Thinking outside the studio lot

Independent producers help majors fill pipelines

“Other people’s money” has become the mantra of the Hollywood majors as they make fewer films themselves, and look to outside producers to keep their distribution pipelines full.

According to the Motion Picture Assn. of America, releases from Disney, Fox, Paramount, Sony, Universal and Warner Bros. dipped 4% between 2001-2010, while product from studio specialty arms fell 51%, largely because of the shuttering of speciality labels like Warner Independent, Paramount Vantage, Fox Atomic, and Disney’s sale of Miramax.

Non-MPAA members, which includes everyone but the six majors, showed a 55% increase in pic production during those nine years.

In 2010, MPAA members produced 98 films, compared with 652 films from non-MPAA members, according to data from the org. That’s a 19% drop in pics for the majors from the prior year’s total of 121 (non-MPAA members produced 613 in 2009).

Last year, the majors produced 104 pics, according to Rentrak — close to the 10-year average of 110. And the studios already have 94 films slated for release in 2012.

These figures can be a little misleading.

Studios may be distributing the films, but they aren’t fully financing most of them. As budgets get bigger, studios want to mitigate their risk on pricey pics. The credit crunch, diminishing homevideo dollars and the tightening of purse strings by corporate parents have also contributed to the studios’ production slate cutbacks.

With the rare exception of a “Harry Potter,” or Disney’s family tentpoles, studios increasingly are turning to an expanding list of moneymen with sizable personal wealth, control of hedge funds, credit lines and other sources of equity with whom they’re making big-budget pics.

While mitigating risk on production budgets, the studios, acting as distribution entities, can take advantage of the growing box office overseas — especially in China, Russia and Brazil — and new digital distribution platforms.

As Disney reduces its inhouse productions to a half-dozen live-action family films, it’s filling out the rest of its distribution pipeline with films from Marvel Studios, Pixar and DreamWorks.

“We feel we’re better off by reducing the size of the slate and making films that are bigger and increasingly more risky,” Disney chief Robert Iger told investors last year. Those films include “Oz: The Great and Powerful” and “John Carter,” each of which cost more than $200 million.

The Mouse House isn’t alone in that shift.

Paramount wound up with “Iron Man,” “Thor” and “Captain America” through a distribution deal with Marvel Studios when the comicbook giant was self-financing its slate of superhero fare. Par also releases DreamWorks Animation’s toons, and landed “Transformers” and “G.I. Joe” through a pair-up with Hasbro, and the “Indiana Jones” films from a long relationship with Lucasfilm. “Star Trek,” “G.I. Joe” and the remake of “Footloose” were backed by Spyglass (now in charge of MGM). And the studio now has David Ellison’s Skydance reinvigorating the “Mission: Impossible” franchise and backing the “Star Trek” series, which was rebooted in 2009.

The deals let Paramount collect a lucrative distribution fee while touting tie-ins with high-profile tentpoles.

Another factor aiding the rise of outside-studio producers is the recent slow defrosting of the credit market, which has helped investors to raise enough capital to buy Miramax, MGM to refinance its debt with $500 million and return as a player, New Regency to close a $500 million credit line and Dune Capital Management to extend its deal with Fox to back 35% of the studio’s slate.

At the same time, the hunt for profits during the economic downturn has put pressure on the majors to make safer bets: four-quadrant franchises that play globally and perform across divisions. The downside: Those films are expensive, with $100 million-plus pricetags that are quickly ballooning past the $200 million mark.

“People still want to see movies,” says one studio chief. “Unless you’re Disney, moviegoers don’t really care who makes them.”

MGM, which was once the embodiment of the studio system, is emerging from bankruptcy as a producer of pics for other studios, focusing heavily on remakes like “RoboCop,” “Death Wish,” “WarGames,” “Mr. Mom” and “Carrie.”

And aside from the creative aspects, studios are outsourcing their funding. Sony and Universal relied on Relativity Media before seeking other sources as Relativity moved to become more of a mini-major. India’s Reliance Big Entertainment kept DreamWorks alive. Universal has brought Cross Creek onto the lot. Warner Bros. has a longtime deal with Legendary Pictures for its Batman, Superman and “The Hangover” films, while it also has deals with Alcon Entertainment and Village Roadshow for other tentpole fare.

These financiers-turned-filmmakers are helping take the weight off studios having to fully fund their slates as cost-cutting congloms demand more profits from their film divisions.

Participant Media, which co-finances pics with Imagenation Abu Dhabi, had two of the top films at the B.O. this past fall, with Warner Bros.’ “Contagion” and “The Help,” a DreamWorks production that Disney distributed. Participant on average backs two films per year, Legendary co-finances three high-profile tentpoles annually with Warner, while Spyglass averages three, including “The Dilemma” (U), “No Strings Attached” and “Footloose” (both Par) in 2011.

The biggest player is still Relativity, which has co-financed 20-30 films a year since 2005, spread out mostly between Sony and Universal, ponying up to 50% of each film’s budget. In 2011, however, it pulled back to around 11, including Sony’s “Battle: Los Angeles”; U’s “Bridesmaids” and “Hop”; and U, DreamWorks and Imagine’s “Cowboys & Aliens,” as it shifts gears to become a mini-major in its own right. Its solo releases in 2011 included “Season of the Witch,” “Limitless” and “Immortals.”

What’s more, with each hit under a financier’s belt, there’s even more incentive to fund additional films. Just look at Cross Creek activities after its investment in “Black Swan,” which made a strong showing at the worldwide B.O. The shingle moved to back Imagine Entertainment and Universal’s “Rush,” and signed on to back a slate of films for U.

But having co-financing partners also means sharing the upside, often on films that the majors would have been more hesitant to offer up 10 years ago. That’s especially true when it comes to sequel-worthy franchises, which new funds like Hemisphere Capital are now being offered, like “The Smurfs” and “Men in Black III.” While its “Harry Potter” franchise was off-limits to partners, Warner Bros. enabled Legendary to back its high-profile DC Entertainment properties starring Superman and Batman. Whether that continues remains to be seen now that WB is taking more control of DC’s characters.

“The studios are still navigating through a period where there’s pressure on margins. … They’re certainly not overinvesting and making more films,” says John Nendick, global media and entertainment leader at Ernst & Young.

Until growing forms of digital distribution compensate for a decline in DVD sales — which doesn’t seem likely to happen anytime soon — that won’t change. Alternate suppliers

The number of releases by non-studios and studio subsidiaries grew over the past decade from 270 in 2002 to a high-water mark of 466 in 2008. The recession and a crowded marketplace yielded fewer releases in recent years, though the trend suggests tallies are again on the rise.

Return to Movies & Money >>