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Polygram Poised To Play In The Majors

Sometime in 1996, Michael Kuhn is hoping to sneak up on the Hollywood studios and give them a shock.

That’s when Polygram Filmed Entertainment is planning to emerge from its chrysalis with the launch of its U.S. distribution company and reveal itself in all its glory as a European-owned major studio, pumping movies of all shapes and sizes through its own outlets around the world.

Until then, Kuhn and his mentor, Polygram president Alain Levy, are happy if rival Hollywood execs, international film financiers and analysts continue to find the intentions and internal workings of PFE something of a mystery, and to question whether the company really knows what it’s doing.

“When people ask, ‘What does Hollywood think of Polygram?’ I say I hope Hollywood hasn’t noticed us,” Kuhn explains. “I would like them to suddenly wake up to the fact we’re here when we open our worldwide distribution, and to ask, Where did they come from?'”

But there are still a few mountains to climb first. More than anything, PFE prexy Kuhn urgently needs to get a regular supply of decent films flowing from the company’s main production labels – Propaganda, Interscope and London-based Working Title – to follow its sole hit to date, “Four Weddings and a Funeral.”

The out-of-the-blue success of “Four Weddings” has made it somewhat harder for Kuhn to keep the profile low and the waters muddy. But it’s typical of Polygram’s stealthy advance that while “Four Weddings” was attracting all the attention last year, the crucial turning point in its film strategy passed without fanfare outside the company.

Late last summer, Kuhn was called before the Polygram board to account for PFE’s first three years and to seek a new mandate for his strategy to build a global movie studio from scratch. He got it: The board approved his plans for another four years and gave him significantly deeper pockets to carry it out.

But it was close. Kuhn recounts the stark alternatives: “We made our report to the Polygram board on the whole thing. We presented them with all the figures so that they could tell us they didn’t like it and shut us down, or tell us to go on. They said go on – but now it’s really serious.”

Timely ‘Wedding’

The arrival of “Four Weddings” could not have been more timely. Before that, the main production labels had suffered a string of commercial and critical flops with films like “Posse,” “Kalifornia,” “Holy Matrimony” and “Romeo Is Bleeding.”

PFE’s balance sheet did not make pretty reading for the cadre of cautious and skeptical Philips engineers, music honchos and bankers who guard the shareholders’ interests.

Kuhn insists that PFE’s performance had stayed within the financial parameters set three years before, notably a $200 million ceiling for net cash exposure. But sources close to the board suggest that this was only true after tax credits and projected future revenues were taken into account, and that in reality PFE had lost twice as much and allowed its cash exposure to get twice as large as originally expected.

There was also some concern that while PFE’s average costs of production was well below Hollywood’s average, the average box office performance in the U.S., a rough indicator of eventual profitability, was proportionately even lower.

But, as Kuhn points out, the key fact is that the board took a long hard look at the figures and gave PFE its blessing. Of course, it helped that by the time the board came to make its decision, Kuhn had delivered a $4.5 million pic that was well on its way to grossing $250 million worldwide from theatrical alone, and is estimated eventually to inject more than $50 million into the company’s bottom line after video and TV sales.

It was precisely the kind of lucky accident that PFE’s system of semi-autonomous labels is designed to cause. “No one knows nothing about movies, so you’d better cover the waterfront with a whole range of tastes and a whole range of budgets,” Kuhn says. “It’s just like the record business – one year this label is hot and that one isn’t, and one company has a hit that just falls out of bed.”

But far from easing the pressure, “Four Weddings” and the board’s greenlight for the next phase have simply upped the ante. With PFE now providing more than 10% of Polygram’s revenues – music remains overwhelmingly the company’s core business – film figures will be broken out separately for the first time. As the man himself says, “All the successes and failures of Michael Kuhn will be there for all to see.”

Leaving aside the key issue of production quality, Kuhn, a rigorous self-critic, nonetheless believes that the strategic plan has stood up well.

Indeed, in Kuhn’s view, the creative failures confirm that the company was right to move cautiously into production, spreading itself across several labels to avoid over-reliance on a single team, working up gradually from low-budget to higher-budget projects, and not committing huge sums of money to setting up a distribution infrastructure until the production companies had started to get their acts together.

But he blames himself for being too conservative, for believing the mystique that has built up around the film business. “This kind of mystification is just the way the establishment keeps newcomers out,” he says. “We’re doing things differently from the studios, but I think our managers and our distributors are every bit as good.”

The unprecedented fact about “Four Weddings,” he says, is that it was the first time a Euro company had marketed its own film so successfully direct to the U.S. public, rather than handing it over to a local distrib.

PFE also has refuted the received wisdom that it would be impossible to graft movie activities onto Polygram’s music operations around the world: “There’s a common view that the film business is such a mystery that mere record people cannot understand it. Well, that’s proved to be total bollocks as well,” Kuhn declares.

PFE’s next priorities include the acquisition of film catalogs and the big move into U.S. theatrical distribution.

Polygram’s first big catalog purchase, the acquisition of ITC Entertainment for $153 million, surprised many people in Hollywood, who had valued ITC much lower. But the move fulfilled two strategic goals for PFE: First, to generate revenues that will tide the company through the ups and downs of production, and second, to give it a much-needed TV distribution biz in the U.S.

Brit channel for U.S.

The bonus for Polygram – which is based in London but is 80% owned by Dutch electronics giant Philips – is that the ITC library’s vintage British programming plays as well in international markets as in the U.S., and includes several classic titles, such as “The Prisoner” and “Thunderbirds,” that are ripe for adaptation into big-budget movies. Kuhn has also suggested that it could form the basis for a Brit-themed cable channel in the U.S. The launch of a major U.S. distribution venture will come when Interscope’s current commitment to Disney expires, which should be sometime in 1996. At the moment, PFE (which paid $35 million for a 51% stake in Interscope) takes only international rights to the company’s movies, although it puts up the bulk of the production budgets. Kuhn explains that when Disney’s domestic P & A spending is added to its minority share of the budget, Disney’s financial commitment to each project roughly equals PFE’s.

Polygram already has a half-share of Gramercy Pictures, its joint venture with Universal to handle films released with less than 1,000 prints. It also has a distribution deal with MGM, which would collect fees to release up to four big-budget films a year, although it has yet to handle a single one.

Canny with middleweights

That’s partly because Gramercy has proved unexpectedly adept at handling mid-sized movies that were originally earmarked for MGM, and partly, in the case of a $45 million movie like Working Title’s “Paris Match,” because PFE arranged a co-financing deal with Fox.

Around the world, Polygram’s push into direct theatrical and video distribution is sailing confidently ahead under PFE Intl. prexy Stewart Till. It already owns Pan-Europeene in France and MFP in Benelux, and it is launching its own operation in the U.K. this spring. In Spain it has a joint venture with local major Sogepaq, and next on the agenda is Australia, where PFE plans to have its own outlet by the end of the year. Video sell-through and rental operations have been successfully grafted onto Polygram’s existing channels for releasing its own musicvideos.

PFE produces low-budget movies around the world – in France, Benelux and Hong Kong, for example – principally to feed its local distribution companies, but with an eye to export through the international pipeline if appropriate. Till also acquires a select number of small pix from indies, and has recently supplied PFE with some of its most successful titles, including the Aussie comedy “Priscilla, Queen of the Desert,” the Scottish thriller “Shallow Grave” and, in the U.K. alone, “Reservoir Dogs.”

The success of the acquisition policy only casts into sharper relief the weak record of PFE’s own labels. The label concept – which gives production companies creative freedom to develop, while being financially accountable to Kuhn and Levy at the center – gives producers a big responsibility.

Kuhn insists that if a label desperately wanted to produce something he felt was not financially viable, it could do so, but this has never happened. Usually, as in the case of Working Title’s $12.5 million Tim Robbins pic “Dead Man Walking,” which starts shooting in April, a protracted period of argument ends in a budgetary compromise, with the producers finding a way to squeeze costs down to a level Kuhn can swallow.

But this can be a frustrating process for outside talent. Robbins, who has an overall deal with Working Title, reportedly got so angry with the conflicting signals that he tried to shop the project to other financiers. Getting anything into production still seems to be a struggle. Aside from the Coen brothers’ $7 million “Fargo” and Jodie Foster’s “Home From the Holidays,” the slate for early ’95 looks thin.

The absence of a single creative figurehead – Kuhn, despite his flirtation with playwriting as a young man, insists he’s just the money man – can confuse outsiders. But Till argues, “What you lose in clarity, you gain dramatically in having a lot of intelligent people who are a bit empowered to make decisions.”

Kuhn accepts that both Tim Bevan and Eric Fellner at Working Title, and Steve Golin and Joni Sighvatsson (who recently ankled) at Propaganda, took time “to figure out the sorts of movies they wanted to make in the wider Polygram context.” Both companies come from a quirky low-budget tradition, and Kuhn says turning around their development slates to meet Polygram’s ambitions was “like turning the QE2, and the fruits of that haven’t emerged yet.”

Management troubles didn’t help. “At Working Title, where we had Sarah Radclyffe, she and Tim fell out, then she left and Graham Bradstreet and Tim fell out, so Graham left and we brought in Eric, and then Tim and Eric are snug as two bugs in a rug. Five minutes later, after 10 years of perfect harmony at Propaganda, Steve and Joni fall out. I assume it will go on forever like this,” Kuhn observes wryly.

With pix like “Paris Match'” and Propaganda’s “Candyman II,” Kuhn believes they are moving firmly in the right direction. Bevan says that 18 months ago Working Title looked like the most vulnerable of the Polygram labels, but it was only the freedom they were given under the label system that allowed “Four Weddings” to emerge.

Interscope has proved its credentials as a producer of big-league Hollywood hits, but since joining the Polygram stable it has had probably the worst run in its history with duds like “Terminal Velocity” and “The Air Up There.” Kuhn ascribes this partly to the bad luck of being caught in the Katzenberg-Roth handover at Disney, partly to the inevitable cycles of success and partly to a period of adjustment to Polygram’s methods. Kuhn has high hopes for the upcoming “Mr. Holland’s Opus.” “Nell,” the first film from Polygram’s three-year deal with Jodie Foster’s Egg Pictures, has performed moderately, grossing $27.2 million so far in the U.S. through Fox. Other labels still to come on stream include Chris Blackwell’s Island Pictures and some kind of venture to make movie versions of Andrew Lloyd Webber’s musicals with the composer’s Really Useful Group, of which Polygram owns 30%.

Countering H’wood history

If Kuhn and Levy succeed in their aims for Polygram, it will be an extraordinary achievement, running counter to the past 50 years of Hollywood history littered with the carcasses of those who tried and failed. Sometimes the smoke-screens that drift around PFE seem designed less to baffle its competitors than to protect the company from the grandness of its own ambitions.

But behind the diffident and disingenuous manner, you can be sure they know precisely what’s at stake. As Kuhn notes, “I would be incredibly stupid and egotistical not to be cautious about what we’re doing.”

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