Theater chains, desperate to pull back from the financial brink, are steadily phasing out all but the blockbuster films on which they make the most profits. In response, major art-house divisions of Hollywood studios are reinventing themselves, moving away from low-budget pictures and toward bigger-budget crowd-pleasers. In turn, independent filmmakers and distributors are being hammered as never before.

In the not-too-distant past, the major art-house divisions seemed to be all over the place, attending every key film festival around the world in a frenzied attempt to acquire independent movies, which they would then release through their own distribution machines.

Not any more. Distributors like Miramax Films, Fine Line Features and Fox Searchlight Pictures have been slashing the number of films they buy, and focusing on bigger-budget films with good marketing hooks like "Crouching Tiger, Hidden Dragon," made for a relatively comfortable $12 million to 15 million, and "Traffic," a big-budget drama saturated with stars.

There are several reasons for the change of strategy chief among them, the spiraling costs involved in marketing a picture and the refusal of big video chains like Blockbuster Inc. to stock more than a few choice indie titles. But many industry insiders say the problem begins and ends with the movie theaters.

"Theaters are desperately out to make money, especially considering the state of exhibition today," said Steve Bickel, president of The Shooting Gallery International, an independent production and distribution company. "The patience they may once have had is totally eroded by their own financial difficulties."

What Bickel is referring to is a crisis that has consumed the exhibition side of the business for the past year. After investing too heavily in massive construction of new theaters, many chains are either going out of business, facing bankruptcy or struggling just to survive.

Because of that, they are increasingly risk-averse. Michael Barker, co-president of Sony Pictures Classics, noted that in most multiplexes the lowest-grossing film is the first to be dropped. All too often, that is an art-house title that needs weeks before word-of-mouth spreads and builds a critical audience mass.

In a typical deal, after a theater's operating costs have been paid, the first week's revenues are split 90-10 in favor of the distributor which is why the initial grosses are so important for a studio. That split shifts in the exhibitor's favor as the run continues, though precise terms are separately negotiated for each picture. The longer a film's run, the more the theater operator makes.

Pressure from exhibitors to increase flagging revenues comes after a decade in which almost every major studio established a specialty unit from Searchlight to the recently formed Paramount Classics and Universal Focus. Now many of these are finding they have to be very careful about which pictures they commit to, or the theater chains just won't play them.

Distributors change course

Only a few years ago, Fox Searchlight was buying films like "The Brothers McMullen," made on a shoestring budget of a few thousand dollars. Now it is choosing to invest in a very different kind of picture.

It was Searchlight that first developed "Traffic," which was eventually made by USA Films, the fledgling movie division of Barry Diller's media empire. Its budget: a staggering $55 million more than 100 times the cost of the average Sundance Film Festival contender. USA felt it was a far better investment to put its money in one big picture than in many smaller releases.

Similarly, a company like Miramax, which used to dominate the film festivals, went for more than a year without any significant acquisitions. Instead, it cut back on the ultra-low-budget releases, ramped up the number of bigger-budget films produced in-house and beefed up its sister company, Dimension Films, which makes "genre" releases like "Scream" and "Scary Movie." (It recently has started buying again, though on a small scale.)

This year's Sundance festival in Park City, Utah, which ran from Jan.18 to 28, provided plenty of proof of the new strategy that independent powerhouses are pursuing.

Whereas three or four years ago Miramax and other cash-rich companies were snapping up almost every decent picture in sight, this time hardly any of the independent movies shown at Sundance found buyers despite several drawing solid reviews.

"Nobody got 'silly money' for any one project," said producer Michael Peyser, at Sundance with his film "Haiku Tunnel." "Even if you had multiple bidders, the advances are not large any more. The buyers got burned in the past, and the costs of marketing and distribution have risen considerably."

Increased marketing costs are pivotal. The Motion Picture Association of America said that while the average studio film costs $51.5 million to make, it costs another $25 million to market. How can art-house movies compete with that?

"Years ago, you could depend on national magazines like Time and Newsweek to review foreign films and independent films on a regular basis," said Sony's Barker. "But now there seems to be less coverage than before. I think it's due to pressure from editors."

Diversifying for stability

Producer and distributor Regent Entertainment, which produced the critically acclaimed "Gods and Monsters," is one company that is still betting on art-house releases.

But Regent is also following a new strategy: buying theaters as well as producing movies. That diversifies risk and gives it a solid real-estate investment. Indeed, the value of its real estate holdings has soared, according to Paul Colichman, one of the company's partners.

Regent has invested several hundred thousand dollars in renovating the Regent Showcase on La Brea Avenue in Hollywood and is putting the same kind of money into a theater in Dallas.

And the renovations appear to be yielding results with the Showcase's latest release, "Crouching Tiger, Hidden Dragon." In its first week at the Hollywood theater, "Dragon" brought in an almost unheard of $100,000, said Colichman. Still, he notes, most of the time the theater does "only breakeven business."

That may be fine for art lovers, but it isn't acceptable to Hollywood business executives.

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