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Relativity’s Demise a Lesson in Over-Reaching: Analysts

The collapse of Relativity Media has provoked a sense of shock and dejection — along with a blunt reminder of the brutal bottom-line focus required for survival in Hollywood — among media trackers.

“It seems like another instance of over-reaching,” noted Matthew Harrigan, a media analyst with Wunderlich Securities. “They tried a very clinical approach but at the end of the day, Relativity didn’t have enough scale to compete effectively.”

Thus, Ryan Kavanaugh joins a long list of self-styled Hollywood moguls — with such names as Howard Hughes, Carolco’s Mario Kassar and MGM’s Giancarlo Paretti — who fell short after an initial splash amid promises of a new paradigm for success in the filmed entertainment business.

“I wish it weren’t true, but this filing does have a chilling effect on people being willing to invest,” Harrigan added.

The analyst noted that failures are not uncommon and pointed to the 2010 disappearance of The Film Department, a smaller venture organized by industry veterans Mark Gill and Neil Sacker. The duo attracted investors who were close to ponying up $200 million in new financing to produce, acquire and release five to 10 films a year but pulled its IPO registration statement when the financing evaporated.

“Those are very smart guys with a good plan,” Harrigan recalled. “It just shows how hard this business is to operate when you don’t have access to low-cost funds.”

Jason E. Squire, an associate professor at the USC’s School of Cinematic Arts, told Variety that the filing is a sobering development.

“I think it’s always quite sad when a player is lost,” Squire told Variety. “This is a cyclical and uncertain business that doesn’t need this right now.”

About 75 of 250 Relativity employees were handed pink slips on Wednesday in advance of Thursday’s filing for Chapter 11 bankruptcy protection, which disclosed that most of the assets of the 11-year-old company founded by Kavanaugh will be sold at auction.

“It’s very tough for the people for the people who are losing their jobs,” Squire said. “And as a filmmaker, you never want to see your films get caught in this kind of situation.”‘

Longtime media analyst Harold Vogel said that Relativity’s collapse is not singular.

“The road is littered with companies that could not keep the cash flow going,” he noted. “At the end of day, you need big cash in Hollywood. These companies usually start with ambitious people who don’t have deep enough libraries to do that.”

Vogel added that the economics of Hollywood have not gotten any easier in recent years.

“You never have enough cash and a billion dollars doesn’t buy that much any more, given that 50% of your spending is now in marketing,” he asserted. “The competition for the attention of the audience has gotten much more severe, given the shift toward over the top programming and videogames.”

Only the major studios have the scale to absorb the massive losses on tentpoles such as “John Carter” and “Battleship,” Vogel noted. And despite Relativity’s woes, he believes that investors will still be willing to open their checkbooks to back feature films.

“I don’t think Relativity is going to diminish that interest,” he noted. “But it is a reminder of how difficult the business is.”

 

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