Japan’s Thirst for Hollywood Is Unquenched

In the police thriller “Black Rain,” a Japanese detective dismisses his rebellious U.S. counterpart, actor Michael Douglas, by saying: “Music and movies is all America is good for.”

The line drew subdued laughter in U.S. theaters last year, but indications are that Japanese investors find more than a measure of truth in those words.

In the wake of Matsushita Electric Industrial Co.’s agreement last month to purchase MCA Inc. for $6.59 billion, the Japanese thirst for U.S. entertainment remains unquenched. Driven by visions of an exploding global marketplace for software products such as movies and television shows, Japanese firms are converging on Hollywood with all the fervor of would-be starlets.

At Creative Artists Agency in Beverly Hills, which brokered the Matsushita deal under Chairman Michael Ovitz, staffers spend hours sifting through overtures from potential Japanese clients. Others in Hollywood are scrambling for their share of the lucrative business.

Deal makers foresee a rash of Japanese joint venture agreements with independent production companies, now that most of the major film studios are spoken for. Some investors have considered underwriting the careers of Hollywood’s leading actors and directors.

Christopher C. Murray, an O’Melveny & Myers attorney who specializes in joint venture deals, said Hollywood obviously dazzles the Japanese, especially with their stock market struggling and the number of U.S. investment opportunities dwindling. The Japanese have made major investments in U.S. real estate, from prestigious high-rise buildings in major cities to golf courses, including Pebble Beach. With many of these investments suffering from the current real estate slump, entertainment companies have become more attractive.

“Film libraries could be as good an investment as Impressionist art,” Murray said. “The Japanese see that more clearly than others. . . . And barring an economic cataclysm, the Japanese are just going to keep coming.”

So are other foreigners, as Italian financier Giancarlo Parretti’s $1.3-billion purchase of MGM/UA Communications Co. demonstrates. But entertainment industry analysts say that no foreign suitor matches the enthusiasm and conviction of the Japanese.

Firms based in Japan have rained about $13 billion down on Hollywood in the last two years. The deals include Matsushita’s purchase of MCA, Sony Corp.’s $3.4-billion acquisition of Columbia Pictures Entertainment Inc., Sony’s $2-billion purchase of CBS Records Inc., and a $600-million film financing pact between Walt Disney Co. and a Japanese group called Touchwood Pacific Partners.

Peter Dekom, a leading entertainment attorney who arranged JVC’s $100-million funding of Largo Entertainment last year, sees the trend continuing. “People are definitely in conversations,” Dekom said. “The interest is as great as ever.”

Rumors are flying about where their next big investment will land. Time Warner Inc., which is seeking foreign investment partners, is one obvious possibility. Some analysts see the media giant striking an alliance with Toshiba Corp. Others foresee a marriage between Paramount Communications Inc. and another Japanese electronics firm, Hitachi Corp. Smaller production companies are also expected to reap the benefits of the Japanese spending spree.

One executive who specializes in such investments said as many as a dozen deals are in serious discussion. Another, Jeffrey Logsdon of Seidler Amdec Securities Inc. in Los Angeles, sees a strong likelihood of more $100-million to $200-million Japanese equity investments. Unlike the MCA and Columbia acquisitions, those deals ostensibly would preserve American control.

Logsdon said investors are largely motivated by fears of missing out on a good thing. “There’s a lot of me-too-ism,” he said. “No one wants to be left at the starting gate.”

Merrill Lynch analyst Harold Vogel also supports the copycat concept. “It’s beginning to look like everyone has a Japanese sugar-daddy,” he said. “This is the fad of the day in Japan, just as it was in other countries before. . . . But it will cool off, and it will cool off in five years because there will be limited success. That’s the nature of the business.”

Outsiders have had their share of headaches in Hollywood. Coca-Cola Co. sold Columbia Pictures last year and Transamerica Corp. unloaded United Artists a decade ago after both ventures proved disappointing to the corporate parents.

The Japanese, too, have already taken some hard knocks in Hollywood. CST Communications struck out in a recent three-picture, $15-million financing deal with MGM/UA Communications Co. when it insisted on picking its projects--”Bright Lights, Big City,” “Betrayed” and “Fatal Beauty,” all of which bombed. Another Japanese consortium will have to absorb most of the $26 million that it spent on the troubled film “Solar Crisis.” And Apricot Entertainment, bankrolled and managed by the Japanese, has been slow to get off the ground.

Analysts say those experiences have hardened the Japanese to the realities of the business and made them more cautious in choosing partners. Companies with the highest degree of commercial sensibility and international appeal attract the most offers these days.

Those seen as likely magnets for the next wave of Japanese money include Imagine Films Entertainment Inc., which produced “Parenthood” and the coming “Kindergarten Cop”; New Line Cinema, which was responsible for the phenomenal “Teenage Mutant Ninja Turtles,” and Castle Rock Entertainment, which produced such films as “Misery” and “When Harry Met Sally.”

Similar companies already in business with the Japanese include Interscope Communications Co., which will receive as much as $250 million from the investment firm Nomura Babcock & Brown; Morgan Creek Productions, which has received $100 million from Nomura Babcock; Carolco Pictures Inc., the recipient of $60 million in funding from Pioneer LDC Inc., a division of Pioneer Electronics Corp., and Largo, which operates under financing from JVC.

Foreign financing also comes in smaller packages. The Japanese have partially or fully funded countless individual films, including Warner Bros.’ recent “Reversal of Fortune.”

William Morris Agency Vice President John Ptak maintains a list of Japanese investors he can call for specific film projects. Ptak secured 30% Japanese funding for a coming $20-million Wim Wenders movie called “Until the End of the World.” Ptak said the Japanese are considered in any funding mix. “We still rely on the studios (for financing) quite heavily,” Ptak said. “But the world is getting smaller. And American movies travel well.”

By far, the most radical concept is the direct funding of top stars and directors by the Japanese. Attorney Murray said there may be nowhere else to turn once the best production companies have been gobbled up. “If the production companies have their dance cards full, it may be that the next logical step is to go to the actors and directors,” Murray said.

Under the financing packages being discussed, a Japanese investor would make a sizable pool of production money available to an Arnold Schwarzenegger, a Tom Cruise, a Steven Spielberg or an Oliver Stone. The star or director would then be partnered with a major studio, which would have ultimate approval over which films were made. Murray said the arrangement would mean less financial risk for the studios and greater financial rewards for the actors and directors because they would retain a substantial ownership in projects they were involved with.

Not everyone favors such arrangements. Pat Choate, author of a hard-hitting book on the Japanese in America called “Agents of Influence,” foresees terrible consequences for the entertainment industry if the acquisitions continue. Choate contends that foreign ownership will ultimately lead to outsiders “controlling the hearts and minds of the American people.”

Others question how long the Japanese can be expected to maintain their hands-off policy when it comes to creative control at companies such as MCA, Columbia and Largo.

At the same time, there is always a hunger for new capital. New Line Cinema President Michael Lynne said there is no Japanese investment deal in his company’s immediate future but added: “Favorable access to capital is always something of interest for a company like ours.”

Imagine’s Brian Grazer, who declined comment on his company’s plans, said he views Japan’s interest in Hollywood as positive. “The fact that this big giant company just bought MCA anchors our business in a way that says this is a global business,” said Grazer, whose company releases its films through MCA’s Universal Pictures. “What happens is the world looks at businesses and gravitates toward those that have a global currency.”

RECENT JAPANESE INVESTMENTS IN ENTERTAINMENT FIRMS

COMPANY INVESTOR COST MCA Inc. Matsushita $6.59 billion Columbia Pictures Sony $3.41 billion CBS Records Sony $2 billion Walt Disney Co. Touchwood Pacific $600 million Interscope Nomura Babcock $250 million Morgan Creek Nomura Babcock $100 million Largo Entertainment JVC $100 million Carolco Pictures Pioneer $60 million