No Fiscal 12-Step Program for Movie Industry in ’97

Those who think the movie industry will get runaway costs under control in 1997 should think again.

Studio honchos readily admit they’re addicted to “event pictures”--the buzz words of 1996--and have no intention of kicking the expensive habit any time soon. They figure their energies and resources are better risked on hugely exploitable films like “Independence Day” that can generate megaprofits worldwide than on mid-size ones where returns are minimal at best.

Since those kind of movies cost megabucks to make and promote, it’s safe to assume that the cost of talent, material and industry-average production and marketing costs will only soar higher in 1997 and into the foreseeable future.

How much red ink it would take to reverse the trend--if that’s even possible--is anyone’s guess.

Maybe, just maybe, enough will spill in the summer of 1997, when there are arguably more than a dozen event movies costing more than $100 million each--including “Batman 3,” “Speed 2,” “Titanic” and “Airforce One”--to shock studio chieftains into taking some kind of defensive action.

But don’t count on it, even though the movers and shakers of Hollywood moviedom admit that they’re shaking in their Armani suits.

“I’m nauseous,” remarked one studio head when asked about the prospects for the movie business next year and beyond, given the risk-reward ratio in today’s market. “The numbers are finally starting to catch up with everybody--it’s depressing and it’s going to get worse. No way are all those movies going to work, and I don’t believe anyone’s going to be immune.”

Larry Gerbrandt, a senior analyst with Paul Kagen Associates, says, “The industry perversely has always been secretly praying for a train wreck to somehow break the cycle.”

Disney Studios Chairman Joe Roth agrees: “One of the fascinating and gruesome things is a guy gets shot and you feel terrible, but you feel great that it wasn’t you. On the big movies, you hope that if you have an $80-million to $100-million one, it’s the one people are coming to see.”

The movie business is a crap shoot and next year the stakes will only rise higher.

“God knows, the budgets grow ever more terrifying and the risks become more bizarre,” acknowledges Sony

Pictures President John Calley. While a seasoned executive like Calley knows “there is no formula for success,” he believes studios today need to hedge their bets by making as many “high potential” movies as they can--meaning ones with the most commercial subjects, screenplays, stars and directors--and as few middle-range movies as possible.

“We’ll be as aggressive as we can on the franchise-potential mainstream movies and we’ll take eccentric risks on movies like ‘Leaving Las Vegas,’ ” the low-cost, critically acclaimed film that Calley green-lighted as the former head of United Artists.

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Robert Daly, co-chairman of Warner Bros., also says his studio has no intention of shying away from big, expensive movies whose upside potential seems great. “Movies absolutely cost too much and because there are so many, you have to spend more in marketing, but movies like ‘Jerry Maguire’ prove that if you have the goods you can make a lot of money.” The film, starring Tom Cruise, which was financed and released by Sony, is one of the season’s biggest hits.

Universal Pictures movie Chairman Casey Silver, acknowledging that “it’s a disturbing trend that costs are escalating faster than revenues,” says studios must learn to say “no” when a project doesn’t make financial sense.

Recently, Universal decided not to go forward with the movie “Primary Colors,” based on Joe Klein’s best-selling book, unless its $75-million budget could be pared considerably.

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“There are more big movies out there competing than ever before, so you better bet responsibly and intelligently,” says Silver, who hopes to work out the “Primary Colors” situation with director Mike Nichols “on a rational, financial basis.”

Some studios, like Disney, are cutting back on the number of movies they make and release, but most aren’t.

Paul Dergarabedian, executive vice president of Exhibitor Relations Co., which tracks the box office, says there are actually more movies scheduled for release next year (about 440, of which 178 are from the majors) compared with 1996 (when there were about 426, of which 169 were from the majors).

While total box-office revenues for 1996 are expected to be up an estimated 8% to a record $5.85 billion, according to Dergarabedian, it’s become increasingly difficult for studios to recoup costs.

Several, among them Paramount, Disney, Fox and Sony, sometimes share costs on bigger movies, but movie executives admit that partnerships aren’t always advantageous because of how much upside is sacrificed in the process.

Don’t look for production and marketing costs, which cut deep into movie industry profits, to come down next year, or for star salaries--which are up as high as $20 million for top-tier actors--to take a dip.

“Once you cross the threshold with talent, they’re like elephants. Once they find a watering hole, they always remember its location and size,” says Gerbrandt.

Calley concurs: “Tragically, I don’t see a break in the salary structure, but rather a need to enhance our income sources.” The Sony chief said because the returns on most movies are “so marginal, we better have other revenue streams to exploit.”

Gerbrandt points out that because most of the former stand-alone studios such as Warner Bros., Paramount and Fox are now “buried within huge multinational businesses, a $100-million [bomb] hurts, but not as bad when it can be offset by profits generated by other divisions.”

While “movies continue to lose money or break even,” says Gerbrandt, “studio libraries continue to appreciate in value, and successful TV syndication operations can save a studio’s bottom line.”

Sony’s TV business is thriving, while its losses on the movie side have been substantial.

Next year, studios such as Sony will be under intense scrutiny by new managements. Calley and his team are faced with having to turn around the fortunes of a movie studio and stabilize a management that has been in upheaval for the seven years the Tokyo-based electronics giant has owned the company.

Frank Mancuso and his team at MGM, the studio bought earlier this year by Kirk Kerkorian and Seven Network for $1.3 billion, will also be closely watched to see if they can get the studio they revived once back on track after the disruption of the sale. There are many questions about how and where the company will secure enough additional capital for production and marketing.

Universal, which has been on a spending spree for producer deals and projects in order to ramp up under its new ownership and management, headed by Seagram Chairman Edgar Bronfman Jr., Ron Meyer and Frank Biondi, hopes to generate enough hits to justify all the expenditures.

Next year will be particularly significant for PolyGram, which lost out on its bid for MGM and is expected to launch its own domestic distribution operation as long planned. The Dutch-owned company, which owns several small film labels, has yet to prove itself a player in the big leagues.

The next chapter will also be written for Time Warner’s independently run film operations--Castle Rock and New Line--both of which are in transition. Castle Rock, on a prolonged losing streak, found no buyer this year, so it’s likely to operate as part of Warner Bros. and make fewer movies. New Line, which found itself in trouble when it ventured into more expensive movies, is being shopped by New York investment banker Furman Selz but it’s not expected to be a quick, easy sale. Warner may retain a minority stake, and founder Robert Shaye and President Michael Lynne would like to buy themselves a chunk with passive investors as partners.

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Then there’s DreamWorks SKG, which in the latter half of next year will finally release its first three live-action movies: “Peacemaker,” “Mouse Hunt” and Steven Spielberg’s “Amistad.” The company, owned by Spielberg, David Geffen and Jeffrey Katzenberg, is due to release its first animated feature, “Prince of Egypt,” around Thanksgiving 1998. Hanging in the balance is the company’s much ballyhooed dream studio at Playa Vista, which has been stalled by ongoing problems with the developer.

Speaking generally of the movie business, John Krier, president of Exhibitor Relations Co., said, “It’s going to be wild again next year. There’s no question.”

And, despite the demise of publicly traded independents such as Carolco and Savoy, and large write-offs at Sony and Castle Rock, Gerbrandt reminds us, “It’s such a wonderful business, no one wants to leave it.”