The film processing business, critical to moviemaking but devoid of Hollywood glitz, faces slow growth and narrowing profits from a host of pressures. Chief among them are industry consolidation and the potential of electronic distribution to theaters.Struggling with these trends, the world’s twin titans, Deluxe Film Labs and Technicolor Inc., are locked in a fierce battle for market share. Increasingly they are buying business. According to court documents relating to a 3-year-old antitrust suit and recent interviews, the labs have for years written multimillion dollar checks to the major studios in return for long-term contracts to process film. Lately, in an effort to lock up even more business, the labs have turned to buying small stakes in indies. Queried on so-called “upfront payments,” no studio exec wished to speak on the record. Technicolor acknowledged the practice, but not specific amounts. Deluxe would not comment. In September, Deluxe drubbed Technicolor in the contest for Miramax Pictures’ business. Deluxe then sank $ 5 million into the cash-strapped indie distribbery, sewing up Miramax’s 20-pic slate. Great timing: Disney gobbles up Miramax the following spring, inevitably goosing the number of exhibition screens — and prints needed. Prints cost about $ 2,000 each (for five reels). A typical release calls for 800 to 2,000 prints, for which studios are chargedan average of $ 2 million, or less than 5% of the cost of producing and distributing a major film. Unsure whether they will survive the inevitable transition to electronic distribution, lab execs say they need to lock in customers for eight years or more while studying the options themselves. Since Britain’s Rank Organisation snapped up Deluxe three years ago from Fox Inc. for $ 150 million in cash, the two labs have been undercutting each other to win business. When Rank proposed buying Deluxe, it already owned the Toronto-based Film House Lab, causing the U.S. Justice Dept. to scream antitrust. But rather than force prices up, the merger permitted a more muscular Deluxe to battle market leader Technicolor. Losing competitors Nearly squeezed out by the giants is Consolidated Film Industries, now a distant third in capacity and capabilities. To stop its slide, it is trying niche processing, such as 70mm film and trailers. “Rank and Technicolor have systematically set out to dominate the mass duplication business of release prints and homevideo,” says Tom Ellington, chairman of CFI’s executive committee. With the labs’ overhead fixed, the goal is to woo enough customers to keep the equipment busy. Because both labs boast high quality and fast turnaround, service wasn’t enough to distinguish them. That has led to the unusual, unpublicized but not uncommon practice of “upfront payments,” or “advanced discounts.” The more volume a studio promised, the better the price. Deluxe now counts Paramount, 20th Century Fox, MGM, Orion and Universal through its Film House lab. Technicolor claims Disney, Warner Bros., Sony Pictures and Carolco. In February 1992, competition reached a fever pitch when Deluxe snatched Paramount from Technicolor. A rumored $ 36 million in advanced discounts would be generous, even for an eight-year package. Sources say typical deals had been for no more than five years. The practice, say insiders, started with Ronald Perelman, who through his acquisition company, MacAndrews & Forbes, bought Technicolor in 1984 for $ 70 million. Four years later, when he sold the lab to Carlton for $ 780 million in cash, he’d cut a few precedent-setting deals. For one, Technicolor put $ 30 million into TriStar Pictures for a 6% stake, reaping an enormous windfall when Columbia bought out the studio in 1987. Carlton, in turn, continued to build its stable by reportedly signing up Warners and Disney in 1989 with upfront payments, according to court documents. The studios came to expect the same enticements when Rank bought Deluxe in 1990. While that deal immediately brought Film House and the L.A. lab together, sparking the suit, it also made Deluxe big enough to challenge Technicolor. According to court transcripts, by 1990 Technicolor controlled 65% of the market , leaving Deluxe with less than a 35% share. To seal its commitment to revitalize a neglected Deluxe, Rank vowed to pour $ 14.5 million into the lab over five years. It has made good on its promise. And Rank’s fiscal year-end report from October 1992 puts the film and TV division, which includes Deluxe and Film House , firmly in the black with $ 42.2 million in profits, a 41% increase from 1991. Independents targets With the major studios locked up, Deluxe and Rank are now taking an equity stake in the indies. This can be a tricky investment. Technicolor put $ 14 million in Carolco Pictures in 1991 for an eight-year contract, but soon saw the indie near financial collapse. Jarvis is much more optimistic about last summer’s $ 10 million investment in Savoy Pictures. “You never know when a Savoy will become a TriStar,” says Jarvis. “We hope it will.”
Want Entertainment News First? Sign up for Variety Alerts and Newsletters!
- Petrol Advertising, Burbank, California
- Company Confidential, New York, New York
- Entertainment Partners, New York City, New York
- University of California, Los Angeles, Los Angeles, California
- Drexel University, Philadelphia, Pennsylvania