After nearly 40 troubled years, studio returns to tentpole strategy

In 1969, when the jaunty former CBS president Jim Aubrey showed up at MGM with a mandate to revive the studio, the first thing he did was kill all 15 big-budget, commercial pictures in the pipeline, including “Tai-Pan” and “Man’s Fate.”

Fast-forward to 2006: MGM chairman-CEO Harry Sloan, who’s been at the Lion just under a year, is doing exactly the opposite.

Having barely finished remaking MGM into a pure distribution and marketing outlet for producers of mid-range indie pics, Sloan is moving the studio aggressively into the tentpole biz.

Over the next few years, MGM is planning to release half a dozen films, some in the $150 million to $200 million-plus range. Studio is ready to unveil such high-profile projects as “Terminator 4″; one or two installments of “The Hobbit,” which Sloan hopes will be directed by Peter Jackson; and a sequel to “The Thomas Crown Affair” with Pierce Brosnan.

It has already announced a “Pink Panther” sequel and the next 007 pic “Bond 22,” due out in November 2008. “Rocky Balboa” unspools in February.

The pics are all franchises that MGM owns the rights to through its 4,000-title library. The goal is to release two or three tentpoles a year, all of which will be made with financial partners, including Wall Street money or other studios.

Sloan thus becomes the latest in a long line of chieftains who have tried to revive the fortunes of the once-fabled studio. MGM was the pinnacle of the studio system through the 1950s before it was acquired by Kirk Kerkorian in 1969, but since the ’70s has suffered through a series of sales and financial setbacks.

Only two years ago, the Lion was again written off as a viable studio entity when it was bought by Sony, Comcast and a group of private equity firms that paid — or overpaid — $4.8 billion in a heated bidding war with Time Warner.

It’s not the worst showbiz deal of the decade: The Time Warner-AOL deal grabs that dubious honor. But two years later, Fox, and not Sony, has the rights to distribute MGM’s homevideo output, and Sloan is making the studio a stand-alone entity.

The folks at Sony and their partners must be wondering what they got for their money. Here’s what: Sloan tells Variety his aim is to build MGM into a $10 billion company — more than twice what the partners paid for it.

The goal is surprisingly ambitious for someone who’s marking his first hands-on foray into the motion picture biz. The studio has distributed three films so far: the Weinstein Co.’s “Lucky Number Slevin” ($22.5 million domestically) and “Clerks II” ($24 million) and Maverick Films’ “Material Girls” ($10.5 million).

Not exactly remarkable figures, but those were modestly budgeted pics and Sloan is convinced that the studio’s growth will be marked by megapics.

Working under Sloan is chief operating officer Rick Sands, a seasoned executive from Miramax and DreamWorks. And Sloan has had experience in showbiz, buying and selling off companies for great profit, such as SBS Broadcasting, New World Entertainment and Lionsgate.

With sweeping views, Sloan’s spacious office at MGM’s Century City headquarters is a creamy yellow, with white moldings, and a classical rotunda that recall the interior of a Vegas casino (inherited from previous chairman Alex Yemenidjian).

Sloan seems genial and relaxed — too unstressed, frankly, for a studio head.

“We expect to do with 400 people what they did with 1,400,” he says, referring to MGM’s pre-sale size, as though making movies was a pretty basic, even breezy, endeavor.

Sloan is plotting MGM’s resurgence with an operation lean in overhead and risk. For its big projects, MGM is hedging its bets financially by partnering with other studios and Wall Street funds, including slate financing deals popular at other studios. Sloan says MGM won’t be tapping its investors for tentpole coin.

The financial and distribution rights to the Bond movies will be split with Sony. (For the upcoming “Casino Royale,” Sony has theatrical rights, MGM has TV rights.) “The Hobbit” will be produced in partnership with New Line, which Sloan says shares the rights to the property with MGM.

MGM has no production or development department. “The companies that are least efficient in development and production are the major studios,” he says matter-of-factly.

Chuckling, he recalls his statement when MGM announced it was going into distribution last March: “We decided to skip the part where you lose your ass on development and production.”

But as MGM moves to tentpoles and there’s more at stake, is it worth it to stay out of the filmmaking process?

“These properties don’t necessarily benefit from studio interference,” Sloan insists. “Barbara Broccoli and Michael Wilson know what they’re doing with James Bond. Peter Jackson knows what he’s doing. And Steve Martin and Bob Simonds certainly know what they’re doing with ‘The Pink Panther.’ “

MGM has set up an extraordinarily trim marketing team of fewer than 20 and relies heavily on outside vendors. In some cases, it will market in collaboration with other studios.

Under marketing head Perry Stahman, MGM works with producers on everything from trailers to billboards, with the Lion putting up a minimum of $20 million toward P&A, and producers footing the rest. (MGM’s P&A fund is worth $150 million.) Some companies, like the Weinstein Co., handle marketing entirely on their own.

Still, how lean an operation can MGM afford when it rolls out campaigns for mega-sized films?

Already, some producers grumble that MGM’s marketing arrangement works better in theory than reality, and that “collaboration” is confusing with so many involved parties.

Sloan acknowledges that “there have been kinks,” but points out that MGM’s marketing department is new. Stahman didn’t come on board until April, and as recently as last week, marketing hires were still being announced.

“I think it’s fair to say that three months ago we didn’t have a marketing department and now we’re releasing 12 films before the end the year,” Sloan says. “The only thing that would be unusual would be for things to be going 100% according to plan.”

Sands adds, “It’s not just a structural issue, but a learning-how-to-work-with-people-efficiently issue. Everyone has different expectations and we’re trying to meet those expectations within reason.”

With distribution in place, Sloan and Sands see the decision to pursue tentpoles is a natural next step for MGM. Their mandate has been to create new product to freshen the Lion’s valuable library.

New product feeds MGM’s domestic and international output deals, including a lucrative pay TV arrangement with Showtime. In that deal, which is largely what lured producers such as the Weinstein Co. to MGM, Showtime pays the Lion a fee for its films. Sloan wouldn’t comment on the terms. But fees are typically 20%-25% of a film’s theatrical U.S. box office and 50% of video rentals.

Sloan downplays the importance of the Showtime deal, which expires in January 2009, by pointing out that MGM receives more revenue from its long-term international TV deals. He’s more worried about closing those because many international territories are controlled by a single buyer like Sky in the U.K. or Premiere in Germany.

In another aggressive move, MGM will be hiring about 100 new people to launch an international television distribution arm for its films.

MGM’s structure and strategy are far different from what was conceived in the deal two years ago. Wall Street types say the partners even needed to renegotiate their covenants with banks, which lent money to one kind of a company — basically a gutted shell with library — and got entirely another.

Soon after the consortium bought MGM, diverse agendas clouded the picture. Comcast sought titles for its key video-on-demand service. Sony sought films for Blu-ray, although MGM isn’t exclusive to that new DVD format.

Financial partners Providence Equity, Texas Pacific Group, DLJ Merchant Banking and Quadrangle just wanted to make money.

Sony, with a 20% minority stake, was the only partner in the movie biz. So it took the lead, and a leader was needed to pull the consortium together.

But the partners came to believe their new asset would be impaired by the general impression that MGM had been absorbed by Sony and was closed for business.

Sloan was hired last October, and is said to have put in $50 million of his own money. He won’t confirm the figure but says it was for the same value as the earlier investors.

The consortium’s most provocative decision was canceling MGM’s library distribution deal with Sony after a year and handing it to 20th Century Fox, which set up a dedicated worldwide sales force of 50 people.

“When that (DVD rep) goes into Wal-Mart he’s not wearing a Sony blazer, he’s wearing a Lion,” Sloan says.

With Sony distributing MGM’s library, cash flow is said to have plunged a whopping 25%-35% in a year — a drop that can’t be explained by overall market fluctuations.

Some in Hollywood say Sony studio staffers on the ground didn’t want to distribute the MGM movies, and weren’t given the proper incentives to do it well. Others note that studios have different strengths, and distribbing library fare isn’t Sony’s strongest suit.

Fox took over domestic distribution in August, and is starting international duties this month.

Sony defenders have argued that the complex transition from MGM to Sony, involving education, logistics and technology, just needed more time. They note old movies lost more ground than other categories in the overall DVD malaise. And they point out that MGM had slowed production in the year before and during the sale which meant it had fewer new titles to freshen up the library.

Enter Fox, offering a large and very alluring guarantee.

By all accounts, the vote by MGM’s board, including Sony reps, to change distribution partners was a unanimous, if not a happy one.

But the fact remains that MGM has decreased in value since the partners bought it. That means Sloan has to dig MGM out of a hole before he can start to make money for the studio’s owners.

What’s past is past, Sloan says.

“It’s more about MGM taking control of its own destiny than one distributor over another,” he says. “A viable, free-standing studio is worth significantly more than a company that’s captive to another studio … come sale time” — which he predicts within five to seven years.

Whether the original deal was worth $4 billion, $5 billion or $6 billion “depends on what you think will happen with the video market. Discussing whether the price was high or low is behind us.”

“I think it’s got to be worth $10 billion, which is what I want to do with it.”

That’s a big number, more reflective of a powerful media conglom than a struggling standalone studio.

Others have tried to revive MGM’s fortunes before. For 30 years, MGM was bought and sold (several times by Kerkorian), relaunched and then scaled back. It missed out on every opportunity of investing in cable, in satellite, in broadcasting, while others jumped in.

Sloan says MGM won’t make that mistake again. It’s scouring the globe for acquisitions, primarily in new media.

“There’s still opportunity because I think as much will happen in the next five years as happened in the past 30,” Sloan says.

He is confident that MGM’s investor group will open its wallet when something big comes along, even if it means competing with the likes of News Corp., Viacom or Walt Disney.

“I think our shareholders have the resources and the appetite to look in the same fashion as the other companies. They have an appetite not to miss the opportunities.”

Sloan describes a period of relative harmony among MGM’s investors. He praises the board (who happen to be his bosses) which is stocked with luminaries including Providence Equity chief Jonathan Nelson, TPG’s David Bonderman and Sony Corp. chairman-CEO Howard Stringer.

“The group met, made some changes in the model. They confronted it intelligently and cooperatively,” he says. “At this point, everybody is primarily a financial investor.”

As for speculation that at a certain point Sloan will do with MGM what he’s done with companies in the past — take them public in an IPO — he says: “I’ve run a number of public companies, I like the public sphere.” But being at MGM “is a bit of a breather after 20 years of being a CEO or chairman of a public company and having quarterly conference calls.”

Not one to rest on his laurels, he adds: “But I don’t know how long the breather will be.”

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