Rough cuts on movie money

New studio mantra: Honey, I shrunk the budget

Here’s a surprising plot twist for Hollywood.

At a time when the motion picture business is showing new signs of life — with box office achieving boffo heights and with DVD and foreign markets generating robust new revenue streams — studio production budgets are shrinking, some by hundreds of millions of dollars.

No studio chief will discuss budget cuts on the record, but it’s the worst kept secret in Hollywood. As corporate parents and Wall Street overseers grow increasingly squeamish about the volatility of the movie industry, the majors are all feeling the pinch.

Each studio has its own set of problems — and many of these are not specific to the movie industry; instead, they are the function of a decades-long trend toward globalization and consolidation and a moment of economic uncertainty across all industries.

“These companies used to be cottage industries, driven by the revenues of motion pictures,” says producer Peter Guber. “When I started at Warner Bros. in the 1960s, it was a $400 million company. Last year, it lost $100 billion dollars.”

Troubled congloms have less tolerance than ever for red ink and big risk.

“There’s not a business in the country now that is not continually looking for ways to cut and save. We’ve been one of the last to be hit,” said one studio exec.

Universal Pictures has been put on a crash diet in preparation for an asset sale by its overextended corporate parent; the Mouse House is being squeezed by the ad recession of a sibling TV network and declining attendance at theme parks.

Sony acknowledged last week its biggest business, electronics, needs help and profits are on the skids. Sony is pinching pennies across the board and took the unusual step of appointing a seven-member oversight committee to examine costs at the studio.

In a quest for frugality, Viacom’s Paramount seems to be turning out ever fewer movies.

And AOL Time Warner, Jeff Bewkes recently touted Warner Bros.’ and New Line’s focus on “sustainable growth that balances risk and return.”

He was speaking to Wall Streeters about quarterly earnings for the giant conglom, which is weighed down by a mountain of debt and an ailing America Online.

“This is unrelated to the performance of the motion picture part of the companies,” says one top rep who works with all the studios. “That’s the great irony in this whole thing. The companies have other concerns in terms of capital allocation. They need the money elsewhere.”

The net result is the same for every major: Studio chiefs are desperate to trim the fat on the lot, while maintaining the same level of productivity and the same volume of pics in the pipeline.

Studios are achieving budget cuts in several ways:

  • An increasing number of studio productions are bankrolled jointly by other studios and outside financing sources. This year, 11 major releases will be co-ventures of two or more studios. A decade ago, the 1993 cannibalist drama “Alive,” a co-production of Disney and Paramount, was the year’s only multi-studio effort.

  • Studios are chipping away at overhead and development costs. They’re spending less on premieres, capping expense accounts, consolidating and outsourcing marketing and publicity services and even restricting travel privileges — few production execs fly first class and some now fly coach.

  • Studios are scaling back deals for new material and talent. With fewer big movies going into production, there are fewer opportunities for actors, writers and directors. That’s not a problem for top players, but mid-level talent is getting squeezed.

    “The $1 million writer is a really hard sell,” says one agent, who added it’s better to get $500,000 for three scripts than $1 million for one script: “Don’t build your writers’ quotes up too high because you’ll get your client priced out of the market.”

    One-step deals are the new norm for writers, and the volume of production pacts around town remains flat this year, with several bringing their own financing to the table.

  • Agencies are creating production funds in order to remove the financial burden from studios and generate jobs for their clients. The end of the master franchise agreement last year left CAA, ICM and WMA free to seek foreign financing deals and make equity investments in production companies.

In 1998, New Line’s Michael Lynne and Bob Shaye gambled the future of their company on a single franchise, the “Lord of the Rings” trilogy, which cost nearly $300 million to produce.

It’s a gamble few studio chiefs are willing to make these days.

“Nobody wants to take the big gulp alone right now unless you own the franchise,” says Guber.

Many of this year’s top releases are co-ventures of two or more studio partners, often with a handful of territories farmed out to smaller players.

“Peter Pan” is a co-venture of Revolution, Sony and Universal. “Master and Commander: The Far Side of the World” was bankrolled by Fox, Universal and Miramax. “Terminator 3: Rise of the Machines” is a co-production of Intermedia and C2; Warner Bros. has domestic rights, Sony has foreign and Tokyo-based indie Toho-Towa has the pic in Japan.

Increasingly, studios will parcel out individual territories instead of selling foreign rights wholesale. Rights to places like Turkey or Malaysia don’t typically fetch more than a couple of million, but they add up. “We are migrating from co-financing to selling territories,” averred one studio finance exec.

Studios are also growing more dependent on co-financing producers like Spyglass, Intermedia and New Regency, many of whom can more nimbly pursue overseas subsidies and tax credits. The collapse of foreign financing outlets like the German Neuer Markt and the international pay TV market has, of course, robbed financing producers of some of their clout.

But those who have remained robust are now inking aggressive deals on studio tentpoles.

Spyglass, for instance, is partnered with Universal on “Bruce Almighty” and with U and DreamWorks on “Seabiscuit.”

“Because the studios are cutting back on production spending, and they need to fill their slates, it creates a lot of opportunity for us,” says Jon Gumpert, vice chairman and head of motion picture operations at Intermedia.

Split-rights deals are a windfall for studios when the pics don’t work. But with a blockbuster franchise like “The Matrix,” it can be a major drag on profits.

Warner Bros. brought in co-financing partner Village Roadshow before the first “Matrix” was shot and became a runaway hit. It was the first pic for Roadshow on the lot, and now the two entities are 50/50 partners in the next two installments.

Another pitfall is a loss of franchise control. Partners who have no role in developing material can still wind up with a say in not only theatrical distribution, but merchandising and TV shows, to say nothing of sequels.

Until the health of the media congloms improve, the situation isn’t likely to get any better.

“It goes in cycles,” says Strike Entertainment partner Tom Bliss. “The clock will cycle around again when the balance sheets are strengthened and when there’s growth again at the conglomerates.”

That may not happen, however, until the overall economy shows signs of recover.

“We’re looking three years down the road before we see these budgets restored,” says one exec.

(Cathy Dunkley, Jill Goldsmith, Gabriel Snyder and Anthony D’Alessandro contributed to this report.)

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