Picture This: Warner Bros. Having a Rare Down Year

By Claudia Eller

Aug. 18, 2006 12 AM PT

Times Staff Writer

Last year Warner Bros. President Alan Horn was at the top of his game.

Boy wizard Harry Potter, eccentric candy maker Willy Wonka and crime fighter Batman catapulted Warner to its most profitable year.

But the hot streak ended with a thud. Not even Superman could prevent a crush of movie losses that has shaken the venerable Burbank studio and its affable leader.

The costly disaster movie “Poseidon,” director M. Night Shyamalan’s fantasy thriller “Lady in the Water,” the computer-animated “The Ant Bully” and the urban drama “ATL” could lose more than $120 million combined for Warner and its financial partners, according to one person familiar with the films’ finances.

“The price of failure is high,” Horn said. “It’s not just the financial cost. It’s reading about it in the newspaper.”

The gusher of red ink is especially painful for a studio so used to success. In 18 of the last 20 years, Warner has ranked among Hollywood’s top three distributors in box-office revenue.

In an interview in his office on the Warner lot, Horn spoke frankly about the cold streak, his most disappointing since joining the studio seven years ago after running the production outfit Castle Rock Entertainment. Even the profitable “Superman Returns,” which Warner hoped would be one of the summer’s biggest blockbusters, underperformed by Horn’s own admission.

Merrill Lynch analyst Jessica Reif Cohen said Warner was having “an unusually bad year.” But, she added, Horn and his boss, Chairman Barry Meyer, are still considered top-notch executives.

“They’ve been incredibly consistent and stable, and the management team is well-respected,” she said.

Still, the two are under the gun from parent Time Warner Inc. to grow the studio’s businesses as they struggle with such industrywide issues as rising production and marketing costs, a cooling DVD market and changing consumer demands. Late last year, Warner slashed 400 jobs worldwide.

“I think there’s a huge amount of pressure,” Reif Cohen said. “Time Warner stock isn’t performing, and for Warner Bros., which has been so successful, it becomes harder to grow the business.”

Warner’s flops also underscore the inherent risks for investors behind the torrent of private equity money flowing into Hollywood. Warner and other studios increasingly rely on outside financing from hedge funds, private equity firms and other sources to spread their risks.

Warner’s recent losses will be shared with equity players Legendary Pictures and Virtual Studios, each of which has committed hundreds of millions of dollars to co-finance the studio’s movies.

Increasingly starry-eyed Hollywood investors are feeling the sting of failure when expected blockbusters go bust.

“All I can say to our partners is the same thing I say to our people here at Warner Bros.: It’s painful to lose money on a movie,” Horn said. “We are in the business for the long term. We are producing a slate of movies and some will work and some will not.”

Warner is especially dependent on the outside money to protect its downside. Except for its lucrative “Harry Potter” series, the studio has partners on virtually every film.

Although the partners split costs with Warner, the deals are particularly good for the studio because it winds up making far more on the hits and losing less on the flops than its investors. That’s because it takes an off-the-top distribution fee of more than 12% before sharing any revenue.

But independent media analyst Harold Vogel wonders whether access to such easy private equity money has clouded Warner’s movie choices.

“Maybe Warner Bros. got a little inebriated, and it distorted their normally good judgment,” Vogel said.

“Everyone can have a bad year. Just the same, I don’t understand how a smart management team like Warner Bros. could have made ‘Poseidon’ or ‘Lady in the Water.’ ”

Horn said Warner wasn’t just going on a spending spree using other people’s money.

“The decision to bring in a partner always helps us in the risk analysis,” he said. “But I would never say I wouldn’t make ‘Poseidon’ without a partner.”

Still, Horn knows financiers have only so much patience. But he believes they still consider Warner a good long-term bet.

“I know that if a partner loses money over time, that partner will be gone,” he said. “I am confident that we are picking movies that will give us a slate that will make money.”

Neither Virtual’s nor Legendary’s top executives returned calls seeking comment. Typically, such investors spread their money and risks over a slate of studio movies.

It hasn’t helped Warner that none of the six profitable movies it has released this year -- including “V for Vendetta” and “Superman Returns” -- has been a blockbuster. Horn said the half-dozen would make “from a lot to a little” money.

Horn declined to divulge figures, but a person familiar with the studio’s internal projections said Warner’s cut of the “Superman Returns” profit was expected to be $50 million to $60 million. The film cost $209 million to produce and more than $100 million to market worldwide.

Horn expects “Superman Returns” to eventually gross about $400 million worldwide, more than last year’s hit “Batman Begins.” Nonetheless, “Superman” fell at least $100 million short of his expectations.

“I thought it was a very successful movie, but I think it should have done $500 million worldwide,” Horn said. “We should have had perhaps a little more action to satisfy the young male crowd.”

Still, he’s betting Warner has firmly reestablished the “Superman” franchise and is planning another installment for summer 2009.

Horn is more blunt about his disappointment with “Poseidon,” a movie that critics skewered and audiences avoided. Warner and its financial partners sank $160 million into the remake about a capsized cruise ship, figuring that arming “The Perfect Storm” director Wolfgang Petersen with today’s state-of-the-art special effects would wow moviegoers.

Then, Horn said, “I heard a 15-year-old girl say, ‘I’ve seen a luxury liner go down. I saw ‘Titanic.’ ”

To date, “Poseidon” has grossed only $60 million domestically and $120 million internationally. Horn said Warner and its partners are expected to lose about $50 million on the movie.

“ ‘Poseidon’ was an event movie for us and we had high hopes for it,” Horn said. “The audience didn’t show up.”

Horn’s top production executive, Jeff Robinov, concurred that the studio miscalculated.

“Between Wolfgang and the scale of the picture, we felt we didn’t need more than that,” he said.

But in hindsight the studio should have cast bigger stars, Robinov said. It also didn’t help that its May 12 release date was sandwiched between the premieres of Paramount Pictures’ “Mission: Impossible III” and Sony Pictures’ “The Da Vinci Code.”

Horn and Robinov also had high hopes for Shyamalan’s $70-million “Lady in the Water,” which sources estimate could lose $20 million to $30 million.

The movie was panned by critics. Some observers also question whether Shyamalan, known for such hits as “The Sixth Sense,” inadvertently sabotaged his movie by participating in a tell-all book published one day before the film’s release.

Critics said he came off as whiny and spoiled in lambasting his long-term allies at Walt Disney Studios for passing on his movie.

Horn said the book didn’t help the movie but he defended his decision to greenlight “Lady.”

“I thought it was a good bet,” Horn said. “Night Shyamalan is extremely talented, and my respect, affection and commitment to him is unchanged.”

“The Ant Bully,” Warner’s attempt to capitalize on Hollywood’s computer-animation obsession, is expected to lose $40 million, one Warner executive said, even though it was made for less than $50 million.

Horn said he was giving serious thought to cutting back on the number of films Warner releases, following in the footsteps of a similar decision by Walt Disney Co.

Warner typically releases 18 to 22 movies a year, Horn said, and is now leaning toward the lower end. However, he said, he has no plans to scale back on the four big-budget movies it releases each year.

“You don’t abandon the strategy,” Horn said. “That’s just crazy.”

Horn said he was excited about the remaining four months and 10 movies left in 2006 and what’s ahead in 2007, when Warner has another “Harry Potter” sequel, “Oceans 13” and “I Am Legend” starring Will Smith.

In the coming months, Warner is releasing Martin Scorsese’s gang drama “The Departed,” starring Leonardo DiCaprio, on Oct. 6, the animated comedy “Happy Feet” on Nov. 17; the action adventure “Blood Diamond,” also with DiCaprio, on Dec. 15; and the sports drama “We Are Marshall” on Dec. 22.

“I actually think that we’ll finish out the year -- and I could be wrong -- doing over $1 billion in domestic box office,” Horn said.

Which is why he doesn’t want to be judged just yet on 2006.

“It’s like being in the middle of a basketball game,” Horn said, “and my team’s down 30 points and you say, ‘Game’s over.’ ”

(BEGIN TEXT OF INFOBOX)

Big duds

Here are the Warner Bros. movies that will lose the studio and it’s investors money this year:

Title:Poseidon

Release date: May12

Est. cost (in millions): $160

Est. loss (in millions): $50

Title: The Ant Bully

Release date: July 30