Sharing pix is risky business

Study shows co-financing does little to cut costs or boost profit

"Master and Commander's" British naval Captain Jack Aubrey braved the high seas and fought the Napoleonic wars in a single ship. So you'd have thought his producers would have had similar brio.

Alas, this season's tentpole du jour, with a final cost of $170 million, was financed by a whole armada of studios: Fox, Universal and Miramax. For the major studios these days, there's clearly safety in numbers for so-called "risky" studio event pics ostensibly to withstand a fickle box office seas and fund a hefty arsenal of stars, props and special effects.

But if a Russell Crowe-starring high-seas action pic franchise with 18 more books under option isn't a good bet, what is? Did Fox and its peers lack the courage of its conviction?

Studios are putting less of their own cash into movies than ever before, citing corporate bottom-line pressures for their budget restrictions and the common sense of risk-sharing.

In fact, cuts of up to 20% have been mandated for aggregate studio production expenditure in 2004, on top of earlier cuts.

The great business school-style solution has run into problems, however. First, the studios have been woefully inadequate in identifying their so-called "problem pictures." Secondly, they're having an even more difficult time finding willing partners.

And that would be fine if this risk-sharing notion actually held true.

In fact, there's surprisingly little evidence that co-financing movies, either by sharing the cost (and rights) with other studios or by enlisting outside capital, is a particularly effective risk-management tool. It certainly doesn't maximize the upside.

Research by finance wonks at Stanford and Carnegie Mellon U. recently found there is no support for the claim that studios tend to co-finance the riskiest films or that co-financing actually helps mitigate the risk of a whole slate of films.

Ronald Goettler and Phillip Leslie examined hundreds of co-financed studio films between 1987 and 2000 and showed that the average return on investment for a wholly-owned studio movie and a co-financed film was roughly the same. Further, they concluded co-financing didn't yield any better returns than simply being the sole owner of many smaller-budget movies. Co-financed films, they claimed, yield the same mix of return on investment as studios' solo-owned films, and there is "no support for the claim that studios tend to co-finance the relatively risky films."

Sure, if "Master & Commander" is ultimately a huge hit, all three partners will make good money, but none will ride the rising tide to its most lucrative potential downstream. And that is precisely where investors believe the real value in owning a film studio ultimately lies.

Studios are anxious to find a solution -- any solution. Production costs have outpaced the rate of inflation for years. Film negative costs rose around 23% in 2002 and are likely to show another 10% rise this year.

So they want to share the danger, to keep Wall Street and stockholders at bay. Most of the major studios now are open to co-financing up to 50% of a given project.

But, ironically, the solution is creating another problem. By co-financing, studios are giving the conglomerates more ammunition in their growth-each-quarter mindset. Ultimately, they are saying to the studios, "You don't have to look at the bigger picture; we can play by your rules and make it work."

All of this hedging is Hollywood's newest obsession, and it's easy to understand in an era of corporatization and obligation to shareholders. Box office by its very nature is volatile, and volatility can rattle a media conglom's share price (even when the money it generates accounts for less than 20% of a company's total earnings).

The problem is, the film biz is creative and any attempt to lessen risks also has the potential to undermine the upside.

Houlihan Lokey banker David Davis says, "These deals were a way the studios could still make money on loser films. Now they're doing it with the good product as well."

One example: "Tripoli" could have been Keanu Reeves' first big role after the "Matrix" trilogy. Reeves is still attached to the story of how U.S. soldier William Eaton joined forces with an exiled king to overthrow the corrupt ruler of what is now Libya, but the studios can't afford it. Fox put the pic into turnaround, and now co-financing companies are kicking the tires.

It's the film that could break Intermedia: "Alexander," Oliver Stone's passion project about the Macedonian king. Warners would commit only $35 million for domestic rights. The budget has already reached $200 million.

Studios are hopping on the joint-venture bandwagon to the point where their net contribution to film product is actually falling.

"The average direct investment has probably gone down on a per-film basis," says McKinsey's media guru Michael J. Wolf. He adds that, in some ways, studios are have moved from being banks to being distribution vehicles.

The penchant to co-finance movies is almost irresistible; it can save a company a huge writedown.

In 1987, for example, 10% of Warner Bros. pics were in some sort of co-financing deal. By 2000, it was 70%. In many cases, that paid off big: Warners covered its fiscal butt on "The Adventures of Pluto Nash" by splitting the loss on the $90 million flop with Village Roadshow and actually pocketed a risk-free $9 million distribution fee on "Battlefield Earth."

In addition to the current "Matrix Revolutions" and "Master & Commander," the studios' slates are full of co-productions, including "The Cat in the Hat," "Timeline" and "Peter Pan."

And Sony, Miramax and DreamWorks have just agreed to partner on "Memoirs of a Geisha," with "Chicago's" Oscar-nominated helmer Rob Marshall directing the long-in-the-works pic.

Hollywood pundits cite the example of "Titanic," on which Fox wound up ceding $600 million of the pic's earnings to Paramount in exchange for $65 million in upfront dough. But Fox still made a handsome profit on the mega-hit, and there are many other examples of pics -- "Gladiator," "A Beautiful Mind," etc. -- that earned so much money that everyone came out with a tidy profit.

But for every success story, there are numerous tales of woe.

Under pressure from poverty-stricken Vivendi this past summer, Universal wagered on keeping all rights to its not-so-jolly green giant "The Incredible Hulk," while giving up all international rights (including DVD) on "Bruce Almighty" in exchange for covering $45 million of the budget. The windfall on "Bruce's" overseas box office, DVD and TV sales will easily stretch into hundreds of millions of dollars.

Clearly, co-financing is in vogue, but skeptics believe "risk-sharing" is another way of saying "lack of conviction in a project."

How else could Disney-developed "The Sixth Sense" wind up financed (and exploited) primarily by Spyglass, even after Disney had screened it?

And even the best poker players make mistakes: Witness Par's decision to retain full rights to "Lara Croft Tomb Raider: The Cradle of Life."

With a 25-pic annual release slate, Warners enjoys some of the highest financial returns in the industry. WB divides its films into three categories: wholly financed franchise-type pics that exploit core characters with merchandising potential; riskier co-financed films; and distribution-fee deals with virtually no risk.

Studio's stated goal is to keep production budgets steady year to year while handling the maximum number of films.

Since "Titanic," Fox says it embraces the idea of rolling the dice on its biggest pics.

"We're more inclined to take the risk than other studios and are less likely to sell off international rights," says Fox prexy Peter Chernin. He says his team runs a profit-loss analysis test on each film before determining when to hedge their bets. (Fox has domestic on "Master & Commander," which is shared overseas by Universal and Miramax.)

(Jonathan Bing contributed to this report.)

Read the full article at:
http://www.variety.com/article/VR1117895718.html

Like this article? Variety.com has over 150,000 articles, 40,000 reviews and 10,000 pages of charts. Subscribe today!
http://www.variety.com/emailfriend
or call (866) MY-VARIETY.
Can't commit? Sign up for a free trial!
http://www.variety.com/emailfriend

© 2007 Reed Business Information
Use of this Website is subject to Terms of Use. Privacy Policy