FILM—Studios Shifting Risks, Costs of Live-Action Film

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The Walt Disney Co. looks like it will be the box-office champ for 2000, with a 14.6 percent market share heading into the final days of the year. But rather than touting that achievement, media reports and even Disney officials themselves have been talking about what a dog live-action filmmaking has become, in terms of profitability.

“Everybody has halved their live-action budget in the last five years, except Warner Bros., and it looks like they’re starting to now,” said Laura Martin, an analyst at Credit Suisse First Boston.

In an effort to reduce costs and cut back on risk, studios that once would foot the entire bill for a production have been passing off the risk inherent in bankrolling a blockbuster feature which generally carries with it blockbuster talent at like prices by pursuing partners to take on overseas distribution for a 50 percent share of the profits.

In some cases, studios have preferred to let independent producers absorb greater risk and greater potential reward by sourcing domestic financing and leaving the studio to act only as a distribution vehicle.

“At this point it’s a difficult business and most people are challenged to make a profit,” said Bill Mechanic, who left his post as chairman and chief executive of News Corp.’s 20th Century Fox in June and is in the process of setting up his own small production shop.

“We’re entering the next iteration of how pictures are made,” he said. “The company (former Disney Studios Chairman) Joe Roth started, the company I’m starting, are probably good for the system. The owner/operator is the best thing for the industry, both creatively and in business.”

The reason, he said, is that “it’s easier for someone who’s in complete control and not afraid for their job to make those decisions.”

As for studio chiefs, they seem to be touting how much they’re not spending on live-action filmmaking.

Two weeks ago, Disney Chairman Michael Eisner was busy telling a group of European analysts at a meeting in London not about his company’s leading box-office gross. Instead, Eisner stressed: “We have substantially reduced our overhead, virtually eliminating expensive production deals with outside talent, cut back on the number of scripts developed, and reduced the number of live-action films we’re producing.”

The trend is expected to accelerate in the months ahead, as Hollywood studios become subsumed by huge global conglomerates (punctuated by last week’s federal regulatory approval of America Online Inc.’s $126 billion acquisition of Time Warner Inc.), making movies an even less significant business, in terms of the parent companies’ overall global operations.

And of the multitude of products churned out by these global behemoths, live-action films have an “abysmal record” of returns, as one industry analyst put it.

In response, Hollywood studios are increasingly removing themselves from the production process, relying instead on their distribution infrastructure to generate revenue.

Shrinking contribution

This shift away from production is characterized as a late response to the realities of the film business, one where studios have become smaller and smaller contributors to the bottom line of the large media companies that own them.

Consider Disney: Its live-action feature films accounted for $110 million of operating income for the fiscal year ended Sept. 30. That barely registers as a drop in the bucket for a corporate parent that generated $4 billion for the same period.

Late last year, Eisner announced that the company would slash its investment in live-action feature films by $500 million. Fully 80 percent of that money was cut this year, with the balance expected to be lopped out of the budget in 2001.

It’s a move, said analyst Martin, that just makes sense.

“A great live-action picture does $100 million (in box office) and a disappointing animated feature does $100 million (in overall business),” she said, adding that animated features simply cost less to produce and have far greater potential to generate licensing revenue.

But the fact that studios are stepping out of the production business does not mean fewer films will be finding their way to the local multiplex, nor does it mean that by giving up much of the upside, the media giants that own the studios are taking a hit.

Spreading the risk

Where a studio in the past might have been willing to foot the bill for the entire production cost of a $70 million live-action feature, it’s now more likely to put up half that amount and look for a joint venture partner willing to come up with the balance in exchange for overseas distribution rights. They have the same number of pictures on their slate, Martin said, it’s just that they’ve reduced their risk by half.

It is a change that has had an impact both on producers who’ve been used to having studio deals, as well as the kinds of movies that end up getting made by the majors.

“For us, it’s an opportunity,” said Michael Barnathan, president of 1492 Pictures, the production company of director Chris Columbus. “It poses a problem for the studios because what they really do is cut the downside and cut the upside.

“Studios have always lived on the blockbuster at least since ‘Jaws,'” he said, “and those are just a gold mine of money (through sequels and licensing), but what they’re doing is giving half of that to someone else.”

What happens, Barnathan said, is that the studios are increasingly interested in projects with big-name stars and lots of action the kind that will do well overseas and for which they can more easily find a partner.

Still, the basic power structure of Hollywood is not likely to change any time soon. The power still rests with the distribution systems operated by the studios. “No matter what my company does, I still have to go through that infrastructure,” producer Mechanic said.

That doesn’t necessarily mean Mechanic will limit himself to lower-budget projects like “Something About Mary,” “X-Men” and “The Fully Monty” films produced while he was at Fox and that scored huge box-office successes. “Mission Impossible,” “Cast Away” and “The Grinch” may be wildly expensive to make, but the box office they generate make them worth the expenditure.

The benefit for the independent producer, said Barnathan, is that by setting up deals outside the studio, the producer remains an owner of the project and participates in its revenue in perpetuity, rather than getting only a relatively nominal share allotted as producer fees.

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