An Event-Tempered Approach

Disney has been flying high for the last six months doing just what former studio Chairman Jeffrey Katzenberg advised against.

Five years ago, in what became the most widely read “memo” in Hollywood, Katzenberg said the industry should shake off the “blockbuster mentality” and just say no to big star salaries and big budgets. But today the historically tightfisted studio has been capitalizing on the reverse strategy and put itself in the competitive live-action “event” movie business for the first time ever.

Disney’s recent success with its new live-action strategy doesn’t necessarily mean that Katzenberg was wrong. The marketplace has changed considerably from five years ago when Katzenberg wrote his 28-page tome, and Disney was a different company.

With a willingness now to spend as much as or more money than its rivals on talent, material and marketing of big films, Disney is responding to a worldwide marketplace that’s driven by event films.

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When Joe Roth took over the studio job two years ago, he decided that Disney was making too many films, was too often unwilling to pay market value for stars and ideas or the going costs for production and marketing and was under-exploiting the Disney brand name in its live-action family genre.

“The strategy is not to be volume-oriented as a first priority but idea-oriented and to take advantage of the international marketplace with star- and event-driven pictures, and to take advantage of Disney’s brand and its marketing prowess to do as well in live action as animation,” Roth says.

“My obligation is return on investment and my belief is the best return on investment is doing event-oriented non-Disney films and some event Disney films,” says Roth, who proposed the studio make three event movies a year--one animated, two live action.

For the adult-oriented event movies, Roth says, “We’ll certainly pay market price. It’s having confidence in your ideas that you go after a top movie star and top director.”

With rare exceptions, Disney was notoriously cheap when it came to paying competitive prices for talent, often opting instead to make high-concept movies without stars.

“They were cost-conscious first and idea-conscious second,” says one industry observer.

Disney chief Michael Eisner insists the company has always stepped up for a good idea--something his own production executives dispute--and says there’s been no change in philosophy where spending money is concerned. Disney has been and always will be a “discriminate” spender, he says.

“We are still tightfisted. We still feel we should be prudent and watch where we spend our money and hopefully remain as frugal and shareholder-interested as we have in the past,” Eisner says, noting, “Joe is a person with really good ideas and good management skills.”

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Eisner adds, “What Joe and his people are saying is that a good idea is a good idea at any cost--whether it’s a well-executed idea at a moderate cost or one that’s more expensive. It’s when you spend too much money on a mediocre idea that you get hurt.”

Unfortunately, no one knows that going in.

By no means was Katzenberg off base when he warned in his memo that overspending can lead to disaster, as it has for many movie firms. “Costs have escalated; profitability has slipped, and our level of risk has compounded,” he wrote.

In today’s lower-margin movie business, the stakes are higher as production and marketing costs continue to soar.

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While the risks don’t always pay off, for Disney they have lately. For the first time in recent memory, the studio is a force to be reckoned with in live action as well as animation.

The first test of Roth’s new strategy to turn non-animated classics into event movies that could be promoted throughout all its divisions, including theme parks, consumer products and home video, paid off in spades last weekend with the huge opening of “101 Dalmatians.” The $60-million remake of the 1961 classic cartoon grossed a record $45 million over the five-day Thanksgiving holiday period.

The movie could eventually gross $200 million domestically and that much again overseas. Industry analysts say ancillary and merchandising sales could yield hundreds of millions more--making “101” a potential billion-dollar franchise to rival Disney’s biggest animated movie “The Lion King.”

Roth says it was clear to him that Disney “was equipped to make worldwide events out of Disney-themed movies through its stores, parks, consumer products and home video divisions whether they were animated or live action.”

While Disney’s live-action family division under David Vogel has been the studio’s most consistently profitable movie unit with series like “The Mighty Ducks” and “Homeward Bound,” the worldwide potential of a “101 Dalmatians” bodes well for other upcoming exploitable titles like “George of the Jungle” and “The Absent-Minded Professor.”

Roth also recognized that Disney wasn’t in the game of adult-oriented movies. Given that the real growth of the movie industry was outside the U.S., Roth concludes: “Not to get into the big star, event picture business was missing an opportunity.”

A longtime executive at Disney’s Touchstone Pictures says, “I felt like we were out of the movie business until Joe came in and said, ‘Let’s make fewer movies, but movies that count.’ ”

Thus, Disney rolled the dice on two expensive action movies, “Ransom” and “The Rock,” each costing $70 million to produce and more than $25 million more to market. Both cleaned up at the box office. “The Rock” has grossed about $335 million worldwide so far and Disney expects to see $100 million profit when ancillary sales are counted. “Ransom” has grossed $105 million domestically in less than a month and is expected to reap $200 million overseas.

That means Disney will have four live-action movies grossing more than $100 million in the last six months, which includes the $32-million “Phenomenon,” a $150-million worldwide grosser, and the fast-rising “101.”

Under Roth and his top executive team, headed by Vogel and Touchstone President Donald Deline, Disney is clearly on a roll.

Yet there’s no guarantee that all its upcoming expensive movies will work. Despite the positive press the well-liked Roth generates, his movie picks both at Disney and his former production company Caravan have hardly been all hits.

In the second quarter of the recently completed fiscal year, Disney had film write-offs of about $50 million, based on the poor performance of the Roth-greenlighted movies “Mr. Wrong,” “Before and After” and “White Squall.” Additionally, the studio wrote off an additional $60 million to $70 million on other projects and development deals.

“It was a bad run,” Roth admits. “We’re in a high-risk business and movies cost a lot of money. The trick of the game is to have low enough overhead that the winners outgross the losers . . . and you hope to have four or five movies a year that can do the kind of business that will put the balance in your favor.”

Roth has cut overhead by hundreds of millions of dollars with the shuttering of Hollywood Pictures and slashing of projects in development as part of his 2-year-old plan to make fewer movies.

“Joe’s completely changed the motion picture division by reducing overhead and producer deals,” Eisner says. “This company is being well-managed and is under control, and the movies are as financially protected as they’ve always been at our company.”