In Relativity’s thriller “Limitless,” the protagonist happens upon a magic pill that makes him significantly smarter than his rivals.
One might wonder if Relativity Media topper Ryan Kavanaugh found his own magic pill, since he has raised north of $10 billion in the span of eight years.
Now he’s reinventing a fledgling production company into what he’s touting as the new studio archetype — one that is leaner, more efficient and more profitable than the majors.
“The Hollywood system was created 100 years ago, and yet (the majors) still focus around theatrical even though we know theatrical has become a small piece of the pie,” says Kavanaugh, who gained entry into Hollywood via a series of slate-financing deals with Universal and Sony worth billions. “Our risk-reward profile is very different from the studios. Everyone is focused on, ‘Are we No. 1? Did we break $100 million in box office? What was my weekend?’ And it still, unfortunately, is how the press writes about it. But the fact is that it’s not really relevant. It’s all about profit, and people forget that.”
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Still, as a producer and film financier, Kavanaugh was tethered to the studios that he viewed as antiquated. But all that changed last summer, when Relativity inked three colossal deals that transformed the company into a full-fledged mini-major. More importantly, it offered a glimpse of the future of Hollywood in the digital age.
First, the company signed an unprecedented pact with Netflix in early July that brings Relativity-owned films to Netflix’s growing subscriber base during the pay TV window. The arrangement adds roughly $500 million annually to Relativity’s balance sheet, according to a source familiar with deal. Though Kavanaugh won’t confirm the details, he insists the pact is more lucrative and less restrictive than any other studio’s pay TV deal.
Shortly thereafter, Relativity acquired Overture Films’ distribution and marketing divisions from Starz, which allowed Kavanaugh to “maximize our product and control our own destiny.” So far, Relativity films are holding screens better than when they were released by the studios and the company is paying a fraction of a typical major’s prints-and-advertising outlay.
Finally, Kavanaugh launched a joint venture with Virgin tycoon Richard Branson that sees Relativity’s genre label Rogue Pictures developing, producing and marketing two to three movies a year with Branson’s Virgin Produced. The deal also gives Relativity films access to the attractive Virgin Air and Virgin Mobile platforms.
“Ryan knows exactly what he is doing and continues to impress even the most cynical in our business,” says Universal president and chief operating officer Ron Meyer, who will continue to partner with Relativity as co-financiers on a majority of Universal’s films through 2014. “His strong instincts and iron gut have led Relativity in a great partnership with Universal since 2004. Ryan’s knowledge and resources have been invaluable to us.”
Kavanaugh’s biggest resource and sole investor is Gotham-based hedge fund Elliott Management, which has pumped roughly $1 billion into Relativity and provided a revolving line of credit. That coin, so hard to come by amid a global recession, helped Relativity orchestrate its major overhaul.
“No one in town in recent memory has been as successful in securing so much slate financing that affects so many motion pictures,” says Sony president of digital production Bob Osher, who ran point on the studio’s three consecutive slate-financing deals with Relativity, the last of which expires in 2012. “(He) was one of the few guys who was still able to put deals together during the height of the economic downturn. When everyone else was practically paralyzed and unable to move forward, Ryan was making deals happen to capitalize the growth of his own company.”
And like any good student of Hollywood, Kavanaugh parlayed his slate-financing experience into practical knowledge.
“Getting to executive produce, co-finance and be a production company on 30-40 movies a year for multiple years, you get to see up close how everybody does it,” says Kavanaugh, who, like the “Limitless” hero, eschews sleep, clocking a mere 90 minutes to two hours a night. “It was like a crash course or being a fly on the wall and learning from the best.”
In some ways, though, Kavanaugh managed to beat the best, as evidenced by the films he passed on from the two studios’ slates, including Sony’s “How Do You Know,” with its budget north of $120 million, and Universal’s “Your Highness.”
“If you take the slates of those two studios and then you (compare it) to the films in the slate we co-financed, we are more than 40% higher on a return basis,” says Kavanaugh, adding that the only profitable films that Relativity ever nixed were Universal’s “Inglourious Basterds” and Sony’s “Julie & Julia.”
Still, financial acumen only goes so far in Hollywood. Kavanaugh needed to prove his artistic sensibilities to the creative community. Oscar heavyweight “The Fighter,” which Relativity fully financed after Paramount bowed out, helped Kavanaugh do just that. The best picture nominee nabbed two Academy Awards and was wildly profitable to boot. The break-even on the drama, which earned $94 million Stateside at the box office, was $25 million.
“He understands and respects filmmaking, and he is incredibly supportive of the creative process,” says Ridley Scott, who worked with Kavanaugh on “Robin Hood.” “While at the same time, he is one of the savviest businessmen in the industry.”
Kavanaugh has ingratiated himself with actors and actresses, too, as the boss who is more likely to send a private jet to whisk a star off set during a personal crisis than rigidly enforce the terms of the actor’s contract, as is the Hollywood norm. He is also known for seeing a film through to the end and not abandoning ship on marketing when the pic tracks poorly.
“When my father fell (and was badly injured), I was filming in Mexico,” recalls “Limitless” star Bradley Cooper. “Ryan chartered a plane for me to get home immediately to Philadelphia, saving almost a day’s worth of travel time. I am eternally indebted and grateful to him. He is a great friend and boss.”
Tobey Maguire echoes that sentiment.
“He’s a guy I want in my corner,” says Maguire. “His commitment to the success of ‘Brothers’ was clear. He was rigorous in his effort to make the best movie and to give us the best shot at being successful.”
And though Relativity naysayers are quick to label the war-themed drama a bomb, the film that earned a mere $29 million domestically was actually profitable. The pic’s $25 million budget was covered by $24 million in foreign output deals and a $3 million tax credit. Relativity shelled out roughly $25 million on prints and advertising, $10 million on homevid costs including a $6 million distribution fee (which the company would not have paid had the film been released after the Overture deal). The company took in $51 million in revenues — $12 million in box office rentals, $20 million from home video, $16 million from TV (a figure that would be bigger today thanks to the Netflix deal) and $3 million from military, airlines and university usage.
In fact, the “Brothers” example provides a window into Kavanaugh’s game plan, which differs so dramatically from the majors. Unlike a typical studio, where 25%-30% of the films are profitable, Relativity aims for a 1.000 batting average.
“We don’t sit there and say, ‘We have a movie with Bradley Cooper and Robert De Niro in an action movie that’s cool and different, and it’s going to make $80 million,’ ” says Kavanaugh of the greenlighting process of “Limitless,” which is on track to earn nearly $80 million domestically. “We say, ‘What’s the worst it could do? $30 million? OK, will it make money at $30 million?’ We don’t even talk about $80 million.”
Ultimately, Kavanaugh’s success doesn’t come from a magic pill. Meyer says it’s actually something a little less fanciful.
“Ryan’s strength and creativity in structuring a deal that works for both sides is unmatched,” he says. “He’s incredibly smart, committed, and his success is no accident.”