The Peter Principle

Peter Guber, former CEO of Sony Pictures, is the head of Mandalay Entertainment

It is widely believed, not withstanding the MPAA's numbers, that the average cost of a motion picture manufactured by a major studio is approaching $50 million. A North American print and advertising budget to launch in the cluttered marketplace hovers near $25 million. When we factor in costs of international release, we're talking about an average investment of nearly $100 million. The studios release 18 home-grown movies a year (many are producing more), which means they go to bat every 21 days. If that doesn't give the executives involved sphincter arrest, nothing will.

Here's another rush: Today, the development platforms of the studios include as many as several hundred projects, but the vast majority of these movies never get made, and these losses must be absorbed out of the successful pictures.

Time lines are another aspect of the movie business that makes it unique. In the music industry, opportunity horizons can be a matter of just a few weeks or months. Television movies-of-the week make it to the tube in 200 to 300 days. Ah, but a feature film defies the laws of gravity.

Consider the economic differences between TV movies and features. In television the priorities are: First, be on time (if you're late, they're not going to post up a black screen and say, "Sorry, Mandalay didn't deliver this picture on time, so go out for a bite to eat and come back in an hour and a half"). Second, it must come in on budget. The return from all revenue sources is quite predictable--and limited. Third, the movie has to be good.

In theatrical motion pictures, there also are three priorities: First, the film has to be great. Second, the film has to be great. Third, the film has to be great. The other two TV priorities don't really count. Did you ever hear anyone say, "Let's go down to the Bruin Theater; I hear there's a film playing that came in on budget"?

More significantly, for a theatrical motion picture to garner profits, it has to go through an excruciating experience. Consider: In 1978, I made "Midnight Express" for $1.7 million. There were no gross players; in fact, I don't recall there being any net players except for me (that's always a good position). The picture enjoyed a staggering profit. Today, making a studio film of just the two-hour lunch that I had before writing this article would probably cost about $35 million, and you'd have to spend $20 million or so more for a major marketing plan. And if you don't get it released domestically, then it's not worth much internationally. It also would probably take two years to decide whom to cast as the waiter, and he or she would probably get $20 million against 15% of the gross from dollar one. Yes, that's a big carve-out before the financiers get their investment back.

Then, of course, the writer and the director would want to eat out of the same trough. You know those familiar noises: Oink, Oink, Oink, Oink. So "My Lunch at The Palm" would need another star, the newest and hottest on the horizon: special effects. We would have to have the pasta arrabiata morph into the hero just to show that we had this component for the trailer or for the promotional ShoWest reel, which might cost another $100,000. This is presumably necessary to sell the films to the exhibitors, who are taking 50% of the action at the box office on your film. Then, of course, you have to argue with the exhibitor about how much of the 50% you're owed that they will actually pay you.

It's not that I'm cynical about the business; I'm realistic. The odds of getting to King Solomon's mines are becoming longer every day. I don't mean to discourage anyone from being an independent producer or from making a film, starting a small studio or being a major studio executive. It's just that you have to understand that there's a reason why Las Vegas has bells, whistles, alarms, buzzers and horns going off when someone wins big: The odds are slim.

Now, in light of all this, what do we do? Go out of the business? Retire? Give up? Our product often defies rational analysis, so how do we turn our burning passion for a kung fu movie about elephants into a reality?

About 10 years ago, Kirk Kerkorian, who amassed a fortune from buying and selling the assets of motion picture companies, told me that it was crazy for him to spend some $23 million on a movie with no sex, in which the lead character is mentally handicapped and the biggest action scene is a car door closing. That movie was "Rainman," which went on to become, for a time, the highest-grossing picture in movie history--an Academy Award best-picture winner that generated nearly half a billion dollars at the box office for each of our companies. The challenge for today's executives is to harness as many of these individual entrepreneurial triumphs as possible. Of course, nobody really knows which pictures are going to succeed or fail, but our business is uniquely equipped to create and foster executives, producers and entrepreneurs who are tremendous champions of their ideas and are willing to skate on thin ice. Their level of passion is a critical distinguishing characteristic of our business.

So here's Rule No. 1: To be successful financially in the motion-picture business, you must be resilient, and you must understand failure. If you build 747s for a living and you fail, you are out of business. If you make cardiac pacemakers for a living and you fail, you are history. But nobody in our business bats a thousand. Hollywood's elite is populated with producers and executives who can crash and burn on a worldwide stage in winter and return triumphant the next summer. Our industry is run by people who don't fear failure, by people who have failed dramatically, extravagantly and--most important--publicly. Failure is not a demon or the end game. It is an inevitable detour on the road to success.

What much of the risk-averse American media has never accepted is that success and failure are usually about one millimeter apart. The creative entrepreneurial filmmaker or producer will invariably flinch but move forward into the teeth of the possibility of failure in the expectation of success. They must have faith, operating in a total vacuum of tangible feedback, winding their way through a minefield of rumors, gossip and negativism. They have to believe so passionately in their product that they nurture it for years and years, realizing at the end of the day that they may be the only people who absolutely, unequivocally believe it will work. They are willing to risk investing a thousand days of conviction in a process that will result in a judgment--terrific or terrible--on one Saturday morning.

Rule No. 2: Success can be mercurial. As the president of Columbia in the 1970s, I remember distinctly the submission of a dual film package with only one irresistible product. In order to get that film, however, we had to take the other. The movie that we obsessed over was to be directed by Mike Nichols, one of the finest filmmakers in America. It was written by Carole Eastman and starred two of America's great actors, Jack Nicholson and Warren Beatty, with music by Paul Simon. It was called "The Fortune," and let me tell you, it did not make a fortune. In fact, it was a financial catastrophe. In order to get this jewel, we had to take this "other" picture about a quirky hairdresser. That film was "Shampoo." So you see, there is a Movie God. Can you imagine if we were "fortunate" enough to get only the one we wanted?

Rule No. 3: Understand the reality of money. Producers work on the format of O.P.M., Other People's Money. Usually it's studio money, but the studio doesn't want its system cluttered up or its precious intellectual capital squandered on films that don't have a chance of returning a major investment. Because the costs of films are so great, the amount that a producer may bring is usually not the difference. Nonetheless, making an investment in one's own inventory, pictures, passions, projects or company makes a formidable statement to others investing in the project--i.e. that your tongue, your feet and your wallet are going in the same direction.

Of course, studios have to stack the deck in their favor. Vertically integrated international conglomerates use movies as locomotives. It's the general consensus that if your entire program as a studio can generate a 15% distribution return, you should get an Academy Award for "best distributor." In order to reach the 15% figure, studios are virtually required to undertake mega-budget films as cornerstones for their annual program. This assures them--they hope--of shelf space in the theaters and subsequent ancillary markets by virtue of these "locomotives." The danger is that such films at this level of economic investment can, if they fail, spell doom for a company.

The irony is that the cost of the picture itself doesn't assure the success of the film. The whole business in that regard is a little upside-down. When a $100-million film doesn't work domestically and grosses only $10 million to $12 million, as several have this past year, you can't even collect the film rentals from exhibitors for these debacles. That not only takes a tremendous toll out of a company's economic vitality, but it also sucks out intellectual capital. So much energy and time are placed on those mega efforts that if you have another film in the pipeline with a much more modest budget, it's like being in a single-engine Piper Cub landing at LAX 25 feet behind a 747. They won't read you on the radar, and the turbulence from the big jet can sink you.

Even when we get to the theaters, there are arcane elements that shape the destiny of the film's economics. When the $200-million "Titanic" opened, our film "I Know What You Did Last Summer" was nearing the end of its run. Yet tickets for both sold for $7. If we did that with Hondas and Ferraris, every time a Ferrari was sold, the seller would go broke. It's time to examine that economic reality.

How can people in their right mind not sympathize with the anxiety that studios must feel as they undertake these vast deployments of capital--paying producers, directors, writers and actors enormous sums of money--irrespective of success or failure? Many such companies are undertaking different strategies to shelter their risk, such as trying to attract off-balance-sheet financing, even if it's 300 German dentists.

In addition, many studios have embarked on portfolio management as a strategy for protecting and rounding out their financing slate. This often includes an umbrella group of companies with their own production teams and outside financing to supply incremental product to the majors. Companies such as New Regency, Mandalay, Castle Rock, Morgan Creek and Imagine may bring in outside capital or initial partners as well as unique management expertise to help fill out the studios' dance cards. This not only reduces the economic stress for the studios but also allows the creative staffs to focus more forcefully on their own mega-projects that utilize so much of the companies' creative resources. The mix of portfolios some companies enjoy allows them to maintain domestic market share and fill the magnitude of their TV- and cable-output deals, while harnessing creative and entrepreneurial talent they otherwise couldn't attract.

Having said all that, what makes the film business work today is not vastly different from what it was 50 years ago. It's the story, the seminal element of all successful films. If you start with something solid, the talent and the money will find you.

The truth is, there is no truth--only the search, constant, never-ending--no silver bullet, no magic alchemy, no Rosetta Stone, no answer from Carnac. One must be humble in the presence of the Movie God, who often shines down on companies in their time of greatest distress: "Star Wars" at Fox, "Rainman" at United Artists, "Jaws" at Universal.

To ride this juggernaut, you must have this single focused vision: complete belief in self and your project. You, as a creative entrepreneur, whether it is the studio or the producer or the talent force, must be dyslexic. You must think that no means on. And while we know that money makes the world go 'round, money itself isn't what it's all about--only how to use it.

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