Criticize This: Warner Bros. Balance Sheet, Box Office Booming

Warner Bros. long-reigning chiefs, Bob Daly and Terry Semel, have lots to smile about these days, including their studio’s market share leap to first on the strength of current hits “The Matrix” and “Analyze This” after a dismal two years at the box office.

The $10-billion entertainment empire that the duo preside over, which encompasses the studio’s movie, television and consumer products divisions and Time Warner’s global music business, is firing on all cylinders right now. First quarter results released this week showed double-digit gains in each of the businesses Daly and Semel oversee.

The studio chiefs have begun to get their sea legs in music after taking charge of the operation in 1995. The TV division continues to flourish with such hits as “ER,” “Friends” and “The Rosie O’Donnell Show.” And the WB Network--initially pooh-poohed by the naysayers, among them Time Warner’s biggest shareholder, Ted Turner--is as popular on Wall Street as it is among young viewers.

But it may be most gratifying to the 19-year partners--who still frequently drive to work together--that Warner is finally having some momentum in the movie division after being mired in executive turmoil and red ink spilled by such movies as “The Postman,” “Sphere” and “Father’s Day.”

Daly and Semel--recently interviewed at their Burbank offices--admitted to some mistakes in their handling of the movie division but said they have made creative and financial adjustments.

They are confident that the studio’s upcoming films, including Stanley Kubrick’s “Eyes Wide Shut”; the special effects action comedy “Wild, Wild West” starring Will Smith; and animated features based on the popular kids’ TV series “Pokemon” and “South Park” will continue Warner Bros.’ roll.

Q: Are the problems in the movie division solved?

Semel: Very much so. . . . We decided about a year ago we needed to sort of regroup and pull ourselves together. I think we’ve done it and I think the results will be there this year.

Q: Yet questions persist about your (Semel’s) future with the studio.

Semel: I’ve heard and read those rumors quite a bit over the last 25 years. I heard and read them again particularly last year when things weren’t going so well. I said last year, I said this year and I will say again today: Terry Semel is staying at Warner Bros. Terry Semel loves working with Bob Daly, his partner.

Q: You no longer have the entrepreneurial urges you had about six years ago when you almost left to lead a buyout of MGM?

Semel: Not to the extent that I want to pursue them. I pursue my entrepreneurial instincts right here at Warner Bros. We start new companies, we buy companies. I’m very happy.

Q: And you, Bob?

Daly: I have no plans on leaving Warner Bros. I’m not a guy who moves around a lot, and neither is Terry. . . . We still enjoy what we do. I’ve always said, the only reason I’d ever leave is if I don’t enjoy it anymore.

Q: How does it still challenge you?

Daly: One of the reasons I feel challenged is because we have had the opportunity to be involved in other areas of the business and grow other businesses. If you said to me, would I like to come in here and just work on movies everyday of my life or just work on television every day of my life, the answer would be no, I’ve done that. But, we get the chance not only to work on movies and television, build stores and consumer products, and we also get involved in the network and theaters and in the worldwide music division, which has been a real challenge and a lot of fun for us.

Q: You focus more on the music side than Terry, don’t you?

Daly: I get involved more in the day-to-day operations, but when it comes to any major decisions, Terry and I do it together. If you’re talking about making a (movie) deal with Village Roadshow, Terry would make that. When you’re talking about making a deal with Maverick (Madonna’s music company), I would.

Q: When you were given additional responsibility for music many analysts thought it spread you too thin and your movie business suffered.

Daly: Our job was to groom management. We did what we were supposed to do and unfortunately it didn’t work. You can’t win. If you’re involved in everything someone says, “Oh, you don’t grow manpower.” We were criticized before for being hands on in every little detail so we decided to take our hands off.

Q: Last year Terry got more involved again with movies. Did that make a difference?

Semel: We’ll see what the results look like.

Daly: Once we decided that Billy and Lorenzo [top movie executives, Bill Gerber and Lorenzo di Bonaventura] were going to be split and we gave the job to Lorenzo, Terry went in and helped focus him and put the department back on track.

Q: Are you still as hands-on as you were?

Semel: Not as much as I was a year ago. Lorenzo is doing much more of the day to day work.

Q: Warner has been criticized for several years for an over-reliance on big star vehicles and formulaic action movies and comedies. Are you trying to change that?

Semel: Without question. But I think that’s an over-generalization. Warner Bros. is an extraordinarily successful studio for the last 20 years.

Q: Except for the last two years.

Semel: I would agree. I think the last two years the diversity of the program wasn’t there but this year it is. We deliberately went with having 22 or 23 movies this year as opposed to 28 or 29. Secondly. we went out of our way to leverage, and therefore brought in partners on, many more of our films. And third, there’s a different make-up in terms of the cost structures and creative elements to our films. What we’re doing now is mix up our hand so we have a number of good young people movies and a number of movies for over-25.

Daly: What was wrong with our movies was they weren’t as good. The mix wasn’t the problem, it was the quality.

Q: You typically bring in fewer outside partners to share the financing on movies than many of your competitors. Why?

Semel: We’re not opposed to sharing movies with other studios, we just don’t do it as much. Generally, we share them with financial producing partners who enable us to be the worldwide distributor and earn a fee on a worldwide basis. . . . International continues to grow as a marketplace much faster than the U.S. So, why put up your risk money and not be involved as a distributor in half the world?

Q: There are some films you’re fully financing, including “Wild, Wild West,” that are very expensive.

Semel: I think “Wild, Wild West” is the only film that we have on our books that did cost a little over $100 million.

Q: The rumor is more like $175 million to $200 million.

Semel: I promise you, you are way off. The truth of the matter is it didn’t cost anything like that.

Q: So, you’re still willing to take those kind of shots?

Semel: Yes, We think we must. We’re taking less of them alone each year than perhaps we did a few years ago. We’re making fewer movies that cost $100 million.

Q: With independent movies like “Shakespeare in Love” and “Life Is Beautiful” enjoying such success, it begs the question why Warner Bros. isn’t in the specialty film business?

Semel: We don’t avoid doing specialty films. We’re interested in doing a handful of them each year. We’ve avoided having a specific company for it because it’s a hard business to make money in and it’s becoming more difficult because there are more players.

Q: Now that you’ve had a few hits, will Ted Turner get off your back?

Semel: He’s never been on our back. . . . Since Ted Turner has joined this company, the only conversations I’ve ever had with him about our movies was that he wants to buy them for his channels. And the only dispute I’ve ever had with Ted Turner was over a CBS deal in the beginning.

Semel: If Ted commented that the films last year were not good, I think generally speaking he’d be right. I’m the first to say it: I think our films were really disappointing in general.

Q: The WB Network is particularly impressive, creating a new network brand in a very competitive marketplace.

Semel: There were people two or three years ago who thought it was a terrible idea.

Q: Even Turner.

Daly: We were criticized not only by Ted Turner but by a lot of people. Everybody thought it was a silly idea. . . . Thank God it turned out to be a really big asset for the company.

Q: While things have begun to look brighter on the music side, international continues to be your weak spot.

Daly: I don’t consider it our weak spot. I think we have a problem in a couple areas, but certainly the whole business has had a problem in Japan.

Semel: Warner, for the last decade until the PolyGram purchase by Universal, was always the largest music company in America. Obviously, Sony, EMI, PolyGram and Bertelsmann were there many years before Warner became at all important internationally.

Q: Will you ever be No. 1 in music again in America?

Daly: It would take a lot because Universal just spent $10 billion to combine those two companies . . . they’re No. 1 in America for the foreseeable future.

Q: Things are clicking in the music, TV and movie divisions, but all those businesses keep getting more competitive, don’t they?

Daly: Yes, It’s tougher for everybody. But you have to make the most of what you’ve got. We’ve got good assets and good people so I think we’re going to do very well.