STX Entertainment Still Looking to Make Its Mark After ‘Free State of Jones’ Flops

Courtesy of STX Entertainment

Things didn’t go as planned with “Free State of Jones.”

The $50 million Civil War drama, greenlit two years ago by STX Entertainment, was meant to announce the indie studio as a bright new player bent on producing quality movies for adults with top talent. But, despite the presence of star Matthew McConaughey and director Gary Ross, and an extensive advertising push, “Free State of Jones” collapsed at the domestic box office this past weekend, eking out less than $8 million in its debut and raising more questions about STX’s business model.

STX got into the business precisely because it believes that there’s still an audience for the kind of projects major studios abandoned in favor of superhero adventures and tween franchises.  The film, announced shortly after STX was launched in 2014 by Robert Simonds and TPG managing director Bill McGlashan, was handed a prime summer release date. Its failure underscores the difficulty of making movies of this size and ambition work at a time when Hollywood has gone franchise crazy.  STX’s losses on the film will be somewhat mitigated by the fact that it brought in equity partners such as Huayi Brothers, Vendian Entertainment, Route One Entertainment, Union Investment Partners and IM Global, which handled foreign rights to the movie.

STX declined to comment for this report, but individuals close to the studio also note that there are structural differences at play that expose it to less risk when a film flops than its big studio competitors. STX executives say they have exponentially lower overhead to be covered, because its film unit operates with fewer than 100 employees. And sharing investment meant that on “Free State of Jones” the company was supposedly on the hook for less than $10 million of the production cost, though all of the marketing expenditures in the tens of millions.

“Free State of Jones” is the fifth release for STX, which needs more consistent winners at the box office. It turned a profit with the horror films “The Gift” and “The Boy,” but flopped with the Julia Roberts thriller “The Secret in Their Eyes” and the point-of-view action film “Hardcore Henry,” which rivals estimate lost between $10 million and $15 million. The results for “Hardcore Henry” shook STX brass, one insider claimed, because the company had landed global rights to the film out of the Toronto Film Festival after shelling out $10 million. It was a reminder of the financial perils that can come with making a false move.

The company hopes to be on firmer ground with that its other summer release, the R-rated comedy “Bad Moms.” In a sign that audiences are responding to its bawdy humor, an online trailer scored 80 million views in its first 11 days. The film got an enthusiastic reception when footage was screened at the exhibition industry conference, CinemaCon. On Monday, STX announced that it was moving “The Space Between Us,” a sci-fi romance with Asa Butterfield from August to a December release, saying it was a better time of year to launch the film.

Still, STX remains a curiosity to Hollywood insiders. It’s not because its business plan is murky. The company has emphasized in press interviews and in presentations to exhibitors that it is not interested in making big-budget tentpole movies. Instead it has billed itself as a destination for the moderately priced comedies and dramas that once dominated studio slates. The company plans to release 12 to 15 movies annually by 2018, with budgets between $20 million and $80 million. The challenge of this strategy is that studios got out of the mid-range game for a reason — the risks aren’t as great, but the returns are far smaller.

“Part of getting it right requires having a lot of movies in the marketplace and for those movies to succeed,” said one insider. “If you want to get cynical, you get a $5 million profit here and maybe a $2 million profit there, and then there’s a $3 million loss on the other side. That all adds up to not a lot at the end of the year.”

The studio has a home-entertainment deal with Universal, but the company believes it can gain a competitive advantage over the major studios if it creates an inhouse digital strategy. With DVD revenue shrinking, the studio’s leadership is betting that it can corner the home entertainment audience by offering either a subscription-based Vevo-like streaming service or some type of over-the-top mobile app. That will likely come through an acquisition, because creating a product from scratch would be time-consuming and costly. Simonds and STX president Sophie Watts have been meeting with technology companies in the U.S., India, and China as they plot how to build out the studio’s infrastructure.

Simonds has insisted that STX’s movie operation represents only a small percentage of what he and his investors envision for the company: becoming a diversified global entertainment powerhouse, operating on all platforms. In order to scale up and expand beyond a movie studio, STX will undoubtedly be looking to make some transformative transactions in the coming months and years, potentially acquiring other media properties.

One cannot underestimate the difficulty of starting a multi-tiered studio from scratch. Just ask Steven Spielberg, David Geffen, and Jeffrey Katzenberg, who launched DreamWorks in 1994 with huge ambitions, only to see Spielberg’s live-action enterprise morph years later into a pure-play production company.

STX  recently formed a nonscripted television division, installing Jason Goldberg as president. Goldberg, who created and executive produced “Punk’d” and “Beauty and the Geek,” is charged with creating original programming in the U.S., China, and India for distribution across linear and digital platforms. STX already has sold 12 shows to networks in the U.S. and Asia, including NBC, History channel, The CW, and Syfy. The company also plans to continue expanding its scripted production capabilities.

Meanwhile on the movie front, STX is spending aggressively to legitimize itself as a serious contender. At this year’s Cannes Film Festival, the company emerged as the most audacious U.S. buyer, shelling out nearly $60 million to land two coveted projects: Aaron Sorkin’s “Molly’s Game” and Martin Scorsese’s “The Irishman.”

The pacts created a lot of buzz along the Croisette, becoming among the highest-profile deals in an otherwise sluggish market. The sale of “The Irishman,” in particular, was notable for STX both because of its high price — $50 million for international rights, for a movie that has yet to be shot — and because the new Hollywood player beat out the likes of Universal and Fox to acquire the crime thriller. (Paramount holds domestic rights.)

In an interview immediately following the closing of the “Irishman” transaction, STX Entertainment international division president David Kosse insisted that the studio was aggressive because the deals made financial sense, not so it could make a statement. “Everybody wants a Scorsese film,” Kosse said. “We want to be a supplier and distributor and marketer of the biggest films we can get our hands on.”

But one executive who has followed the company closely wondered if the Cannes acquisitions were more about sending a message to the industry and “winning against the big guys on a big stage,” than purely designed to drive maximum financial returns. “It didn’t seem like it was part of their formula,” the person suggested. “Their focus is on star-driven, mid-budget films. Are they sticking to their focus?’”

Longtime industry analyst Hal Vogel credited STX with assembling “an impressive board and list of investors,” including private equity firms Hony Capital and TPG Growth, as well as billionaire investor Gigi Pritzker. This, he said, “is a good leg up for any enterprise,” but he added that while the company’s $1 billion in seed capital is notable, “nowadays a billion dollars does not buy you that much. In the past 10 or 15 years, we have seen a lot of companies with $1 billion in capital burn through it pretty quickly. Because you start with a relatively big pot of money doesn’t mean you’re going to make it.”

But the $1 billion-plus STX plans to spend on making, marketing, and self-distributing its movies over the next year is only a fraction of what the studio has earmarked for further expansion.

In recognition of the global nature of the business, STX recently hired Kosse, a veteran executive who previously led British production company Film4, to oversee its international expansion. Though the studio maintains output deals with foreign distributors, the goal is to build up to the point where it releases its own films in foreign territories. The deal for “The Irishman” can be seen as  a signal of STX’s ambitions to operate on a worldwide scale. Vaulting to the level of a major studio, however, will require more than bold vision. It will take hits.