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November 7, 2005I really don't know how to approach Laura Holson's Sunday piece on Warner Bros. I wanted to get a good and fair handle on it before writing about it or recklessly posting it to Movie City News as though it was a hard news story.
On one hand, this is yet another case of the New York Times film coverage team bending over and taking it like the press-release endorsing mediocrity that it has become. Warner Bros is just the most recent studio to "open up" to the New York Times with nothing but a self-promotional agenda and to get a big story out of it.
How does one handle bad news now? You call up the New York Times and tell them how powerful they are, as Monty Python put it in The Meaning Of Life:
"Oh Lord... Oooh you are so big... So absolutely huge. Gosh, we're all really impressed down here I can tell you. Forgive Us, O Lord, for this dreadful toadying. But you are so strong and, well, just so super."
And then, you put every executive not on life support on the phone and tell them what the "truth" is. But the real truth in this story is that Carl Icahn - mentioned in passing in the story - is on the rampage about the stock price at Time-Warner, a successful corporation that got a bit lazy after surviving the AOL debacle, and when Bryan Singer's alleged admission that the budget on Superman was going to hit $250 million turned up in Page Six and then Variety, Warner Bros became more than just another clamp down, but an out and out target - in spite of a good year - in great part because it could be even more profitable.
Add to that the studio's current Poseidon (a remake of The Poseidon Adventure, coming on the heels of a TV version of same this month) which is directed by the very talented, but budget-busting Wolfgang Petersen, who took Troy over $200 million and got blessed by massive overseas returns. And a five month delay on the pricey and not-very-hopeful V For Vendetta.
On the Warner Indie side, the big cuts were in management, particularly in production… which, as it turns out, Warner Indie doesn't do any of. The March of The Penquins, the only significantly profitable film the division has yet had, was a pick-up that was then restructured in a post setting. George Clooney's Good Night, And Good Luck, is yet another project to come out of big WB's deal with production company Section Eight, which Mr. Clooney and Steven Soderbergh own. So the hundreds of thousands of dollars saved in salaries did eliminate a couple of well-liked guys… but they could also be marked as expendable from a block away… or from New York.
But instead of basic reporting on facts that are not really contended, we get the NYT Massage, which is also now regularly given to Bob Iger's Disney, NBC Universal, DreamWorks, and Brad Grey's Paramount. For unclear reasons, the courtesy does not seem to be regularly extended to Sony or Fox.
Still, the hysteria reportage of the New York Times continues. Rather than acting as the paper of record, the Times insists on gathering essentially unconnected stories into an alleged theme in order to drive an agenda to whose motivations I cannot speak. Case in point, reported losses at Disney (based on the Weinstein separation) and at Sony (Stealth, Bewitched and other summer disasters) are thrown in with cost cutting by GE at NBC Universal, Paramount's transition, and DVD returns controversies at DreamWorks Animation and Pixar as some coherent theme of a troubled industry.
There are related issues in some of these stories, but what the New York Times and many others keep missing is that in the last few years, revenues for Filmed Entertainment are higher than ever in the history of mankind… and not by a little… by a lot. What we are now facing is the maturing of the DVD business combined with increased spending based on the massive new revenue stream that DVD has created in the last five years or so. Budgets abhor a vacuum. And now, it's time to start dealing with reality.
Now, those are facts. My opinion is that theatrical box office is a key part of the business model for that future or the industry will have to reduce expenditures by 30% to 50% in a future vision world completely reliant on digital delivery.
But that's another column.
Let's quickly go through the various oddities of this story. Holson writes:
"Last year, Mr. Robinov, the Warner Brothers Pictures head of production, replaced the director of Superman Returns after he refused to board a plane to Australia days before filming was to start. A year earlier, Warner took a $25 million hit when it moved the set of Troy to Mexico from Morocco after studio executives feared that unrest in the Middle East would endanger the cast and crew.
But that's not what is giving Mr. Robinov fits. It's the amount of time he spends trying to figure out which films will attract moviegoers."
Brilliant spin! Robinov inherits, but then sticks with the utterly incompetent McG and gets to the month before shooting a film with a $200 million budget before finding out that McG won't fly to Australia, where sets are already under construction.
Robinov oversees a Troy production that does spend extra money to go to Mexico, but then goes months over schedule and tens of millions over budget to more than $200 million.
But that's not what's giving him fits!
Kiss Kiss Blame Blame. Robinov may well escape a dagger again with Bryan Singer taking the Superman budget "only" $50 million or so over where it started. But Holson lets Robinov off the hook with a basic shrug of the shoulders ("Something is changing in the movie experience.") Robinov then goes on to feed the NYT line, which is that… let's try to figure this one… that they went to see a dark, moody Batman Begins, but didn't go to see House of Wax because… because… anyone… anyone? Must be those videogames! (It couldn't be the failed attempt to squeeze a PG-13 film out of a genre that plays best with an R rating, could it?)
But then, buried under all the tap dancing… a fact! Warner Bros is, according to this story, increasing its interest in splitting costs on more movies. Yet on both major summer movies in 2006… no partner (see note below). Between production and marketing, WB will be in for over $600 million on Poseidon and Superman. And the truth is, they will be fine. Breakeven will be about $700 million worldwide box office, taking DVD and other ancillaries into account. And that seems likely. But it is a big risk. And on top of that, if WB nets only, say, $200 million in profit on the films, the $600 million of risk capital won't look so pretty. Worse, if Poseidon, for instance, doesn't perform great here, but does terrific business overseas, papers like the New York Times are not likely to give them credit… and that is what affects the Time-Warner stock price… which is all this is really about in the first place.
(ED NOTE, Mon, 11:03a - Writing this piece on the fly - really no excuse - I forgot about Warner's first "mea no culpa" story to hit after the Superman price story hit. Variety reported on October 20 that Thomas Tull's Legendary Pictures was taking on "at least" half the cost of Superman Returns. This fact doesn't change the profitability potential of Superman Returns, but it does limit the studios profitability upside to such a degree that unless Superman grosses more than $700 million worldwide, it would have to be considered a loss leader, not endangering overall profitability for the year but unlikely to enhance it much either.)
Next!
Holson writes:
"The kind of deal Warner recently struck with Brad Pitt is starting to become more commonplace. Mr. Pitt agreed to take less money upfront for The Assassination of Jesse James, a $32 million Western that the actor wanted to make."
What Holson doesn't seem to know is that back-end deals are generally a very, very good deal for movie stars and that the biggest names, like Tom Cruise, no longer bother with "monkey cash." Cruise, for one, only takes gross points. If, say, War of the Worlds had been a shocking disaster, Paramount would benefit from not paying Cruise upfront against gross. But as things are, he made between $60 million and $100 million on the film.
The last three releases starring Brad Pitt were all over $350 million worldwide. If Jesse James makes only $150 million worldwide, it will generate net revenues (all in) of at least $140 million. If that happens, and if Pitt got an extra 5 gross points as a result of taking very little up front, it will cost WB an extra $10 million or so. It may be "made money," but the economies of front end vs back end are really not about Brad Pitt or a budget jumping from $30 million to $50 million based on hiring one of 20 major stars. (Just as Sony, where they couldn't break even on the $440 million grossing Men In Black II or the $274 grossing Bad Boys II because so much backend was given away.)
Why doesn't the New York Times know this? It's not a trade secret. It's not what WB wanted printed this weekend. It's a classic Jack Valenti maneuver… make the story about the ratings system while you're securing the freedom to be a collusive industry in Washington.
Holson writes:
"Marketing costs are just skyrocketing, and if we don't address this we are going to put ourselves out of business," said Dawn Taubin, the president of Warner Brothers Pictures' domestic theatrical marketing, speaking about the industry.
Consider this: the average cost to market a film domestically in 2004 was $34 million, roughly half the $64 million average price tag to make one, according to the Motion Picture Association of America. Blockbusters cost even more to market: as much as $60 million domestically and $125 million worldwide."
Ms. Taubin is, as she often is, dead on. But again, by quoting MPAA dogma, Holson misses the real story, especially at Time-Warner.
Taubin attempted something really interesting this summer. She marketed The Dukes of Hazzard all summer long, starting all the way back in April. And the film opened to $30 million. But even with the innovative campaign, tracking made it clear from early on that Taubin was getting the message to potential audience, but they just weren't that interested in this product. Marketing is more effective than ever. In fact, it is so good that people have a chance to enjoy the marketing and still reconsider whether they want to see the film.
But there is also this… a $30 million opening for a movie that no one really wanted to see is not a bad start. It is far from the ugliness of Stealth or The Island. $80 million for Dukes, $34 million for Must Love Dogs, $39 million for The Sisterhood of the Traveling Pants… all good results… if this was a few years ago. In the summer of 2000, only 27 films grossed over $30 million domestic. This summer, 32 films…. which is a record shared with last summer. But the perception is of an industry slipping. If you can't make a car chase movie based on a TV show and have it perceived as a hit with an $80 million gross, you have a problem… and it has nothing to do with the popularity of going to the movie theater.
Holson writes:
"On Wednesday, Time Warner announced that operating income before depreciation and amortization for filmed entertainment - which includes New Line Cinema, Warner's sister company - was down 30 percent, in part because of movie marketing costs."
Wondering what "that operating income before depreciation and amortization for filmed entertainment " actually means? So was I. Let's look at what Time Warner actually had to say:
"Revenues rose 6% ($147 million) to $2.7 billion, led by the strong domestic theatrical performance of Warner Bros.' Charlie and the Chocolate Factory and Batman Begins as well as New Line's Wedding Crashers. Also contributing to the increase were higher television revenues from home video and international sources. This growth was offset partially by the difficult comparison to the prior-year quarter's international theatrical revenues.
Operating Income before Depreciation and Amortization declined 30% ($108 million), reflecting difficult comparisons to the prior-year quarter's higher-margin international theatrical contributions from Warner Bros.' Harry Potter and the Prisoner of Azkaban and Troy as well as increased marketing and distribution expenses this quarter." (Emphasis in both cases added by me)
I have no way of knowing when the various income streams go on the books at Time-Warner. But to offer a reality check, 3rd Qtr is July-Aug-Sept of this year. Warner Bros released six movies either in that period or in the period just before, so revenues would still be coming in on them in 3rd Qtr. Those films have grossed $506 million overseas. Last year, Troy and Harry Potter 2 alone grossed over $1 billion overseas.
Of course, that doesn't include $125 million for The Island, a film that WB had foreign on… primarily because WB is the top studio right now in handling films overseas.
But I can't wait for the "foreign box office is off" story. Ha ha.
Holson writes about DVD:
"Many analysts tend to agree. "Warner has to come to grips on its spending," said Richard Bilotti, a media analyst at Morgan Stanley. "They don't need all that to open a film when Wal-Mart is more important."
Many analysts are fools who should be happy they don't have to deal with the real world. "Wal-Mart is more important" is the kind of thinking that will help destroy the revenue stream of the film business. Wal-Mart is the primary retail outlet for the marketing of DVDs, an ancillary business. But even Wal-Mart is looking to give up less space to DVDs than they do now… which is already less than they give to, say bicycles.
It is true - and there is some content to Holson's piece in this regard - that the marketer who figures out the most successful bridge from theatrical to DVD will be revered. But what is misunderstood by many, in my opinion, is that people appear to make DVD renting and buying decisions during the theatrical window. It is rare, though it happens, that a studio repositions a film dramatically for the DVD window. Sony is doing it right now on Bewitched. But the most clear example of it is on pay cable, where the promos for movies on HBO and Showtime tend to hit just the right notes for films, regardless of whether it matches the marketing in the theatrical window.
Clooney makes the point, "If studios are forced to pay top dollar, the film gets compromised. You can't get the other actors you want. The edges get knocked off."
This is a key to marketing as well. If you have too expensive a film, the marketing department has to overreach, knocking the edges off the campaign.
Holson adds this about the DVD slowdown, which many of us have been writing about since last Christmas:
"Some analysts suggest that studios should have been better at forecasting demand."
Again, "some analysts" should have been better at forecasting reality, too. This is such a lame slap on the hand, but it also is silly to believe that this conversation hasn't been going on inside of Time-Warner and everywhere else for more than a year. There are people who prayed that DVD would be the first market in history not to mature and soften. But the problem is, as it so often is, that the game of telephone at the studios means that the story is not effectively shared in all departments.
And it's not as though the DVD business is over. It's just not quite as juicy as it once was. And this is the tyranny of "the analysts." But just as "they" don't want to acknowledge that $500 million of the $600 million "slump" can be attributed to The Passion of The Christ and Fahrenheit 9/11 alone, "they" don't want to deal with comparing the current fall back to reality in DVD to the hyper-reality of the last few years. It's not a mystery. It's just a matter of someone holding the line. (In this case, that person is Carl Icahn at WB… Immelt at Universal… The Japanese at Sony… Murdoch at Fox… Redstone at Paramount… Eisner, really, at Disney, though he never got credit for it and Iger is doing an excellent job right now, outside of his dangerous new media obsession.)
Hoslon writes:
"Mr. Fellman, swatting at the air in his office as if shooing away invisible critics…"
This is a small obscenity.
What Dan Fellman says to Holson is what most people who actually deal with studio distribution know. "The situation works just fine; it's really not broken. I hate to use the old cliché; but every household has a kitchen, yet on Saturday night it's still hard to get a restaurant reservation."
Holson, of course, then follows by editorializing, doing her best to diminish the pro… because she knows better.
Oddly, after poo-pooing reality, Holson suddenly shows a clear insight, writing,
"Movies earn money in several ways: first at the theater, then on DVD and later through sales to network and cable television. But with digital downloads or video-on-demand, studios increase their ability to offer consumers a menu of movies, television shows and games at different times and for a variety of prices. The trick is to explore new, potentially lucrative ways of digital delivery while keeping theater owners and DVD retailers happy."
Yes.
Except for one thing. It's not about "keeping theater owners and DVD retailers happy." It's about revenue! Movie tickets are, right now, the most expensive of all forms of accessing filmed entertainment. And I believe that the current DVD price point is the highest amount (outside of incremental growth) that we will ever see for Digitally Delivered Filmed Entertainment.
Ms. Holson's piece is not a complete disaster. But it is filled with NYT spin. And it is a generous form of publicity for the tighter, smarter Warner Bros. But Holson is like a bull interested only in the red cape. If she gores the matador, it's only by mistake. And as much as Warner Bros cartoons and March of the Penguins would ask us to believe otherwise, the bull has no emotional stake in goring the matador anyway. Only in saving its own life.
