Q & A : Polygram Chief Outlines Movie Studio Venture

London-based Polygram, the powerhouse music company, made a splash in Hollywood when it recently agreed to pay $35 million for a controlling stake in Interscope Communications, the filmmaker behind “The Hand That Rocks the Cradle.”

For Polygram, it was the biggest step in a seven-year effort to build a major movie studio out of a handful of small production companies. If the strategy works, Polygram could spend $1 billion on its film operations over the next decade. Alain Levy, Polygram’s French-born chief executive, described his plans in a recent interview in Los Angeles.

Q: What distinguishes Polygram’s strategy in filmmaking from the major studios?

A: Our strategy is not totally focused on Hollywood. It’s a worldwide approach to a business, just like in the record business. The second aspect, which I think is a bit different from the studio approach, is that our senior executive (Michael Kuhn) running Hollywood doesn’t have creative responsibility. He is much more of a manager; somebody who implements the long-term strategy than actually reading scripts and voicing an opinion.

We’ve taken the label approach, which has been pretty successful to us in the record business, which is, to have made smaller creative units, like Propaganda (Films); like Working Title (Films) in the U.K. . . .

(We) let them run pretty much on an autonomous basis, and provide to them . . . in the future, marketing and distribution in the U.S. and international distribution.

Q: Then who does green light the films, if not Mr. Kuhn?

A: Interscope has got pretty big autonomy, which means that only major major movies will have to come to Kuhn . . . I would say in excess of $25 million.

Q: And is that same autonomy granted to the smaller (production companies)?

A: No. They don’t have that autonomy.

Q: Tell us about your timetable and strategy for building a distribution company capable of competing worldwide with Hollywood’s majors.

A: Right now we’re really in Phase One, which is pre-selling a lot of the movies in the U.S., where basically you give away a lot of the rights against a lot of the financing coming through. We have begun Phase Two, which I would say is the Columbia slot and then the deal with Showtime. (Polygram has struck a deal to distribute 12 movies theatrically through Columbia Pictures, and 12 films through Showtime’s pay cable network.)

Phase Three, which I think will be fairly quickly now . . . meaning sometime at the end of 1993 or early 1994, is to take a studio-for-rent approach, where we would assume an increasing part of the “p and a” (print and advertising costs). Phase Four is totally studio-for-rent, where all of our video rights and pay-TV rights would remain with us, and using our video distribution system in the U.S. . . . and worldwide.

Q: When do you think you’ll be in the majority of international markets that you hope to be in? And when do you think you’ll be in the domestic?

A: We’re not in a rush. . . . It’s more a matter of opportunity, and if, in a given country, we have (identified) a distributor which we feel we would be interested in buying into, we will do it. I would say within five years, I would expect we would have our own distribution in the major territories.

Q: Including the United States? A The U.S. is a different piece of cake. Basically, in the U.S. what’s really important and really risky is the handling of your own “p and a” (prints and advertising).

Q: Regarding Interscope, what did Polygram get for its $35 million other than the exclusive services of (Robert) Cort and (Ted) Field?

A: It gets 51% of the company, with a large number of movies in development.

Q: How much is Polygram prepared to commit annually now in working capital?

A: We have said that our net negative cash flow--in other words, what you call working capital--will be in the neighborhood of $200 million.

Q: Over a three-year period? A Yeah. We think it will be speeded up a bit, and that we will probably reach $200 million by the end of 1994, which really speeds it up by about six months. Then my reading of it is that we’ll have enough track record to be able to assess whether we significantly increase it, or we leave it at that, or we walk out totally. But the way things are shaping up, I see a walk-out as being very, very remote.

Q: Who came up with the idea of nurturing different film production companies in a manner that is analogous to record labels?

A: Michael Kuhn (Polygram Filmed Entertainment president).

Q: How long are you prepared to test this label approach?

A: I would say a long time, because that’s really an intrinsic part of the approach we’re taking. It also fits with the Polygram way of doing things. If you look at us in the record business, we do not really have one label that stands out; they’re all pretty active but there’s not one major major label where the others are like second-rate businesses.

Q: Have you contemplated merging any two of the units?

A: No, not at all. I think that would be self-defeating. I do believe that the people running Propaganda are vastly different from the people running Interscope and therefore will come (up) with vastly different movies.

Q: Although Polygram went public in December of ‘89, investors still can’t learn the operating results of your motion picture business in your annual reports. When will you begin breaking out the results of this segment?

A: We’re looking into that. . . . For the time being, it’s not significant. There will be a time when we have to do it.

Q: Polygram started over in movie production in 1985. You’ve made 17 films through the end of 1991. Have movies produced an operating profit in any given year?

A: No. It’s made a profit overall . . . but it hasn’t made a lot. But a lot of these movies were heavily pre-financed, so it’s not a surprise that it’s basically about break even.

Q: After looking at industry averages, analysts at S. G. Warburg projected a loss from your movie-making business efforts to reach 10% of the projected 1993 net profit from Polygram’s music business.

A: That report was totally ill-conceived. . . . What is true, is that yes, we could make losses in the movie business, just like any start-up operation. And we’re totally ready to do that. But it’s nowhere of the magnitude indicated in the Warburg report.

Q: You know the cynicism of Hollywood. You’re certainly aware of the tides of money that have come in from Asia and other parts of Europe. How do you respond to those who say, “Ah. Polygram’s just the latest sucker?”

A: I don’t hear that. . . . What I do hear is, nobody has been able to build a major movie operation in the last 60 years or so. And why would a company which is foreign-owned be able to do it? That, to me, is a totally valid question. . . . We’ve had the chance to analyze why people failed in the last 60 years in building up studios. . . . I would say that the major one is to fall into the Hollywood syndrome all the way . . . where ego overshadows management. The second issue is undercapitalization; the third is not seeing that in the movie business, there’s no way you can make money producing movies only. If you don’t access the distribution profits, you’re dead.

This is probably a five- to 10-year effort. . . . Yes, it will be some drain on the earnings for a number of years. And I’m not expecting quick profit. But out of it you’ll have a company which will be an entertainment company, versus having a music company only.