Studios trim superstars' lucrative deals

This season, with each successful launch of a summer tentpole, whether it be “Iron Man” or “Kung Fu Panda,” comes a sigh of relief among the studios.

But it’s a mixed blessing for Hollywood’s top talent and the agents who represent them. Many of the hits this summer — and of recent years — have been driven not by stars but by superheroes, comic books and other concepts.

The diminished status for stars appears to be accelerating a trend that has been going on for some time: Stars with enough cachet to demand gross receipts on a movie are securing much less lucrative deals than in the past.

In deal-making parlance, it’s a shift to “cash break deals,” from the once-common practice of giving top talent as much as 20% of the first-dollar gross.

In other words, star actors — as well as big-name writers and directors — are being forced to wait until a movie recoups its costs, rather than enjoy a portion of the first dollar that a project takes in.

These types of deals have long been common in the specialty business, but now are being applied to pictures with much higher budgets.

“We are in a cycle where it is good to be the buyer, and unless you’ve got Will Smith or a handful of other stars in the project, every negotiation has become difficult,” says a top agent.

“The world has become all about now. The result of your last movie determines all of your leverage. Past quotes are only being used by studios as a mark to cut from.

“There are only five or six studios now, and even the biggest stars are facing the fact that if they really like a script, they’d better be flexible or they might not see a good one for months.”

One recent example is the Warner Bros. comedy “Yes Man,” which stars Jim Carrey and opens Dec. 19. It was made possible only after Carrey waived his $25 million fee, and agreed to a gross payday to be collected when the film recoups its costs. After that, he would receive 33% of all revenue, and a one-third split of 100% of DVD revenue.

Had Carrey not agreed to the deal, the $50 million film may have hovered around $80 million.

With homevideo revenue flat, rising gas prices and a shaky economy, studios are under increasing pressure from corporate parents to trim costs — and they find themselves able to do so with production scarce because of the one-two punch of a writers strike and a de-facto actors strike.

They have leverage to make deals that lessen their risk and get their money back faster in a project’s revenue stream.

With production and marketing costs climbing, talent compensation is one of the few variables. It’s not just top talent. Third- and fourth- leads who once made $1 million for a project have had to settle for $100,000.

Rest assured, no one will be facing foreclosure, at least if they managed their money wisely. Star actors and directors are still getting hefty upfront payments. It’s just the backend where they will have to wait to reap coin.

M. Night Shyamalan, for example, got an eight-figure upfront salary for “The Happening,” released on June 13. He also has a 25% ownership stake in the film, but won’t reap dividends until co-financiers Fox and UTV recoup their $60 million budget, along with P&A and interest. At that point, Shyamalan will get 50% of the film’s revenue stream.

Paramount’s deal on “Indiana Jones and the Kingdom of the Crystal Skull” allows the studio to recoup production costs, and a 12.5% distribution fee, before giving 87.5 cents on each dollar to profit participants George Lucas, Steven Spielberg, Harrison Ford and David Koepp. They agreed to get a windfall only after the film hit $400 million worldwide, according to a report in the Los Angeles Times. (The film is closer to $500 million at this point.)

Talent may not like the deals, but the alternative is that the project might not be made. Sources say Warner Bros.’ upcoming “Body of Lies” came about after stars Leonardo DiCaprio and Russell Crowe, director Ridley Scott and producer Donald DeLine agreed to split 40 cents of each dollar, but only after the studio recoups its costs.

Warner Bros. is working on a deal that would reteam Larry and Andy Wachowski and producer Joel Silver, but in different terms than the $180 million “Speed Racer,” which lost a fortune at the box office.

The trio will produce “Ninja Assassin,” a $50 million action pic directed by James McTeigue, but will collect a share of the gross when the film breaks even. And the studio is likely to revisit a gross deal it made a long time ago for director George Miller to direct “Justice League,” expected to go into production soon.

Several studio executives say conversations about summer tentpoles routinely start with demands that talent accept such break-even deals. And it’s not difficult for studios to make the case that what they are demanding is all that onerous.

Disney and Jerry Bruckheimer routinely use them on mega-budget films with gross talent on films like “Pirates” and “National Treasure” films. The same will go for the next “Transformers.” In those films, the studios recouped, and the gross participants profited handsomely, even if they had to share more of the risk.

Studios started to gain an upper hand before Hollywood’s labor problems and the economy got shaky. The change came after several studios were ready to cancel projects if talent didn’t re-draw signed deals. Tom Cruise at one point controlled more than 30% of the first-dollar gross on a “Mission: Impossible” film, with the understanding that any gross points for a director or other stars would come out of that pot. So it was telling when J.J. Abrams got no gross deal for “Mission: Impossible 3.” Paramount was ready to scrap the project until the terms were redefined.

Fox put its foot down with the movie “Used Guys,” which was to have been directed by Jay Roach and to have starred Ben Stiller and Jim Carrey. The studio scrapped the project when the creatives declined further cuts in their gross deals.

Universal and Fox backed out of a feature version of the Microsoft vidgame “Halo,” which was to be a multi-step deal that included gross payouts of more than 20% to the tech giant and the film’s producers.

Another defining moment came when Sony got Nancy Meyers and the cast of “The Holiday” to agree, retroactively, to move out of their first-dollar gross deals and into break-even arrangements.

“The idea that talent eats while studios bleed is something everybody got used to, but that didn’t make it right,” says one exec. “In what other business would the first money out go to the partner who put up no money?”

The system only works sometimes. After “The Da Vinci Code” grossed a fortune, Sony was in no bargaining position to get the principals to return in a sequel in a “cash break” deal. And after Universal saved “State of Play” by getting Russell Crowe to replace Brad Pitt just before start of production, the studio was in no position to ask the star to take less than first-dollar gross.

Studios pitch the deals as good for talent in the long run. No studio will greenlight a film any more that gives away more than 25% of first-dollar gross, so if a film has two stars, and a director and producer who earn gross points, they have to cut creatives inevitably cut their gross percentages to fit the 25% cap.

Studios say that, even though “cash break” deals don’t offer a guarantee of “first-dollar” gross, there is potential for talent to make more money should a film become a hit. And studios have been known to throw in some “box office bonuses,” which are that are essentially advances.

It’s worth it to studio bean-counters who want to mitigate risk and find cash break far more reliable than when talent waives upfront salaries but keeps first-dollar gross.

Relativity Media’s Ryan Kavanaugh said talent and dealmakers are finally coming around to seeing the benefits of cash break. Most of the nine p
ics he is financing aren’t paying gross, and he is making headway in doing the same with the studio slates he is involved in.

“The concept is simple,” he said. “If I spend fifty million, let me make that back and I will give fifty cents on the dollar to the creative talent and make them true partners. Agents, managers and lawyers don’t like it, but talent is incentivized. People shouldn’t be bonused in failure, which is the gross business. There is more profit, more pictures and risky films will get made and the business will be healthier if talent profits in sucess.”

While that makes sense, even to talent willing to share more of the risk, the bigger worry is that they will be able to discern just how much they should be paid. That’s a much more elaborate prospect when the threshold is a studio’s break-even point.

The anecdotes about accounting practices are legendary: a studio charging interest on money that was borrowed internally, or another studio posting a standard $200,000 charge for videotapes used for dailies, many years after they had moved such methods to the Web. Studios have to prove that their accounting is on the up and up, some agents say.

“In my naive belief, if studios spend the next three years being more honest about bookkeeping practices, and if they can demonstrate a real ‘cash break’ system, this could overcome the skepticism about accounting practices, and run-up of overhead on every film, that made first dollar gross deal-making a necessity in the first place,” said one top agent.

“The system is broken right now, that ‘cash break’ is the new reality,” the tenpercenter continues. “Mind you, if you have a giant star and can make a first-dollar gross deal where they own 25% of the movie for no financial investment, there will never be a better deal than that. That’s better than being a rock star. But the current system had to change, and it might not be that bad.”

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