New Studio Promises to Unreel a Real Drama

The eye-catching venture announced last week by Steven Spielberg, Jeffrey Katzenberg and David Geffen sent a confident message to the Hollywood entertainment business--and offered insights for all other business as well.

But it was also like the first chapter in a new adventure series, a real-life “Raiders of the Lost Ark” promising cliffhangers to come. For clues to the story ahead, we should follow the money.

Spielberg’s expansive declaration that he and his cohorts were founding a new motion picture studio--the first since 20th Century Fox was formed 59 years ago--reflects renewed buoyancy in Hollywood.

Indirectly, it also said that the day of Japanese investment in Hollywood is over, scarcely five years after it began amid a U.S. recession and fearful claims that Japan’s money was buying U.S. culture.

The truth is, Japanese business has reaped mostly bewilderment from investments in movies--although one Japanese company could shortly chalk up a sizable capital gain.

Reports in Hollywood say a move may be initiated this week to buy back all or part of MCA, the parent of Universal Studios, from Matsushita Electric Industrial Co., which bought the studio for $6.6 billion in November, 1990.

The price could be a whopper: Considering that Paramount went for $10 billion earlier this year, all of MCA would bring at least $12 billion.

Matsushita reportedly is not interested in selling, which is understandable. The Osaka company owns “Jurassic Park,” thanks to Spielberg, whose independent production company works through Universal.

The dinosaur film, a classic for the ages, has taken in $1 billion in revenue so far. And Universal has Spielberg under contract to produce a Jurassic II sequel by June 1997. A film like that recalls the remark of MGM founder Louis B. Mayer, who started out in scrap metal before getting into movies. “I’ve found a business where the product never wears out,” Mayer said in wonder.

Still, Matsushita may as well resign itself to selling, because Spielberg is now turning his attention elsewhere. In movies, as in many other businesses, the most important assets can walk out the door at any time.

That’s what Katzenberg, who recently left Walt Disney Co., and Geffen, the billionaire founder of two successful record companies, are doing along with Spielberg: turning to a fresh challenge.

Possibilities are exciting. Their new entertainment company could become the focus of investments from U.S. telephone and cable companies, which are ambitious to own programming for their envisioned interactive networks.

But before they--and ordinary small investors--put a dime in Hollywood, they should understand how the business really works. They should ask: What is a studio today, when the former realities of sound stages and Judy Garland and Mickey Rooney under long-term contract are ancient history?

A studio today mainly finances and distributes films and programming--functions central to a business that guarantees 12 to 20 films a year to theater owners and 26 weeks of programming to TV channels. It’s a subtle system built on relationships dating back more than half a century--and on money.

Studios regularly charge independent producers, or their own operations, a hefty fee for distribution from the studio’s 40% of gross box office receipts. (Theater owners get slightly more than half of box office.) All sorts of overhead expenses, from marketing to percentage payouts to stars and directors, are allocated to studio distribution charges--which often, frankly, are overstated.

Why overstated? So that cash flow from a successful picture can cover losses on unsuccessful ones. Historically, losers outnumbered winners in the movie business. So any operation that promised to deliver dozens of films a year hoarded cash to pay for failures, explains Art Murphy, a scholar of the film industry who teaches at USC.

That’s why movie studios have never shown returns on investment as high as those of computer or pharmaceutical companies and have seemed something of a risky proposition for small investors.

But half a dozen studios have survived more than 50 years in a business of crazy expenses. It costs $200,000 a day to shoot a film on location now; the average picture costs about $25 million to make. Some cost much more. The final budget for “Water World,” now filming in Hawaii, is estimated at $135 million to $175 million. Universal is producing that one, which may make Matsushita eager to sell MCA. Coca Cola Co. backed away from its ownership of Columbia Pictures in 1987 when “Ishtar” lost $40 million.

What does all that mean for the Spielberg-Katzenberg-Geffen venture? A couple of possibilities. Even though the partners are promised big backing from Wall Street, their fledgling company won’t have the reserves to absorb inevitable losses. So that argues for an affiliation with a major studio or involvement in whatever deal emerges for MCA.

Reports in Hollywood say that major investors are eager to finance an arrangement that would bring the three to the top of MCA to serve with and then succeed Chairman Lew R. Wasserman, 81, and President Sidney Sheinberg, 59.

On the other hand, the big truth today is that the movie business has become less failure-prone. With new revenues from videotapes, cable, international distribution and merchandise licenses, almost all films sooner or later show a profit. (Film libraries accordingly are immensely valuable; when MCA sold for $6.6 billion, 40% of the price was the value of its library--which is now even more valuable with the additions of Spielberg’s “Jurassic Park” and “Schindler’s List.”)

So a new company led by three talented individuals, and backed by the kinds of investment the telephone companies are capable of, could pioneer new kinds of entertainment and interactive distribution.

To learn how the story comes out, watch episodes in the coming weeks--and years. For all its talent, it will take a year or two for the new company to produce an initial couple of pictures and four years to produce an animated feature, not to mention the imponderable of interactive programming.

Still, the exuberance of Spielberg, Katzenberg and Geffen last week promised adventure--and it was a very confident indicator for The Industry and its hometown.