BACK IN THE 1970S AND ’80S, my job with the parent company of Warner Bros. came with an unusual and delightful perk — the chance to sit silently in John Calley’s Burbank studio office and, in between his phone calls to Stanley Kubrick, Mike Nichols and even the occasional agent, to talk to him about the movie business.
On one such visit, I think it was around 1981, John confessed to me his “worst nightmare” for Warner Bros. Suppose for a moment, he began, the top talents in our business — filmmakers and stars alike — figured out that, while they needed the studio to distribute their pictures, in fact they did not need us to finance them.
He pointed out that the majors have historically been richly rewarded for taking the “risk” of putting up the cost of movies that they then distribute. He grew genuinely alarmed at the prospect of the majors being reduced to mere earners of distribution fees, denied the opportunity to bet the shareholders’ money on the possibility that a movie might actually earn money once P&A was recouped, distribution fees deducted and participations — if any — were paid.
What John knew, and I did too back then when I had access to the real numbers, was that this happened far more often than was generally assumed by Wall Street.
Fast forward to 1999. Calley’s 20-year-old nightmare has become an article of faith at several of the majors, whose leaders have “laid off” half or more of the risk on their production program.
This goes down like a well-mixed Cosmopolitan with the current breed of Wall Street analysts, who have been trained to believe that making motion pictures is, in financial terms, both a risky and a low-margin business.
And who can blame them? For the year 1999, when Disney and Warner Bros. were the No. 1 and No. 2 film rental and video champs, the combined reported “filmed entertainment” profits for the two companies — excluding a few unusual items — were only $456 million on total sector revenues of $13.2 billion for the pair.
THIS DISMAL PROFIT PERFORMANCE have something to do with the fact that Disney handed “The Sixth Sense” to Spyglass Entertainment, which financed 100% of the negative cost of this $650 million worldwide grosser. It was then distributed by Disney domestically and in many of the key foreign territories. But it is Spyglass, not Disney, that owns the copyright — and may, if it wishes, make “The Seventh Sense.”
Meanwhile, WB was finding, in Village Roadshow, a willing financial partner to share the risk of “Analyze This” and “The Matrix.” And share they did. These studio co-venturers, not being public entities, don’t publish their P&Ls. But I have little doubt they would make tasty reading.
Now, I understand the point of view of those studios that have elevated co-financing to the status of religious principle. But as the joint venture partner and distribution deals pile up, some studios are thinning development staffs and dropping longtime producer deals, calling into question the very nature of a studio.
If I can be so presumptuous as to speculate on, for example, Jonathan Dolgen’s interior monologue, I suspect it goes something like this: “If in a typical year I’m going to spend $2 billion-plus making and marketing my current program, and I get my distribution fees, even if they’re down to a lousy 15%, off the top, why not bring someone in for half the negative cost? My P&A is never really at risk, I don’t have to ask Sumner for as much capital, and Wall Street analysts will positively kvell about how prudent I am.”
The downside, Jonathan’s imaginary dialogue continues, is: “I have a couple of breakaway hits on which I’ve given up half the backend or perhaps all the foreign. Should be my worst problem!”
What is the flaw in such thinking? None, if you are capital-constrained — as Paramount was in the immediate post-Viacom days or as MGM is today. If that’s the case, it’s certainly better to own half of 15 movies and maximize your distribution overhead rather than 100% of seven or eight pictures.
But when capital is adequate or even plentiful, co-financing is making one of two statements: It’s a random walk when it comes to film selection, or making movies is essentially a lousy business and I’d better find some guy who can write nine-figure checks in return for a zippier social life.
Well, I don’t believe either of these statements is right.
TO LEARN IF MY THINKING was hopelessly outmoded, I checked in with Calley again. I asked him if these days of giga-budgets and mega-star salaries had caused him to revise his 20-year-old perceptions.
“The nature of the risk hasn’t changed, just the magnitude of the bet,” John began. “We find it hard enough to generate 24 pictures a year we truly believe in, and, when we find them, we’re not looking to lay off part of the investment.”
Calley went on to carefully exempt those situations where partnering with a DreamWorks or a Miramax is the only way they can work with a top filmmaker or share in a particularly desirable piece of material.
What about all those turkeys where getting half the budget from a partner represented the only positive number on the film’s P&L?
The examples where this is true may be numerous, but one “Sixth Sense” can offset several years’ worth of losers.
There is a simple rule studio chiefs should keep in mind: You can only lose 100% of your total investment, but many films can — and do — make returns far higher than 100%.
And those returns keep coming in 10, 20 or more years from now.