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Hits prompt rethinking of co-financing

The success of “The Sixth Sense,” which has grossed more than $200 million domestically, raises doubts about the co-financing mantra chanted by studio execs looking to squeeze the bottom line.

On paper, the adult-oriented “Sense,” written and helmed by M. Night Shyamalan, seemed an ideal candidate for risk-sharing.

The previous film that paired Bruce Willis with a young co-star, the thriller “Mercury Rising,” had been a flop. “Sense” itself started life as a low-budget pic, from a relatively untested director, only ballooning into a major production once Willis came aboard.

Then again, didn’t the modest budget of “Sense” ($40 million), its clever script and its major star make it an obvious home run and therefore candidate for full financing?

Of course, not all instances of co-financing are due to mistaken judgment calls. In many cases, it’s a matter of necessity. With nervous corporate parents cutting production budgets, often by as much as 50%, studio chiefs have had to look elsewhere for funds, and many European TV conglomerates, independent producers and foreign sales agents are willing to partner with the majors in order to gain access to their product.

The challenge has become deciding on which projects to partner, and on which pics to go solo. Many of this year’s biggest box office hits were co-financed. In addition, studios tend to fully finance their most expensive pics, including “Wild Wild West” “The Haunting” and “Inspector Gadget,” all of which cost close to or more than $100 million to make — but co-finance moderate entries, such as “Sense” and “Runaway Bride.”

While few studios intend to abandon co-financing completely, most are searching for the “ideal structure” –one that gives them more of an upside on co-financed pics that turn, unexpectedly, into big hits.

Others, such as Fox and Sony, say that they remain intent on avoiding co-financing whenever they can.

“I don’t agree with the basic arithmetic of these partnership deals,” said Peter Chernin, co-chairman of Fox parent News Corp. “If you give away half of every film, then you lose less but you also make less, so how does it improve your end game? The trap of these deals is that the studio always thinks it is keeping 100% of the winners and parting with the marginal films, but can you really guess these things?”

That dilemma has become central to the co-financing debate. It’s why every new co-financing deal differs slightly in the fine print, as studios try to construct the prototype pact.

“You are going to win some and lose some,” said one studio head. “You go in knowing that. The idea is to reduce the volatility, while still building your library, because over the short term the movie business still has really tough margins.”

Nothing illustrates the crapshoot that co-financing has become more than three of this year’s releases — Universal’s “The Mummy” and Warner Bros.’ “The Matrix” and “Wild Wild West.”

On “Mummy,” U tried desperately to find a partner on a pic that looked sure to crash and burn, but could not. The pic took $43 million in its first weekend and went on to become one of the highest-grossing releases of the year.

Warners had the opposite experience on “West.” Early on, the studio staked out a June 30 launch date for the expensive pic, which it regarded as its tentpole release of 1999. Meanwhile, “Matrix,” which cost less than half as much as “West” to produce, was viewed skeptically by WB brass, and the studio decided to co-finance it with Village Roadshow — and was aggressively persuasive in luring VR as a partner.

“Matrix,” of course, became a huge hit, while “West” significantly under-performed.

“Some studios try and make an evaluation of which films are inherently more risky,” says one producer who has been based on a number of different Hollywood lots. “Others, such as Paramount, just co-finance everything.”

Paramount has five producers based on its lot who regularly take foreign rights, either to their own pics or those developed by Par, and tends not to co-finance its major tentpoles such as “Mission: Impossible” and the “Star Trek” pics.

But Par and U are both owned by conglomerates that favor a cautious approach to the film business, and allocate a greater amount of capital to other assets, such as cable networks or the music business, respectively. This can leave Par and U short of cash.

Therefore, while neither studio likes selling off rights to its pics (thereby lessening the value of its library), they are frequently forced to do so.

“It’s a diversification play,” said a highly placed exec actively engaged in structuring co-financing deals.

The exec points out that the benefit of co-financing, even on movies that are successful, is that it can dramatically improve the standing of the studio’s parent company on Wall Street.

“Wall Street likes things to be smooth, not volatile. It’s better to have OK earnings than to disappoint,” he said.

That’s why, according to co-financing experts, Disney and WB will feel pleased with their takes on “Sense” and “Matrix.”

From its North American distribution fee alone, the Mouse could make more than $50 million.

But unlike Par, U and MGM — which has many co-financing deals, including one with Miramax — Disney appears wedded to co-financing, less because it needs to, but because it wants to.

“The economics of Disney are such that we only need one Spyglass at the company,” says Walt Disney Studios executive VP Rob Moore. “We only (co-finance) a handful of movies in relation to our total output, which is 15-20 pictures a year.”

Similarly, Warner Bros.’ co-financing efforts seem more driven by strategy than need.

The studio’s two regular partners, Bel Air Entertainment and Village Roadshow, were created partly at the initiative of the studio to fill a gap left by the departure of Arnon Milchan’s New Regency Prods. to Fox.

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