Warners works B.O. wizardry

Studio relies on risk-sharing to offset disappointments

Will Warner Bros. — the most tentpole-centric of studios — have to rethink its strategy after the icy “Polar Express” and “Alexander” the not- so-great?

The reality is that despite two misfires, WB is fine as long as Harry Potter keeps working his magic.

Every studio has its ups and downs, but WB is suffering an embarrassment due to the twin disappointments of “Polar Express” and “Alexander.”

Embarrassment yes; financial ruin, not a chance.

The studio’s tentpoles are erected on savvy partnerships which leave much of the risk with producing partners — and partners on those two movies who may take the hit.

This year, the studio expects to top its 2003 record of $1.63 billion in foreign box office —- and is expecting boffo numbers for the year’s remaining pics — especially for “Ocean’s Twelve.”

WB’s domestic grosses in 2004 (through November) are right at $1 billion, putting the studio in third place behind Sony and Disney. (Warnerstook in $1.16 billion domestically in 2003.)

Warners’ other high-profile Christmas releases — Clint Eastwood’s “Million Dollar Baby” and the musical “Andrew Lloyd Webber’s The Phantom of the Opera” — are already gaining kudos traction.

Moreover, the studio will share in likely accolades for “The Aviator,” on which it is a 50/50 domestic partner with Miramax, having invested some $20 million in the film.

In terms of production spend, WB execs claim the studio only has $15 million invested in “Million Dollar Baby” (which was financed by Lakeshore) and $19 million in “Phantom” (Webber himself financed it) in return for domestic distribution rights.

Most importantly, the studio’s coffers are bulging from the Harry Potters, its most profitable franchise ever, whose only significant gross participant is author J.K. Rowling. It’s unclear whether Chris Columbus had participation on the first two pics but producer David Heyman now does on the franchise starting with “HP3.”

To date, the three “Potter” pics have grossed over $2.64 billion at the global box office. DVD revenue for the first two stands at $600 million domestically. The studio will release the DVD of No. 3, “Harry Potter and the Prisoner of Azkaban,” this month: Revenues from that release are expected to match its domestic box office of $250 million.

The success of the franchise has hinged on the studio’s ever-increasing strength at the overseas box office, where each pic has close to doubled its domestic gross.

The overseas B.O. has also saved high-profile pics like “The Last Samurai” and “Troy,” whose international numbers far surpassed their domestic perfs.

Overseas B.O. will likely help Warners salvage its otherwise unlucky November tentpoles.

WB has $35 million invested in “Alexander” for domestic rights and another $40 million for p&a. Studio laid down an additional $15 million for five overseas territories — the U.K., Latin America, Italy, Australia and New Zealand.

The Oliver Stone-directed epic has so far grossed $24 million domestically.

Even more than Warner Bros., it was Intermedia’s chairman Moritz Borman who rolled the dice on the $155 million epic.

Warners will recoup its entire P&A spend at first-dollar gross from the domestic box office and receive a distribution fee.

Despite his company’s $65 million investment in the movie production, Borman is adamant that Intermedia mitigated its risk through sales to overseas distributors — with the Japanese paying $10 million, Germans $12 million and French $15 million for their respective territorial rights. (For Intermedia to make money in foreign the local distribs must first recoup their upfront fee and their p&a.)

“Alexander” s overseas box office prospects are probably rosier than domestic coin would indicate: Pic has already opened at number one in Scandinavia and Russia.

The production also took advantage of tax breaks, incentives or film funds in the U.K., Germany and France, which Borman says jointly covered another $35 million. (Advances from Warners against homevideo revenue from “Terminator 3,” which Intermedia produced and financed, also helped the German company finance “Alexander.”)

“From a financial point of view, this picture was always conceived of as a foreign picture,” Borman says. “Warner Bros. was the last one who came in and picked up territories. The financing of the picture was covered out of Europe.”

Though Borman admits he is disappointed that the pic will not make money for him in the U.S., he maintains the losses are contained for both the studio and his own company.

As for the $170 million “Polar Express,” pic will most likely easily pass $100 million in grosses domestically by Christmas, even though it got off to a very shaky start. (So far, the Tom Hanks vehicle has grossed $83 million Stateside.)

Its first-dollar gross participants — including Robert Zemeckis and Tom Hanks — big budget and P&A commitment mean the studio needs a strong overseas box office number and mucho DVD revenue to help the film break even.

But even in this case, the “Polar Express” disappointment was mitigated by WB Entertainment prexy and COO Alan Horn’s decision to split the hefty production budget and global marketing spend (another $110 million) 50/50 with producer-investor Steve Bing.

“Polar Express” is Bing’s biggest investment in the movie biz to date. He spent $85 million on the production and is financially liable for another $55 million, which is his share of the global p&a spend.

The pic will have a long row to hoe in foreign box office, DVDs, and sales to TV before Bing sees a return on his investment.

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