In 2005, Eisner decided not to renew the Weinsteins’ contract. Whereas Miramax belonged lock, stock, and barrel to Disney, the Weinstein brothers had a claim to subsidiary Dimension Films, which Eisner wanted to keep at Disney. So he had to negotiate an exit package for the Weinsteins. Enter Hollywood lawyer (and Shakespearean scholar) Bertram Fields, who got them a $130 million settlement (partially based on what turned out to be Miramax’s phantom profits in prior fiscal years), and allowing Harvey and Bob Weinstein to create a new film company, The Weinstein Company.
After their departure, Disney released many of the delayed movies, which produced losses in 2005 alone of over $100 million. Harvey Weinstein, known for his artful films, also demonstrated with Disney that he had mastered the artful deal that amazed even Hollywood.
PLUS ÇA CHANGE: PARAMOUNT’S REGIME CHANGE
The principal asset of a modern studio nowadays, aside from its library of movie titles and other intellectual properties, is its human capital, which includes executives with the negotiating skills, judgment, charm, and goodwill within the industry to get top stars, make favorable production deals, and profitably organize the release of movies. In the spring of 2004, following a string of six box office flops in 2003, Sumner Redstone, the chairman of Paramount’s parent company, decided Paramount needed a new infusion of human capital. In the regime change, Jonathan Dolgen and Sherry Lansing, who had run the studio for the past decade, were out. Brad Grey, a dynamic forty-seven-year-old television producer and talent manager, would replace them. Even though he had no previous experience in running a movie studio, Redstone gave him a mandate to turn the studio around.
But turn around from what? Despite its flops, the Dolgen-Lansing decade was hardly a disastrous one. During that period, 1994–2004, Paramount released six out of its ten highest grossing films in history, including Titanic, and in eight out of their ten years their division (which included television as well movies) scored record profits. They set up lucrative co-production deals with Dreamworks SKG, established the Mission Impossible franchise with Tom Cruise, and created three profitable distribution labels—MTV Films, Nickelodeon Films, and Paramount Classics. Dolgen’s skill was the art of the deal which reduced Paramount’s risk by using Other People’s Money, his specialty being offbalance sheet financing and foreign subsidies to pay for a large part of a film’s production costs. Through them, Dolgen and Lansing managed to achieve an average return on invested capital of nearly 60 percent during their ten years. Even in their worst year, 2003, they hit their targeted profit numbers.
Enter Brad Grey. He wasted little time in dismantling the team that his predecessors had built. Within six months, almost every senior executive “ankled,” as Variety colorfully describes exiting a studio, including Rob Friedman, the head of worldwide distribution and marketing; Thomas Lesinski, the president of the Home Video division; Donald DeLine, the head of film production; Jack Waterman, the president of pay-TV; Gary Marenzi, the head of international TV; and Tom McGrath, the architect of the studio’s offbalance sheet financing strategy. In all, over 100 executives were either fired or left Paramount in the regime change. “Even by the harsh standards of Hollywood such wholesale bloodletting is unprecedented,” one former Paramount executive said in an email.
Gray also cancelled most, if not all, of the movie projects in process in 2005. Letting it be known that Paramount would place less emphasis, as part of the regime change, on deal-driven movies, he cancelled five such projects based on German and Spanish tax deals, which would have produced about $50 million in bottom line profits. (The financial vice president working on these deals, getting the message, promptly resigned.) But replacing such projects, and packaging scripts with stars, directors, and financing, takes many months, if not years. And by the fall of 2005, Paramount still did not have enough viable projects in the pipeline to provide the studio’s distribution arm with product for 2006 and 2007. The solution Grey found was for Redstone to buy Dreamworks SKG for $1.6 billion.
To finance this deal, Redstone sold Dreamworks’ movie library to hedge funds for $900 million. As a result, Paramount got thirty-odd Dreamworks projects—including Dreamgirls and Transformers—to replace the Dolgen-Lansing development projects.
The new regime, at Redstone’s prodding, also ended its deal with Cruise-Wagner Productions, which had produced not only its Mission: Impossible franchise but its other tentpole film, War of the Worlds. The decision to end Cruise’s contract, despite Redstone’s PR jibes at Cruise, was, to quote The Godfather, “Not personal, Sonny; it’s strictly business.” The real problem was the rich split Cruise had negotiated with Paramount—22 percent of the gross revenues received by the studio on the theatrical release and the television licensing and a 12 percent cut of Paramount’s total DVD receipts.
While Paramount was busy subsuming (and becoming) Dreamworks, the human capital at Dreamworks, including Steven Spielberg and his creative team, exited Paramount to create a new studio, backed by $500 million in Indian financing, which would be the new Dreamworks—or at least the sequel. Plus Ça Change or, as they say in Hollywood, that’s show business.
TOM CRUISE, INC.
The gawkerization of Hollywood, entertaining as it may be to the public, blots out much of the reality underlying the movie business. Witness, for example, the treatment of Tom Cruise after People asked on its Web site in May 2005, if his relationship with the actress Katie Holmes represented “1. TRUE ROMANCE” or “2. PUBLICITY STUNT.” In this pseudo-poll, in which subscribers with AOL’s instant messaging could “vote” as many times as they wanted (paying a charge each vote), 62 percent of an unknown number of respondents chose “publicity stunt.”
Once this statistically meaningless result was sent out on the PR wire, it spawned a frenzy of stories dangling the bizarre idea that the romance had been faked to publicize, in Cruise’s case, Paramount’s War of the Worlds and, in Holmes’ case, Warner Bros.’ Batman Begins. Frank Rich proclaimed in the New York Times that the affair was nothing more than “a lavishly produced freak show, designed to play out in real time,” and that “the Cruise-Holmes romance is proving less credible to Americans in 2005 than a Martian invasion did to those of 1938.” As it turned out, Cruise and Holmes were subsequently engaged, married, and had a child.
What is entirely lost in the fog of media gossip, however, is the entrepreneurial role that Tom Cruise has carved out for himself in the New Hollywood. Consider, for example, the Mission: Impossible franchise. When Paramount decided to reinvent its TV series Mission: Impossible as a movie, Cruise not only starred in it, but he (along with producer partner Paula Wagner) produced it. In return for deferring his salary, he negotiated a deal for himself almost without parallel in Hollywood. To begin with, he got 22 percent of the gross revenues received by the studio on the theatrical release and the television licensing. The more radical part of the deal involved the video earnings (the deal was negotiated before DVDs replaced video tapes). When videotapes became a cash cow for Hollywood in the 1970s, each studio employed a royalty system in which one of its divisions, the home-entertainment arm, would collect the total receipts from them and pay another one of its divisions, the movie studio, a 20 percent royalty. This royalty became the “gross” number that the studios reported to their partners and participants. The justification for this system was that, unlike other rights, such as television licenses, which require virtually no sales expenses, videos have to be manufactured, packaged, warehoused, distributed, and marketed. So, the home-entertainment arm keeps 80 percent of the proceeds to pay these costs. The stars, directors, writers, investors, actors, guilds, pension funds, and other gross participants get their share of just the 20 percent royalty. If a star were entitled to 10 percent of the video gross, he or she would get 10 percent of the royalty, which, under this system, is only 2 percent of the real gross.
But not Cruise. He insisted on—and received—“100 percent accounting,” which means that the studio, after deducting the
out-of-pocket manufacturing and distribution expenses, paid Cruise his 22 percent share of the total receipts. As a result, Cruise earned more than $70 million on Mission: Impossible, and he opened the door for stars to become full partners with the studio in the so-called back end.
By 2000, the profits from DVDs had begun to alter Hollywood’s profit landscape, and since it was now too complicated to track all the expenses, Cruise revised the deal with Paramount for the sequel Mission: Impossible 2. His cut of the gross was increased to 30 percent, and, for purposes of calculating his share of the DVDs, the royalty was doubled to 40 percent. So, he would get 12 percent of the total video/DVD receipts with no expenses deducted by Paramount. In return for this amazing deal, Cruise agreed to pay the only other gross participant, the director John Woo, out of his share.
As with Mission: Impossible, Cruise’s company produced the film, and Cruise, who proved to be a relentlessly focused producer, brought Mission: Impossible 2 in on budget. The movie went on to be an even bigger success than the original, earning more than a half-billion dollars at the box office and selling over 20 million DVDs. Cruise’s share amounted to $92 million—and he was now the key element in Paramount’s most profitable franchise. In light of such a success, Paramount initially agreed on the same deal with Cruise for Mission: Impossible 3. Even with Cruise’s rich cut, Paramount would make money. According to an internal analysis by Paramount, each DVD, which retails for about $15 wholesale, costs the company only $4.10 to manufacture, distribute, and market. Another 45 cents goes for residuals payments to the guilds, unions, and pension plans, leaving the studio with slightly over $10. So, even after giving Cruise his cut of $1.80 per DVD, Paramount stood to make more than $8 per DVD.
By 2004, DVDs were bringing into the studios’ coffers more than twice as much money as the theatrical release of movies, and there was every reason to assume that Mission: Impossible 3 would sell more DVDs than its predecessor. The budget, however, had increased to $180 million, so new Paramount studio chief, Brad Grey, asked for a renegotiation. After the dust had cleared, Cruise still had his huge percentage of the gross—it actually had improved since there were now no other gross participants. When released in 2006, the movie took in $397.8 million at the box office (nearly 70 percent of which came from foreign theaters)—which was less than the prior sequel—but Cruise’s real profit came in his huge 12 percent cut of DVD sales. As it turned out, Cruise was now making much more from the franchise than Paramount, a disparity that so infuriated Paramount owner Sumner Redstone that he terminated Cruise’s contract with Paramount in August 2006.
But Cruise did not go unemployed. MGM hired him in November 2006 to revive United Artists, a studio originally created in 1916 by such legendary Hollywood stars as Charlie Chaplin, Mary Pickford, and Douglas Fairbanks, Jr. but which had been dormant for twenty years. Merrill Lynch organized a $500 million line of credit to finance this enterprise. Whether or not Cruise can relaunch a moribund studio remains to be seen, but Cruise, as one of the handful of producers—along with George Lucas, Steven Spielberg, and Jerry Bruckheimer—who can reliably deliver a billion-dollar franchise, may yet succeed.
THE STUDIOS—REQUIRED READING
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
—Adam Smith, The Wealth Of Nations
In Hollywood, thanks to the services of a secretive research firm called NRG, rival studio executives do not need to meet together and conspire. NRG helps them coordinate openings in such a way that their movies do not compete head-to-head for the same demographic slice of the audience. Founded in 1978 as the National Research Group, NRG—now a part of Nielsen Entertainment—supplies the same weekly “Competitive Positioning” report to each of the six major studios. NRG’s founder, Joseph Farrell, signed all of the studios to exclusive contracts, ensuring that the data from his telephone tracking polls became the accepted standard. Because of this monopoly of information, the report provides the studios with a common basis on which to make their scheduling decisions.
Here is how the research is compiled. The NRG telephone pollsters ask a sample of likely moviegoers first whether they are “aware” of a specific movie and, if so, what is the likelihood that they will see it when it opens. They also ask the age and gender of the respondents. The NRG analysts break down the data from these tracking polls into four basic groups, or “quadrants”: males under twenty-five, males over twenty-five, females under twenty-five, and females over twenty-five. (In some cases, the respondents are also divided by race.) From these results, NRG projects how well upcoming movies will do against each other in each audience quadrant should they open on the same weekend. For studios, the Competitive Positioning report is critical reading. Why? Nowadays, Hollywood has to create an audience for each and every movie via ad campaigns, appropriately called “drives” (as in “cattle drive”). “If we release twenty-eight films, we need to create twenty-eight different audiences,” a Sony marketing executive lamented to me. Audience creation is a hugely expensive exercise. For a drive to work, it must not only round up a herd of moviegoers who favor the movie, it must also get this herd to move at a specific time: opening weekend.
This feat almost invariably requires buying a slew of ads on the limited number of television and cable series that the prospective herd grazes on during the week preceding the opening. To make sure they get the herd’s attention, the ads are usually repeated eight times, which is why these drives cost so much. The multimillion-dollar drive runs into a serious problem, however, if a rival studio goes after the same herd that same week—for example, under-twenty-five males—by also buying a parcel of ads on the same shows. The herd then might be cross-pressured and confused, and certainly divided. Such a competition would likely spell failure for both rivals, since even the winner stands to lose a part of the audience to the rival film. To win, then, studios must avoid such conflicts, even if it means yielding to each other.
Enter NRG. The major studios can and do avert such titanic disasters by consulting the NRG Competitive Positioning report. Each studio gets an early warning from the NRG report when one of its films is on a collision course with a competitor’s film that appeals to the same herd. By comparing the projected turnouts for both films in the crucial quadrant(s), the studios know which film will lose the matchup, and the losing studio can reschedule its opening to a different weekend, even if it’s a less advantageous time period (i.e., not the summer and not the holidays).
Consider how Paramount captured the highly prized Fourth of July weekend in 2005 for War of the Worlds even though Warner Bros. had a major contender in Batman Begins and 20th Century Fox had Fantastic Four. In the NRG tracking polls, all three films did well with males under twenty-five (aka teens), the audience quadrant that’s easiest to find clustered around TV programs and, hence, the easiest to stampede toward a July 4 weekend opening. But War of the Worlds was also strong in the under-twenty-five female quadrant, so it would easily best both Batman Begins and Fantastic Four. (In fact, it led in all quadrants.)
Warner Bros. averted a head-to-head competition by opening Batman Begins in mid-June, and 20th Century Fox opened Fantastic Four on the weekend following July 4. As a result, all three films won their weekend box office and could advertise themselves, as Fantastic Four did, as “America’s No. 1 hit.” No Adam Smith-type conspiratorial meetings were necessary between the rival studio executives of Paramount, Warner Bros., and 20th Century Fox in order to advantageously stagger their film openings so they did not collide. Of course, the weaker contender might try to bluff his way through. For example, in 2002, Disney’s subsidiary Miramax had a direct conflict with Dreamworks SKG concerning the openings of their two competing films Gangs of New York and Catch Me If You Can, both starring Leonardo DiCaprio and both scheduled to open on December 25. Even though the Miramax film had a slightly higher “aware
ness” level in the targeted males-over-twenty-five audience, Dreamworks refused to yield. At that point, Harvey Weinstein, the president of Miramax, and Jeffrey Katzenberg, a founding partner of Dreamworks SKG, had breakfast in New York to discuss their movies’ release dates. As Katzenberg later explained in an interview with the New York Times: “He [Weinstein] and I had many conversations about why releasing the movies on the same day was in none of our interest … as both companies have a big investment in Leo DiCaprio.” A few days later, Miramax blinked by moving Gangs of New York to a different, and less favorable, opening date.
The Hollywood Economist 2.0 Page 9
