Why Sony Is Checking Out the Box Office

A movie called “Willow,” a fantasy tale from George Lucas, the genius who gave us “Star Wars,” is scheduled to open May 20. But Hollywood is nervous; $40 million has gone into the film, and critics who’ve seen advance showings have had mixed opinions.

The only verdict that counts, of course, is that of the public at the box office--which won’t be known for a few weeks. But a lot rides on that verdict for MGM/UA Communications, the company that combines the remains of the old Metro-Goldwyn-Mayer and United Artists studios. The entrepreneurial investor Kirk Kerkorian owns 82.4% of MGM/UA these days but he has it up for sale--he’s told the Securities and Exchange Commission that he would give serious consideration to bids for the company.

And there is interest in bidding, especially from two foreign companies: Philips of Holland and the Japanese electronics giant Sony, which is part of a consortium of Japanese companies now conducting a formal study of MGM/UA’s properties.

But if “Willow” should open as less than a success, it could affect the price Kerkorian and other MGM/UA shareholders would get, particularly as MGM/UA’s movies haven’t done that well in the last year. There have been flops, near misses and one hit in “Moonstruck”--and even that was not a blockbuster in money terms.

That’s Hollywood for you, most people would say, a hit-or-miss business in which great studios and film makers--from David Wark Griffith with “Intolerance” in 1916 to Spyros Skouras with “Cleopatra” in 1963--have been brought down by one movie disaster.

But why then are sound, conservative manufacturing companies like Sony and Philips interested in the movies? Because hit or miss is not the whole story by a long shot.

Valuable Assets

In fact, more money is made in the distribution side of the movie business than in any other. The distributor, whether part of the movie company or an independent firm, arranges for theatrical exhibition, handles advertising and promotion, and splits the box office receipts with the theater owner. The distributor normally gets 30% to 35% of the film’s share of the box office--and gets paid before everybody else. All the stars, directors and producers, those glamorous people whose big contracts you often read about, get their share of the take after the distributor. It’s where the money is in movies.

And, as it happens, MGM/UA has an excellent worldwide distribution operation--one of only seven major systems in the world. It also possesses the United Artists’ film library, one of Hollywood’s most valuable with 950 movies including “West Side Story,” the “Rocky” and “Pink Panther” series and partial rights to the James Bond films. Far from a hit-or-miss business, the movies can even make money from failures--that is, flops are written off immediately but can later produce profit through home video or sales to television.

So bidding interest in MGM/UA is understandable. The thinking among analysts, reports Jeffrey Logsdon of Los Angeles’ Crowell Weedon investment firm, is that Philips is more familiar with entertainment from its ownership of Polygram records but that Sony has more money and a greater desire to buy.

Sony, at $12 billion in annual sales, is one of the world’s biggest makers of television sets, VCRs and other entertainment hardware. But profit margins are getting thin on hardware, with Korean and Taiwanese factories making TVs and VCRs cheaper than the Japanese. So Sony wants to move into the software side of the business, and acknowledges that it would like to buy a movie company. Analyst Donald Krueger of the Wertheim Schroder brokerage firm reports that Sony executives were coy--saying “the timing is bad”--when asked specifically if the company was going to buy MGM/UA.

But timing is one thing, opportunity another. Last year Sony leaped at the chance to buy the record division of CBS for $2 billion. And well it should have. Sony knows that in CBS Records it bought a global distribution system for musical entertainment that is practically priceless. You could not build that business today for several times $2 billion. Sony got a bargain.

Will it get a bargain if it buys MGM/UA from Kerkorian? Hard to say until the price is known. But Kerkorian will want a high one--undoubtedly more than $22 a share for a stock selling under $18 at present. Not only does he know the value of what he has, but he’s as shrewd a trader as they come.

Consider: He sold MGM/UA lock, stock and barrel to Ted Turner’s company, Turner Broadcasting, in 1986 for $1.5 billion. Then, he turned around and bought parts of the company back from Turner for roughly $700 million. Now Kerkorian has put the parts up for sale for at least $1.1 billion.

And he’ll probably get it. If nothing else, he’s living proof for Sony or Philips that you can make money in the movies.