Settling into big leagues

Kavanaugh's future plans

If Ryan Kavanaugh began 2010 with a to-do list, it’s hard to imagine there’s anything left to accomplish.

Become a distributor. Check. Seal a pay TV deal with Netflix that’s more lucrative and less restrictive than anything the majors have. Check. Fully finance an Oscar best picture nominee (“The Fighter”) and co-finance another (“The Social Network”). Check.

Moving forward, are there any mountains left to scale?

“We’ve spent the last nine to 10 months putting together the marketing and distribution operations,” says Michael Joe, previously Relativity’s president who just joined the company’s main investor Elliot Management Corp. “Now the next 12-18 months will be spent executing on these things we’ve put in place and the films we’ve put together over the past year. Our goal is to excel as a distribution company and show that we belong in the big leagues.”

Relativity became a major player in Hollywood thanks to a series of slate-financing deals with Universal and Sony worth billions. Now that Kavanaugh has created a formidable mini-major, will the Hollywood renegade place his capital elsewhere?

A source familiar with the slate deals says there is a high likelihood Relativity will not renew the Sony or Universal pacts when they expire in 2012 and 2013, respectively. But Kavanaugh, who says the deals were necessary to build up Relativity’s library, remains coy about his plans.

“Our own product is a much better use of our capital, with a much better risk-reward profile,” he says. “For the interim period, we’ll stay in that business. And while we haven’t formally decided what our next step is, if we stay in the co-finance business, it will probably be in a less formal way.”

Kavanaugh can envision a scenario where the company co-finances a movie here or there but without the hefty minimums stipulated in the previous studio deals. Given that co-finance coin is in short supply, Relativity will be better poised to call the shots if it opts to continue in its role as a backer of other studios’ fare.

Either way, Relativity’s main focus will be on its core business of producing and distributing moderately budgeted films. In that capacity, Kavanaugh can take on what he sees as Hollywood’s dysfunction paradigm, whereby the major studios fork over first-dollar grosses to actors, helmers and even producers. The problem is perpetuated by the fact that studio chiefs are reluctant to challenge a system that will benefit them in their inevitable future role as a producer seeking first-dollar gross.

“For me, this is my company, and I own it,” says Kavanaugh, who launched the company eight years ago. “There’s nowhere else I’m going to go. I’m not worried about my next career. So, I’m willing to shake it up and say (the system) is broken. Gross sucks. It doesn’t work. Why are we paying bonuses to people when you have a film losing money?”

Kavanaugh says Hollywood is already catching on to the new economic reality. He points to a film like Warner Bros.’ “The Hangover,” where director Todd Phillips opted to receive a bigger slice of the gross receipts but only after the film turned a profit, as an example of a win-win for studio and talent. The move resulted in a $45 million payday for Phillips.

“I say to talent, ‘If you believe in this film like you say you do, then you will make more (money) taking ownership or profits of the film,’ ” Kavanaugh says. ” ‘The only time you are worse off is if the film doesn’t perform. Then we all lose.’ ”

Other areas of the business that Kavanaugh plans to confront include what he considers the wild overspending on prints and advertising, where a studio can easily shell out $50 million to market a summer comedy. A source says Relativity spent roughly $23 million on “Limitless’ ” P&A.

“What we do differently is rather than following the ‘Let’s buy a 15-second or a 30-second spot,’ we’re really focusing on how to virally get this audience,” says Kavanaugh, who uses Rogue’s popular online network to market his films. “That has allowed us to trim our P&A significantly.”

An internal study showed that “Limitless” would have opened at $13 million without heavy promotion on the IAmRogue.com network. But buoyed by the 3.9 million visitors who clicked through the film’s trailers on the Thursday and Friday before opening, “Limitless” bowed at nearly $19 million.

“We’ve built up the Rogue network in less than two years to where it’s the seventh largest music site and the sixth largest movie network,” Kavanaugh says. “And we have 45 million that come on that site. We don’t sell advertising, and we’re not trying to make a profit. We use it to connect the end user to our movies in a new, innovative and viral manner, which connects our end user to the film way before the film would normally be marketed.”

Still, is there anything left that Kavanaugh might want to buy, like his $150 million purchase of Rogue Pictures from Universal in 2009?

“Knowing Ryan, there’s always something new that will catch his interest, and we’ll pursue,” quips Joe, who worked on the other side of the fence from Kavanaugh on the slate-financing deals and Rogue sale during his previous post at Universal. “But it’s difficult to predict the future and what that might be.”