H’wood gets grossed out

Superstar first-dollar deals send studios reeling as cost of tentpoles continues to escalate

Last week, Tom Cruise — thought to receive some of the richest backend deals in Hollywood — and Paramount, under the new Tom Freston-Brad Grey regime, agreed to change the terms on “Mission: Impossible 3.”

Both sides were anxious to make sure the production got a greenlight; everyone involved expressed happiness at the outcome.

The deal is significant for Paramount, since it marks the new regime’s first tentpole. But more interesting was the town’s reaction to reports that the actor-producer had agreed to shave his points on the pic.

As it turns out, insiders deny this, insisting that the key cuts involved production budget and locations. But the details of “M:I-3” became almost incidental as studios and creative types became frenzied at the mere mention of a first-dollar gross deal. These days, studios and stars are increasingly trying to kick each other in the backend.

Studios are committed to tentpoles. But, in their ongoing war over profit participation, execs say they’re tired of seeing stars and directors take home tens of millions through first-dollar gross deals before the studio has even recouped production and marketing expenses.

Stars and directors say they deserve big paydays because they’re putting their equity — i.e., their reputations — on the line with each film. In addition, they’re digging in their heels over backend due to a perennial suspicion that studios are doctoring the books.

One of the central sticking points is, not surprisingly, the DVD.

Studios pay participants out of a pool limited to 20% of DVD revenues. The majors and the guilds agreed on that formula more than 20 years ago, when homevideo was in its infancy and Hollywood said it needed the 80% to break even. Now with DVD coin outweighing box office, talent says they are being shortchanged on DVDs, so are forced to ask for a bigger part of the gross.

Studios counter that this attitude only reinforces the need to retain the 80%, since a distrib often remains in the red — even with hefty box office grossers — until the final DVD tallies are in.

Talent working for a percentage of a film’s grosses is a decades-old practice. In the early 1950s, then-agent Lew Wasserman invented an arrangement whereby client James Stewart would get points in films made for Universal, which couldn’t afford the star’s salary.

The backend deal for the pic “Winchester ’73” gave the actor net points in lieu of a salary, with the money coming from the studio’s rental, or cut of the gross (after exhibitors get their share).

Now, most stars get salary plus backend, and studios are fed up as the percentage points creep up — especially in an era of ballooning film budgets.

No more grin and share it

One film exec says studios are waking up to a slippery problem that had been ignored for a long time.

“It made sense when budgets and marketing costs were lower,” says the exec.

Lawyers and agents who negotiate say the majors are standing fast. Says one dealmaker, “The studios are making a concerted effort to hold the line at 25%.”

Hollywood has vowed such caution before, in the wake of blockbusters with backend components that exceeded 30%, like Universal’s “How the Grinch Stole Christmas” and Sony’s “Men in Black 2.”

Even back then, studios insisted they wouldn’t go past 25%. But when a tentpole has a star actor, star director and star producer, it can be tough to fit in everyone under that cap.

Hollywood is generally sanguine about films with one profit participant, such as last summer’s Fox release, “The Day After Tomorrow” (director Roland Emmerich).

And there are examples of summer tentpoles in which no actors or helmers received first dollar gross, such as Fox’s upcoming “Fantastic Four,” directed by Tim Story (“Barbershop”) and starring Michael Chiklis and Jessica Alba. The studio enjoyed similar terms on the first two “X-Men” movies.

The situation gets tricky with films in which several people have points.

“Cinderella Man,” with its powerhouse trio of Russell Crowe, Ron Howard and Brian Grazer, is one backend-heavy title.

Some rivals estimate that DreamWorks-Par’s “War of the Worlds” may fork out a record amount of the gross to Cruise and director Steven Spielberg, possibly topping the 35% gross points that were said to have been paid out on “Catch Me If You Can” — split among Spielberg, Tom Hanks and Leonardo DiCaprio.

Studio execs know something that some box office trackers haven’t realized: There’s a big difference between “profits” and profitability. Some of the biggest box office grossers proved profitable for backend sharers long before they actually generated profits for the studio.

Though “Meet the Fockers” passed $500 million at the global box office, the most ever for a live action comedy, it’s likely U had just about broken even on the film before it hit DVD, because 27.5% of the gross went to players including director Jay Roach and stars Ben Stiller and Robert De Niro.

Warner Bros. and Stephen Bing, which footed the production and marketing costs on “The Polar Express,” saw the film’s global box office hit $283 million.

The film will be released on DVD this holiday season, but Hanks and director Robert Zemeckis have already seen a payout close to $50 million, thanks to combined first-dollar deals of between 30% and 35% (which includes the points for their companies, Playtone and Image Movers).

After some hefty gross deals on pics like “Men in Black 2” and “Anger Management,” senior management at Sony is said to have vowed never to give up more that 25% of its backend gross again. However, when Sony has powerhouse lineups for films like “Spider-Man 3” and “The Da Vinci Code,” exceptions are made.

Par’s get-tough policy on “Mission 3” sends a message to the town that the Grey regime is in the tentpole business, but not in a profligate manner.

The fact that a studio questioned a star — particularly a star on that level — was quietly applauded by execs at rival studios.

Many execs and agents were impressed that Par stood firm. “They needed to have the movie, particularly since they’ve already sunk $30 million into it,” one producer notes.

The pic’s budget will be trimmed by some 10%. And, as it turns out, Cruise could end up pocketing more money from “M:I3” than “M:I2.” On the previous pic, Cruise/Wagner got 30% of the gross and allocated 7.5% to director John Woo; the latest venture’s helmer, J.J. Abrams, isn’t a gross player.

Gross points are a hot-button topic in the film biz — even hotter in the last few years, thanks to the explosion of ancillary revenue, most notably sales of DVDs.

“The numbers started to go through the roof when people realized there was huge money in the ancillaries,” says one entertainment lawyer.

When studios held the line on homevid percentages at 20%, gross points went up. Now with studios maintaining pressure on keeping gross points at 25%, it’s the video-to-gross ratio that is climbing.

Says the dealmaker, “One of the ways to skin that cat is to take smaller upfront fees and smaller points, but then make the pot bigger.”

The biggest stars have the most leverage in any negotiation and names like Cruise, Spielberg and Hanks have pioneered a change in DVD tallies, getting 50% or more of homevid revenue counted toward the gross.

When Peter Jackson made his landmark deal for “King Kong,” which called for $20 million against 20% of the gross, for his helming, writing and producing duties, he was able to obtain a greater cut of “King Kong” DVD grosses. (He subsequently sued New Line over accounting for “Lord of the Rings” DVD revenues.)

Studios are employing other strategies to clamp down on points. One is to work with fewer gross players per picture. Stars may be indispensable, but studios are more willing to trust tentpoles to tyro helmers, who tend not to get points.

“It’s no secret that studios would rather not pay first-dollar gross to actors,” says one dealmaker. “But they can’t stand to pay it for directors.”

With its long roster of A-list actors, CAA has gotten more into the young directors game, in part because it needs point-free helmers to pair with its high-priced stars.

Last fall, for instance, the agency brought in agent Bart Walker, who brought with him a long list of helmers, including Sofia Coppola, Mira Nair, Julian Schnabel, Steve Shainberg, among others.

Studios and talent are also constantly seeking new models to finance films.

One oft-mentioned picture is 2001’s “Pearl Harbor.” Star Ben Affleck, producer Jerry Bruckheimer and helmer Michael Bay were all in line for a hearty cut of the gross. Disney couldn’t fit them all under a 25% cap, so to make the deal work, they structured their deals so that the movie recouped before they started collecting their gross payouts.

The model was something akin to the 50-50 financing model more commonly seen in the indie world. After investors recover their money, a film’s profits are split evenly among key talent.

But to accept such a deal, talent has to trust that they are getting an honest accounting from the studios — a level of harmony that many doubt is achievable after decades of mutual hostility over balance sheets.

(Michael Fleming, Dave McNary and Jonathan Bing contributed to this report.)

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