Seeing a cloud under every silver screen

THE PAST YEAR HAS BEEN rough on the stock prices of many companies — media kingpins included.

Nearly all of them closed 2000 at or near their 52-week lows — this in a year which began with widespread euphoria amid the early January announcement of the marriage plans of mighty Time Warner and then-lofty AOL.

Certainly a blah year at the domestic box office hasn’t helped. But TW’s recent statement that New Line’s “Little Nicky” was among the leading causes of its fourth-quarter earnings shortfall has raised all the hoary fears that the movie business is, gadzooks, unpredictable.

Now this column has frequently faulted Wall Street for its persistent belief that making movies is a terrible business. (Owning them it regards as a completely different matter.)

Well, once again I am going to take on the difficult task of making the contrary case.

My burden has been compounded by a severe outbreak of crepe-hanging by studio bosses –among the very few whose career choice, not to mention naked self-interest, should incline them to accentuate the positive.

But then there’s nothing like the looming prospect of sitting down at the bargaining table with rapacious actors and those perennially put-upon screenwriters to make the front-office types see a cloud in front of every silver lining.

THE CEO OF MGM, for example, has gone so far as to publicly proclaim the immediate tonic effect a cessation of film production would have on the company’s P&Ls.

Alex Yemenidjian assured a group of investment bankers that the Lion could actually “go into profit without producing a picture.”

Consider, for a moment, the reaction if the CEOs of, say, IBM or General Motors were to announce that their profits would rise if only they didn’t have to produce their primary product.

Yet this statement regarding movies is seen as unsurprising and is, in its most literal sense, correct.

But that fact obscures the underlying fundamentals of the major vertically integrated motion picture companies. Shorn of accounting absurdities and short-term factors, I believe these fundamentals to be extraordinarily favorable.

The activity of making and distributing a full slate of motion pictures has economic characteristics of which most industries can only dream, however much recent financial results at most of the majors may suggest otherwise.

THE MOST BASIC FINANCIAL FACT about making movies is that it is an incremental revenue business.

Once the relatively fixed costs of production, distribution and marketing are recovered, nearly every additional dollar is profit.

Paramount, for example, has shown five straight years of solid profits of $400 million-plus from its various movie operations. (That Disney, for its last two fiscal years, could report total “studio entertainment” profits of only $264 million on revenues of $12 billion while ranking No. 1 in domestic and foreign film rentals both years is an accounting subtlety I will leave to a future column.)

As for underlying demand, it is only growing. The markets for movies are almost all expanding, and they are, thanks to the worldwide march of technology, growing in number.

American movies not only enjoy a 98% share of the domestic market, they constitute 80%-95% of foreign markets, save for France and Hong Kong, where they must make do with shares closer to 60%.

In the area of new technology, companies in other industries invest sums to develop hardware that make “Dr. Seuss’ How the Grinch Stole Christmas” or “Charlie’s Angels” seem positively bargain basement. Those devices enhance the usefulness, attractiveness and profitability of vast libraries of feature films, most of whose costs have been recouped long ago.

Those libraries have value that is not always readily acknowledged. Time Warner’s recent earnings warning might have cited the amazing success of “The Exorcist” in re-release — some $35 million in pure profit from a 27-year-old movie.

WHILE MOST AMERICAN BUSINESSES have trouble attracting and keeping eager and capable workers in sufficient numbers, the film industry has its pick of young workers, usually willing to work for subsistence wages just to get a foothold in the business.

But perhaps the most common complaint about the movie business is its capital intensiveness. This admitted truth is the flip side of a wonderful advantage the established film companies possess: enormously high barriers to entry.

It has taken almost seven years for the combined brains and reputations of Spielberg, Katzenberg and Geffen plus $2.7 billion of OPM (Other People’s Money) to make DreamWorks effectively the first new major in 50 years.

Conversely, decades of brutal mismanagement at MGM and the sale of the bulk of its library 17 years ago crippled but couldn’t kill that company. Indeed, under Yemenidjian’s tight fiscal management, the company is finally showing distinct signs of life.

Would you like to know what’s really wrong with the business? That secret was vouchsafed to me nearly 30 years ago, when I confessed to one of Wall Street’s genuine seers, Oppenheimer founder Leon Levy, my plan to leave the financial trade for a job at Warner.

He urged me not to, saying that the movie business was a terrible business. “Why?” I asked.

“Because you have to be smart,” he responded.

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