Big Losses and Big Lessons at the Movies

John Kluge, the richest American, is making money on “Dances With Wolves,” the Academy Award winner that has taken in $150 million so far at the box office. Yet Kluge still wants to sell his 68% ownership of Orion Pictures, the studio distributing “Dances.”

Chairman Martin S. Davis of Paramount Communications will meet with security analysts this week about his company, which is a longtime subject of merger rumors. However, Davis would have a hard time merging or selling Paramount these days because of an overhang of losses from expensive movies that bombed.

Sony, the Japanese consumer electronics company, is pouring money into enormously extravagant operations at Columbia Pictures and TriStar studios. Reportedly, it isn’t flinching yet, but movie industry insiders are taking bets on how long Tokyo will tolerate waste and excess in Hollywood.

Welcome to the money behind the movies, where “Batman,” a movie that has grossed more than $250 million, is still in the red--although one of its stars, Jack Nicholson, has earned more than $50 million from the film. Undaunted, the producers are preparing a sequel, “Batman II.”

Hooray for Hollywood, as the song says, where big names and big money provide a fascination found in no other business.

But it’s more than cotton candy. Movies today are a great American and world industry--and a leading U.S. export earner. And what’s happening in movies can offer you insights that apply to any business, or investment program. It can even suggest answers to such fascinating questions as: What is the future? And what do Japanese investments mean to Hollywood?

First, the biggest insight right now is that no matter how great the trend, you can lose money. Rising living standards and increased leisure time are trends the world over. From villages in Mongolia to the mountains of Peru, people want more entertainment programming, and so the market is growing for movies, TV shows, tapes and videos.

But that doesn’t mean making films is a sure way to make money. On the contrary, explains Art Murphy, an authority on the motion picture business at USC. The studio today lays out at least $30 million to $50 million to make and promote a picture. Then when it’s released, the studio must estimate from initial box office what the ultimate pay-back will be. Often those assumptions are harsh, and a potential loss must be recorded. It’s the movie equivalent of a dry hole in oil or mining.

Paramount last year produced some very expensive dry holes, including “Days of Thunder,” “The Two Jakes” and “Godfather III.” Now the pending losses dull its attractiveness to any merger partner or purchaser.

Why do movies cost so much to make? You’ve got to pay the help. There are relatively few global box office stars, and their agents negotiate deals giving them millions up front plus a percentage of the ticket sales. Sylvester Stallone had a $20-million participation in “Rocky V,” which lost money for the MGM-Pathe studio; Nicholson had a $6-million guarantee before his lucrative percentage of the gross on “Batman.”

Such deals are nothing new, of course. The fate of the old movie studios was sealed years ago when MCA’s Lew R. Wasserman “perfected the percentage deal and gave the stars new clout,” writes Neal Gabler in “An Empire of Their Own,” a good history of the film business. Today’s successor to Wasserman is agent Michael Ovitz, head of Creative Artists Agency, who not only puts together deals for talent but represented Sony in its purchase of Columbia and Matsushita, of Japan, in its acquisition of MCA.

Faced with such star-and-agent power, big backers such as Kluge are getting cagey. Kluge, 76, who immigrated from Germany as a youth and built a $5.6-billion fortune in broadcasting and cellular phones, owns 68% of Orion Pictures. But he has taken a separate, collateralized interest in two of Orion’s pictures, “Mermaids” and “Silence of the Lambs”, in return for an investment--an unusual arrangement for a studio owner. What’s Kluge’s game? He wants his money right off the top, just like the stars; he didn’t build a $5-billion fortune financing inflated egos.

Sony, meanwhile, is taking a bath with Columbia and TriStar, where studio heads are spending lavishly to redecorate offices and committing hundreds of millions to films such as “Hook,” an adaptation of Peter Pan with Dustin Hoffman, Julia Roberts and Robin Williams, and “Bugsy,” a gangster tale with Warren Beatty. When, inevitably, one of the big-budget films crashes, Sony may crack down on the spending. Coca-Cola, a previous corporate owner of Columbia, lost patience with the movies after “Ishtar” lost almost $40 million in 1987.

But Sony and Matsushita may stay around because they have another agenda. They are investing in Hollywood to learn about entertainment programming because they sense the way technology is moving. It is moving toward a mingling of computing and video.

Sony, for example, has a new product in Japan called Data Discman, a hand-held computer-cum-TV set that can hold the equivalent of 300 books--a library in the palm of your hand. Sony is working on new ways to adapt music and video to tapes, discs and computers.

And in the United States, hundreds of small firms are working on new combinations of video and computers. It’s a fledgling business to be sure; progress in these new media will develop over most of this decade. But interactive computer-video is the future. Someday the big global stars will be descendants of computer-generated Max Headroom--and that will reduce the bargaining power of the Stallones and their agents.

Significantly, John Kluge is backing the new technology with investments in small firms such as Image Entertainment, a laser videodisc company in Chatsworth.

Kluge is selling a movie studio but investing in laser videodiscs. Another insight from the movies: Smart investors look ahead.