference. At a seeming standstill, Brooks came up with something novel. He asked that he be given the rights to distribute and sell his upcoming pictures in France and Scandanavia.

Ladd was taken aback and stammered out that he couldn't do that. Brooks was puzzled. "Why not," he asked. "You're still the head of the studio." Ladd couldn't argue the point and called in his secretary to draft a deal memo and send it on to the contract department.

I can't say with unerring certainty that this particular encounter set a precedent that would change the way Hollywood did business. But it's a distinct possibility.

A quarter century on, carving up pictures as you would slice an apple pie is pretty much common place. It might involve two studios as in the case of Something's Gotta Give with Sony taking domestic rights and Warner Bros. assuming distribution overseas. More often an international producer, who's pre-sold most or all the major international territories, will go to a major to provide the last piece of the jigsaw puzzle. That occurred on The Grudge, Sky Captain and the World of Tomorrow, the forthcoming The Aviator and numerous other movies.

There are countless other ways of slicing the action including, as with Brooks, producer deals in which select territories are retained. DreamWorks, for instance, distributes its film through UIP outside of North America save for South Korea and Hong Kong where an investment from CJ Entertainment gives that company rights to the pictures. Revolution Studios has its films handled by Sony throughout most of the world except for a handful of countries that include Japan, Israel, Portugal and Sweden.

There are a lot of different rationales employed to justify giving away potential revenue on a picture's back end. The one spin that has a modicum of sense is that by sharing the risk up front, the studio is limiting its financial exposure on a movie. However, that way of thinking prompts several questions. The big one is that if a studio developed a project, why didn't it realize from the outset that it was too costly to bear the complete brunt of the financing?

The answer might be the involvement of a star. However, the presence of a marquee name is supposed to increase the market value of a film. So, it follows that if talent fees are the source of concern what's occurred is that the additional value is out-stripped by the profit participation that's been given away to the star or other talent in gross profit position. I recently mentioned that on The Last Samurai studio insiders were projecting that Warner Bros. is expecting to see a profit from the film of $10 million while Tom Cruise's profit participation will net him something on the order of $70 million.

It doesn't take a genius to conclude that it was a bad deal for the studio. It matters little that the film underperformed in North America. Had it grossed more, it would simply have sweetened the actor's purse. The more telling questions are why the deal was made at all or the necessity of doing the picture given the studio's unfavorable position on profits. I can already hear an executive saying that Cruise had a pay-or-play deal and deep sixing The Last Samurai would mean writing off $30 million in fees and development costs.

It's hard to be sympathetic to that argument. Again it underscores the fact that a very bad deal was made. By attaching a star of that magnitude, the studio appears to have forced its hand into making a film whether it was confident of it having the rarified commercial appeal required to be profitable or not. A whole string of whys follow. Why attach a star during the development of a film and why prior to at least a tentative green light? If the answer is the star's interest and in this case his company's involvement as a production entity, then why strike a deal where he has no financial risk and, in fact, stood to make a considerable amount even if the production was canceled. Doesn't it also stand to reason that if the star ultimately has reservations during the process, he can pull the plug and walk away with millions? Who in their right mind would stack the deck against themselves?

When Sumner Redstone acquired Paramount Pictures back in the 1990s, he instructed the film division to seek financial partners to ramp up the number of films the studio made annually. His intent was to pump up the studio library and as we all know that's the single greatest asset on any lot. That was the driving concern behind Disney releasing 30 films a year in the early reign of the Eisner-Katzenberg era. Disney, to its credit, sought investment via a series of stock offerings under the Silver Screen Partners imprimatur. The downside was that in addition to Pretty Woman and Three Men and a Baby the output included Cabin Boy, My Boyfriend's Back and Captain Ron whose value to a growing library was negligible.

Ultimately the ideal behind selling off rights for a studio is to structure a deal that favors its end against that of the partner. Paramount managed to do that for instance on Nobody's Fool and several other projects it rightly saw as having limited appeal internationally. The sales agent lost his shirt and declared bankruptcy. Paramount, at the same time retained world rights to such franchise titles as Mission: Impossible and Star Trek.

Of course, the last thing a studio wants to do is sell off rights to a project that's going to be fabulously successful. While splitting costs up front limits a major's initial financial exposure, it also means that it receives only part of back end profits and that comes with an enormous sting should the picture become an unexpected commercial blockbuster.

That sort of worst case scenario happened on The Sixth Sense. The eerie thriller had been developed at Disney and its director M. Night Shyamalan had a track record that included two totally undistinguished features. Bruce Willis was attached to star but he was coming off a string of lackluster movies including Mercury Rising and no one at the studio had more than modest expectations for the project's commercial success. So, Michael Eisner instructed then studio chairman Joe Roth to seek out a financial partner to ease the general anxiety about the picture's commercial prospects.

Roth, a skilled salesman, went and knocked on the door of the newly formed Spyglass Entertainment. He didn't inflate the picture's value though he limited the potential risk to a break-even proposition. What he stressed was the opportunity to be involved in a prestigious studio production quickly and Spyglass agreed to put up half the costs and receive co-credit on a picture it neither developed nor had any part in the creative decision making.

The story might have ended there except that Eisner continued to press Roth on finding additional partners to eliminate Disney's risk. So, another call was made to Spyglass in which it was offered complete ownership with the studio dropping its distribution fee to a rumored 12%. The Sixth Sense went on to become a box office phenomenon that reaped several hundred million for Spyglass and roughly $40 million for the Mouse House. Disney stopped pursuing the policy and, with the money saved, hired Michael Ovitz to be Eisner's second in command. Admittedly, the last cause-effect ratio may be slightly strained.

- by Leonard Klady