MOVIES : Just a License to Make Money? : Movie merchandise is making more mega-bucks than ever. And now, it can even be a factor as studios decide what movies get made.

Films you’ve never heard of are already being configured into toys and video games. And T-shirts and jackets. And Happy Meals. And Halloween costumes.

The animated versions of “The Hunchback of Notre Dame” and the Broadway musical “Cats,” the medieval epic “Dragonheart” starring Sean Connery and Dennis Quaid, and the sequel to “Jurassic Park” won’t be in theaters until 1996 or 1997, but their respective studio licensing divisions are already busy hatching merchandising strategies for these big-budget efforts.

Work on some of this summer’s licensing-friendly projects was initiated before 1994, so that in a few months it will be hard to bat an eye without seeing another “Batman Forever” or “Waterworld” product, or toys and games spawned by Disney’s animated Indian princess “Pocahontas,” or a film based on TV’s erstwhile friendly ghost, “Casper.”

The licensing of sports, entertainment and other name-brand related properties is a $65-billion annual retail business. Professional sports licensing leads the pack with about 35% of that total, according to Al Ovadia, who heads the licensing department at 20th Century Fox. And that’s because team and player identification is strong and consistent, he explains.

But movie and TV character licensing are said to account for about 10% to 12%, or an average of $6.5 billion to $8 billion a year--more than the industry’s annual box-office take of about $5 billion. Some estimates run as high as 23%, when long-term characters like Snoopy and others are included.

Movie character licensing has always been a potential source of supplemental income on movies and television. The backbone of the business is classic characters from Disney, Warner Bros., Hanna-Barbera and others that sell year after year--everything from Mickey Mouse watches to Flintstones dolls. Occasionally, a blockbuster like “Star Wars,” “Star Trek” or “E.T.” will spark astronomical retail sales of $1 billion or more from related items.

“Star Wars” has reaped $2.5 billion to date and will get a boost from upcoming reissues and three new installments. “Star Trek” continues to refresh its merchandising appeal via new films and syndicated TV spinoffs.

Of course, licensing can be a costly gamble. In the summer of 1993, Burger King committed to what must have seemed like a sure hit before its release--”Last Action Hero”--and then watched as the film became one of that year’s biggest flops (the bet that rival McDonald’s made on “Jurassic Park” came out considerably better). Disney took a bath on “Dick Tracy” merchandise. And last fall’s “The Swan Princess” performed poorly--as did products tied to it.

Licensing windfalls related to specific films and TV series used to be as rare as Democratic presidents. If an entertainment project generated $100 million at retail it was--and still is--deemed successful. Over the past five years, however, there have been a succession of licensing gold mines related to hit films. According to the Licensing Newsletter, more and more movies are generating nine-figure sums ($1 billion or more) including each of the last four Disney animated films: “The Little Mermaid,” “Beauty and the Beast,” “Aladdin” and “The Lion King.”

“Jurassic Park” recently topped the $1-billion mark, according to Universal Pictures, while the two released “Batman” movies and the subsequent animated series have resulted in $1.5 billion from consumer products.

A billion dollars at retail translates to $50 million or more in revenue for the studios based on standard royalty fees of 7% to 10%. The studios retain a standard 50% distribution fee, according to entertainment attorney David Colden, making it “an enormous profit center.” Several studios do some licensing in-house (MCA has its own T-shirt division, Winterland, and Sony and others have video game subsidiaries), and Disney and Warners have retail outlets to hawk their new and perennial merchandise.

Licensing royalties are largely found money. The studios put out a minimum of expenditures--maybe several hundred thousand dollars on a big-budget movie, according to Ovadia--and often receive up-front advances from licensees. Equally important, each and every toy, video game or item of apparel bearing the imprint of a movie is free advertising for that film. Remember the first “Batman” with those ubiquitous T-shirts everywhere you turned? More than 20 million were sold, according to Dan Romanelli, Warner Bros’ president of consumer products.

“Profits are not only in hard dollars, but in the supplementary advertising and the exposures these tie-ins provide you with,” says Gordon Armstrong of the Entertainment Marketing Group. After a film opens, promotional and merchandising tie-ins help spread the word of mouth. “Even when a film doesn’t work, all the hype can have an effect on awareness through to a film’s video release.”

Merchandise sales have also become an important source of additional profit participation for major stars.

Jack Nicholson became even richer from his reported 15% of the “Batman” merchandise revenues. Arnold Schwarzenegger was reportedly willing to take a big cut of merchandising (more than the normal 15% for major stars) and defer his salary to get the upcoming “Crusades” off the ground.

“When you have an actor who’s willing to allow you to use his likeness, it’s a tremendous opportunity,” Armstrong says. “You put a Schwarzenegger on the right project and it’s phenomenal what you can do, even if you have to give him a percentage.”

Not all actors are so sanguine. “Forrest Gump’s” full potential for merchandise was curtailed when Tom Hanks would not allow his likeness to be used on products. Instead, T-shirts espoused “Gumpisms,” which worked because of the more adult-oriented nature of the film.

Not surprisingly, at least for the near term, decisions on what movies are made will be swayed by the potential for licensing and promotional tie-in possibilities. With “event” movies now costing $40 million or more, the attention and extra revenue from licensed goods and fast-food promotional programs is considered a major incentive in the decision to greenlight these movies.

Studios lay out $10 million or more just to sell a high-profile movie. And it’s not uncommon for a fast-food chain to pour $30 million into a movie tie-in promotion, a large chunk of it in advertising.

“Toy licensees and video-game manufacturers spend money on ads too,” says Brad Globe, who runs Amblin’s licensing division. “They might spend $4 million to $5 million on TV alone.”

As with box-office returns, merchandise sales have shown an ability to expand to accommodate hit movies. And continued exposure through sequels, spinoff TV series and the like adds measurably to a film’s retail shelf life. The successful straight-to-video sequel to “Aladdin,” “The Return of Jafar,” kept interest in products from that movie alive long after the original film had faded. (Disney is currently filming a video sequel to “The Lion King.”) “Batman” remained viable by becoming a syndicated cartoon series; “Beauty and the Beast” was an ice show, then a Broadway show.

It’s a trick movies have learned from television, where familiarity with shows like “Barney,” “Mighty Morphin Power Rangers,” “Teenage Mutant Ninja Turtles” and “The Simpsons” breeds licensing contentment. The “Turtles” hold the licensing record for recent entertainment properties with about $4.5 billion in sales, closely followed by “The Simpsons” with about $3.5 billion. “Barney” and “Power Rangers” have both earned about $1 billion.

The elasticity of the licensing market for movie merchandise will be put to the true test this summer, when a record nine films with heavy merchandise and promotional tie-ins will appear almost simultaneously: In addition to sequels to such films as “Free Willy” and “Batman,” 20th Century Fox is releasing the live-action big-screen “Power Rangers.” Disney has its next original animated tale, “Pocahontas.” Amblin/Universal has created a special effects-laden live-action version of “Casper.” And writer Melissa Mathison (“E.T.”) has adapted the best-selling children’s book “The Indian in the Cupboard” for Paramount and Columbia.

Also battling for the consumer dollar will be Kenner action figures from Kevin Costner’s “Waterworld” and “Congo,” based on Michael Crichton’s novel, and figures from Sylvester Stallone’s futuristic comic book hero, “Judge Dredd.”

“I can’t recall a year with that many potential licensees,” says Armstrong. “It’s going to be a really interesting battle.”

The search for licensees usually begins 12 to 18 months before a film’s release, sometimes even before it has gone into production, says Andrea Hein, president of Viacom consumer products. Potential licensors are shown the script, any footage and are often invited to the set. “There’s usually a lot of wining and dining and other seductions,” says Larry Carlat, the editor and publisher of index, a licensing trade publication. “Universal flew everyone out to see the ‘Waterworld’ set in Hawaii. Disney takes them down to Disney World and brainwashes them there.”

In the licensing world, bad publicity can be worse than no publicity. “Waterworld” has already contracted with Kenner for a toy line. But press reports that the film is financially out of control are a potential cause for concern in attracting other licensees and retailers.

“You want the buzz to be good when lining up manufacturers,” says Nancy Overfield-Delmar, senior vice president of licensing and merchandising at 20th Century Fox. “Bad press, especially an indication that the release date might move, can be awful.”

The sale of merchandise as well as promotional tie-ins with fast-food chains are keyed to a specific release date. Intimations that the film won’t make that date can influence whether a Kmart or Target chain decides to spend movie-merchandise allotted dollars on a “Waterworld” or plays it safe by filling their racks with “Batman Forever” toys.

Movie or TV character toys currently account for as much as 50% to 66% of retail sales, says Karen Raugust, editor of the Licensing Newsletter. One property like “Ninja Turtles” can put a previously unheralded toy company like Playmates on the map.

Mattel, which has produced the toys for Disney’s “Beauty,” “Aladdin” and “Lion King,” is doing the same for “Pocahontas,” says company spokeswoman Donna Gibbs. And with good reason: In 1993, business from Disney merchandise was $330 million for Mattel; last year, about about $450 million. A good portion of 1994’s revenue comes from “Lion King,” but Mattel is still introducing new products from “Beauty and the Beast,” a film that’s four years old.

If the movie doesn’t capture the public’s imagination, as was the case with “The Rocketeer,” “The Jetsons” and “Hook,” retailers get stuck holding the bag. Even a box-office performer like “The Mask” didn’t generate the kind of spinoff sales that had been anticipated, Carlat says.

On the other hand, the popularity of “Forrest Gump” brought a post-release surge of interest from licensors. Before “Gump” opened, it was difficult for companies to imagine a demand for this movie. But when it became clear that “Gump” would be huge, “we had to throw away all the rule books,” Hein adds. Twenty-five products have been developed; in addition to the best-selling “Gumpisms” by Winston Groom, a Gump cookbook had an astonishing initial print run of 700,000.

Studio licensing divisions are also carefully charting the international market. Entertainment-related products have not been as popular overseas, varying from territory to territory, from film to film.

A major international breakthrough was “The Simpsons,” which has done half its merchandising business overseas, according to Ovadia. The other was “Jurassic Park,” which also did well internationally--almost 20% of its total sales, Globe says.

“We had 500 licensees worldwide,” adds Linda Berkeley, senior vice president of business development for MCA’s merchandising division, and only 100 of them were in the U.S. “It’s a way of opening up new markets, such as Eastern Europe and even India.”

Because of their consistent relationships with merchandisers, this summer’s films from Disney, Amblin/Universal and Warner Bros. (“Pocahontas,” “Casper” and “Waterworld,” and “Batman Forever,” respectively) are considered the front-runners in next summer’s licensing race.

But “Pocahontas” may suffer somewhat from the “can you top this?” syndrome, say studio licensing heads. After “The Lion King” there may be nowhere to go but down. In addition, it’s a title aimed primarily at girls, though that didn’t hurt “Mermaid’ or “Beauty.” “A more important question is what will happen now that the studio’s changed hands?” asks Carlat. “It’s not as sure a thing as it was before (Jeffrey) Katzenberg left.”

“Batman Forever” may also have a bit of a climb since the franchise has been around for a while. But, says Warner Bros.’ Romanelli, this time “Batman” will have two new villains--Harvey Two Face and the Riddler, played by Tommy Lee Jones and Jim Carrey--and a new hero, Batman’s sidekick, Robin (Chris O’Donnell), to entice buyers.

Similarly, how does Amblin reinvent the venerable “Casper”? “My gut instinct on that,” says Carlat, “is that they’ll do quite well. Spielberg has an entirely new vision of the film, filling it with (reportedly 40 minutes of) special effects.”

The other potential powerhouse title is “Power Rangers,” simply because it was one of last year’s major sellers. But Carlat cautions, “How much more money can they squeeze out of it? Power Rangers may have peaked.”

With the record number of films, there will be licensing casualties. And because there are so many movies, there’s the possibility of a blood bath, which could endanger the current “up” cycle for movie properties.

The more calculated the licensing push, the more it’s apt to turn off buyers. A few years ago, Saturday morning TV was mobbed with shows created from existing toy lines rather than vice versa. It worked at first, and then consumers turned off--in a big way.

More likely, however, summer ’95 will produce the normal two to three major licensing revenue generators. And consumers will continue to be the entertainment businesses’ walking billboards.