Film industry forced to change business model

Star value isn’t what it used to be.

In defense of movie stars — yes, Hollywood still needs them. But the opening of the Ridley Scott-directed thriller “Body of Lies” provides a vivid reminder that stars do have the potential to boost any movie … as long as they don’t cost too much.

Suppose Russell Crowe and Leonardo DiCaprio had been paid a third of their going rate, and the movie had cost a third less. Would the pic’s $13 million opening frame have been seen as such a disaster?

Hollywood’s problem is that once costly stars climb aboard a project, studios tend to ratchet up the scale with stunts and effects. They wind up trying to turn every movie into a tentpole.

Sure, the studios have pots of money to play with. But just like the world economy, the film industry has burgeoned out of control. It’s inflated and overblown. It needs to let some air out of the bubble and return to a more reasonable size and scale.

For starters, Hollywood ought to throw everyone out of the $20 million club.

Warner Bros. insists it didn’t pay full freight for DiCaprio and Crowe; they share the pic’s adjusted backend gross. The CIA actioner, set in Iraq and Jordan, cost more than $100 million, not including worldwide marketing costs. Warners should have thought twice when it couldn’t find a partner for the film. But execs thought they had star insurance; the studio could write off as much as $100 million on this picture.

The brutal truth about today’s Hollywood is that the majors have been releasing too many films that cost too much money. Disney, notably, has gone the other way. Not only has the studio scaled back its releases, it’s refusing to pay backend gross participants on its tentpoles until after the studio recoups its costs.

Paramount, in the wake of its DreamWorks divorce, plans to scale back to 20 films a year.

“What’s going on in the economy on a global basis has an impact on every business,” says studio chairman Brad Grey. “We’re streamlining the company to make it as lean and agile as possible. You can be sure we will deploy our capital in a diligent and prudent fiscal way.”

While Grey is still pushing forward with tentpoles like “Star Trek,” “G.I. Joe” and “Transformers 2,” he says he’s “aggressively restricting backend deals,” with first-dollar gross capped at 25%.

“It’s incumbent upon everyone in the industry to look at our economics,” he says.

The entertainment biz may be resistant to economic downturns, but studio owners are not. They’re all carrying increasingly expensive debt. Paramount’s owner, Viacom chairman Sumner Redstone, was forced to sell National Amusements stock to meet his margin calls. And Warren Buffet bought stock to bolster NBC Universal owner General Electric’s fortunes.

This is the perfect time to fix the studios’ broken economic model. The studios have to just say “no.”

“We’re at a crossroads,” says producer Mark Johnson. “So much of what we’ve counted on isn’t working. It’s not a question of old school vs. new school. It’s Lewis and Clark time, the things we’re not sure about, that we hang our hat on, like movie stars.”

Today’s astronomical price inflation basically starts with nervous studio heads overpaying for movie stars.

Twentieth Century Fox was the first studio to top the $1 million payday mark with Elizabeth Taylor on the 1963 mega-flop “Cleopatra,” which, with inflation, is still the most expensive movie of all time.

And back in 1988, there was much handwringing when Fox paid $5 million to Bruce Willis (who had made just one film, “Blind Date”) to star in “Die Hard.”

“This throws the business out of whack,” MGM chairman Alan Ladd protested to the New York Times. “Like everybody else in town, I was stunned.”

Paying a relative novice like Willis such a sum meant that all the other stars, such as Dustin Hoffman, who had scored $5.5 million for “Tootsie,” had to get a boost. Indeed, there was nowhere to go but up during the boom-boom ’80s and ’90s, as upstart players like Cannon and Savoy paid hefty premiums to land stars such as Sylvester Stallone.

Then in 1996, Columbia Pictures, desperate to nail hot comedian Jim Carrey for “The Cable Guy,” paid him $20 million. That meant all the other top stars, from Tom Hanks to Tom Cruise, had to get that sum, too. When Demi Moore landed $12.5 million for 1995′s Striptease, the men had to get that much more. When Universal gave away first-dollar gross to Arnold Schwarzenegger on “Twins,” it opened another Pandora’s box.

After a long list of stars routinely commanded $20 million vs. 20% of the gross, studios even started sharing more of their DVD revenues with certain stars. Eventually, global action heroes like Harrison Ford and Mel Gibson were commanding $25 million, forcing other actor and director salaries up in relation. Even a midrange star like Kurt Russell was earning $15 million.

The movies that had to carry these fees became safer, more formulaic and less interesting, and to make their money back they needed to perform on a global scale. “The bigger the movie stars become,” says Johnson, “the more constricting their roles and the scope of their roles.”

Sequelitis contributed to boosting star fees. Once stars got paid a higher figure, agents would demand it again.

Studios vied for the stars and used paydays and perks (such as overpaid hair and makeup people, entourages, nannies, and chartered jets) to sweeten the pot. They indulged monstrous behavior and demands.

Finally, after Schwarzenegger collected $25 million to play Mr. Freeze in “Batman & Robin,” Intermedia and C-2 paid the muscled star an unprecedented $30 million for “Terminator 3.” Schwarzenegger may well be remembered in the record books as the highest-paid star of all time.

Today, new production company MRC, trying to compete with the studios, is offering talent like Sacha Baron Cohen not only a hefty upfront fee but an ownership stake in movies like “Bruno.” “They’re sharing our revenues,” says president Tory Metzger, a former CAA agent. “Our upside is their upside.”

But the overdue market correction on star salaries is already trending down. The studios are capping backend grosses at 25%. And they’re insisting on recouping costs before delivering gross payouts, and they’re putting overage limits even on top directors.

Viacom’s Redstone signaled a seismic shift when he angrily ousted Tom Cruise from his Paramount deal after the star made more money than the studio on “Mission: Impossible 3″ — even after Grey had altered the backend formula.

Marvel is hanging tough with deals on its “Iron Man” sequel and was willing to walk away from Terrence Howard’s pay demands to play War Machine, casting Don Cheadle instead. Marvel is investing in its characters and properties and isn’t playing the studio game.

Lionsgate’s Joe Drake (“Juno”) is also hoping to eschew business as usual. But when he visited a major agency recently to discuss a slew of new projects, they asked: “Will you pay our clients’ full freight?” While he doesn’t see wholesale reform, Drake says, by giving talent more creative say in upside success, “there is an opportunity for the talent and the creative side to align their interests with the distributor, without the traditional push-pull relationship.”

The studios don’t have to play the same old game, either.

Bring costs down and they’ll gain more flexibility to make better, more interesting and varied movies. They could lure adults back to theaters and appeal to niche markets without having to play it safe with four-quadrant pics.

If stars and studios want to make different movies, the studios don’t have to indulge the stars: Let them go to the indies.

“Everybody’s been riding the gravy train and nobody wants to get off,” says one agent.

There are other ways to make studio movies on a slimmer scale.

Consider the George Clooney model: “Syriana,” “Good Night, and Good Luck,” “Michael Clayton” and “Burn After Reading,” like the “Ocean’s” series, all featured multiple stars working for less than their usual fees.

There’s also the Clint Eastwood paradigm: His films are always produced with modest upfront costs.

“Going forward with anything execution-dependent,” says one Warners exec, “we will try different formulas. The world has shifted.”

Producers describe a distinct industrywide course change since the writers strike. Unfortunately, that often means studios shelling out for top talent while cheaping out on everything else. “Everyone is refusing to pay for anything,” says one producer. “With the economy tanking it has gotten worse, with people walking away from deals: ‘We’re not paying your quote. Take it or leave it.’ It’s really scary. People who are trying to make a living are not making a living.”

Ironically, Carrey, whose asking price has been in the toilet lately, stars in a Warners comedy that may hit the zeitgeist on the nose: In “Yes Man,” he plays a negative guy who makes a pact to say yes to everything. Carrey said yes to not getting his usual price in a mainstream comedy. And if the movie hits, he collects — bigtime.

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