Partnering Studios Share Risk, Profit

In trying to tackle the exorbitant costs of making movies today, studios sometimes pay a big price to avoid taking risks.

It’s become an increasingly popular practice among the Hollywood majors to partner with each other, seek equity investors or sell off valuable rights to their most expensive, or risky, films as a way to curb costs and protect against major losses on any given title.

Paramount Pictures Corp., under the stewardship of Viacom Entertainment Group chief Jonathan Dolgen, has for 3 1/2 years led the charge in laying off risk to other parties. This is a perfectly logical and practical business strategy given the daunting economic realities of the movie business today, in which $100-million production budgets are no longer unusual.

But it could be argued that splitting the rights on a movie or sharing profits with another studio is antithetical to being a truly globalized entertainment company, whose library value is enhanced by the full exploitation of its software throughout the world.

“Long-term library assets are a major factor driving the values of all these entertainment companies over the years,” says Ken Lemberger, president of Sony Corp.’s Columbia TriStar Motion Picture Group.

It’s a complicated and nagging question that has studio heads searching for more effective ways of hedging their bets--by acquiring rather than selling increasingly valuable foreign rights--and only risking big on movies with the most exploitable worldwide value.

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Naturally, it’s not that simple. No one has the secret formula for what audiences will love.

In protecting their downside, how much potential upside are entertainment companies willing to sacrifice? Sometimes a lot.

Casey Silver, chairman of Universal Pictures, which has partnered on such movies as “Twister,” with Warner Bros. Inc., and “True Lies,” with 20th Century Fox, said: “It’s a way to manage risk in a very risky business. But in doing so, you’re also giving up potential upside--and it is a global business.”

Universal had originally been seeking a partner on Imagine Entertainment’s “The Nutty Professor”--a risky $50-million-plus movie because Eddie Murphy’s career was in a slump. But the studio wound up lucking out when Paramount passed on the option at the last minute. The comedy, produced by Brian Grazer, turned out to be a worldwide hit, reviving Murphy’s career.

Sony could potentially leave hundreds of millions of dollars on the table because of a regrettable deal it made years ago on “Air Force One,” the Harrison Ford movie that opens nationwide today. Instead of buying worldwide rights to the summer release, it opted for domestic only. And Sony has to split any profit from the domestic market with the film’s producer, Beacon Communications--leaving the studio with a mere 25% ownership of a likely blockbuster.

The overseas markets could be hugely lucrative, given the international marquee value of Ford and the explosion of the foreign marketplace.

Walt Disney Co., which bought the foreign rights from Beacon, will be the beneficiary of such a windfall.

Two years ago, Sony made another two-picture partnership arrangement with Disney on two potential blockbusters. The studios will share the costs and worldwide profit pool on Paul Verhoeven’s upcoming Thanksgiving release “Starship Troopers,” which cost upward of $100 million, and writer-director John Hughes’ forthcoming “Peter Pan,” for which there is no script as yet.

Although each company will save half the production costs it otherwise would have paid, Sony will only see half the profit it might have if either or both films are worldwide hits.

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“Today, selling foreign rights as a means of financing films doesn’t make a great deal of sense,” says Lemberger, part of a new regime at Sony. “It’s really an expensive form of borrowing. . . . It’s not an effective risk hedger.”

A more sensible way to control risk, suggests Lemberger, is “making movies at a price reflective of their value in the world marketplace.” In other words, “if a film is worth making, it’s worth keeping the worldwide rights.”

That’s why Sony’s current administration has a proclivity toward “only making films that are valuable throughout the world,” explains Lemberger, and “risking 100% of the cost of making and marketing them rather than selling away part of the rights.”

That’s not to say Sony or other studios are abandoning the practice of co-financing certain movies.

Sometimes studios find it necessary to team up with a competitor to gain access to certain talent that is critical to a film getting made.

For instance, Sony owns the rights to “Peter Pan” but wanted John Hughes, who has a deal at Disney, to write and direct it. Therefore, it made sense for the studios to partner.

Paramount found itself in a similar situation with two of its 1998 releases, “Saving Private Ryan” and “Deep Impact.” Both are shared-pot deals with DreamWorks SKG, the start-up studio of Steven Spielberg, David Geffen and Jeffrey Katzenberg.

With “Private Ryan,” to star Tom Hanks, Paramount owned the material. But Spielberg would agree to direct only if his company could co-finance and share in the film’s profit. Because Spielberg is producing “Deep Impact,” directed by “ER’s” Mimi Leder, Paramount, which will release the film domestically, was obligated to sell foreign rights to DreamWorks’ foreign theatrical distributor, Universal Pictures.

In a perfect world, would Paramount have preferred to own both movies outright? Absolutely.

To be sure, Paramount is more cautious than its competitors. The studio, which saved itself a ton by laying off some risk on a number of box-office bombs to Rysher Entertainment, makes some sort of financial arrangement--be it securing an equity investor, pre-selling rights or taking a partner--on many of its movies. And makes no apologies for doing so.

Paramount’s philosophy is that it’s better to spend $35 million on two movies than $70 million on one.

“Given the economic environment of the motion picture business today,” says Dolgen, “the concept of co-financing has to be viewed as an important tool in trying to address those economic realities.”

Dolgen adds that sharing the risk on movies is no longer a novel idea, but one that “most, if not all, the studios are thinking about or utilizing to one degree or another.”

Paramount asked Disney to put up half the cost of its $80-million movie “Face/Off,” with John Travolta and Nicolas Cage. Although the action film has grossed nearly $90 million to date and will likely break $100 million domestically, it’s projected to make even more--possibly as much as $150 million to $200 million overseas. Paramount has to split half of those worldwide revenues with Disney.

In hindsight (a thoroughly useless exercise), Paramount may have been better off owning that movie 100%.

But the studio must be congratulated on the savvy arrangement it struck with 20th Century Fox on James Cameron’s “Titanic.” Realizing the cost of the ambitious production could easily mushroom out of control, Paramount--which will release the film domestically in December--capped its investment at $65 million, based on an expected budget of $130 million. In fact, before production wrapped, the cost would grow to $200 million or more and Fox would be responsible for shouldering all overages.

Disney Studios chief Joe Roth says studio executives must remain open to a number of financial arrangements on movies these days.

“It’s hard to have a fixed or arbitrary attitude about it. You have to evaluate each picture,” Roth says. “On some, you don’t want to give up the upside. But it’s a very complicated situation.”