‘Witch’ Casts Lucky Spell on Artisan

In a bewitching scenario for independent film distributor Artisan Entertainment, industry sources estimate that in the next seven years Hollywood’s newest movie franchise, “The Blair Witch Project,” and its sequels could generate $500 million in revenue and $150 million in profits for the privately held company.

Artisan’s investment in the pseudo-documentary that nobody else in Hollywood wanted will ultimately total around $30 million. That includes an acquisition price of $1.1 million, out of which $100,000 went toward finishing costs in addition to the $220,000 spent to enhance the film for its theatrical release.

During the entire life of the theatrical run, Artisan is expected to lay out $25 million more in marketing expenditures, which will include a re-release of the film in October two weeks before its Halloween video debut.

Much has been made of the movie costing Haxan Films--the Orlando, Fla.-based consortium of young filmmakers and producers behind the thriller--only $30,000 to produce. But that’s misleading, because it doesn’t take into account the additional $100,000 or so in post-production costs that it took to prepare “Blair” for its premiere at the Sundance Film Festival in January.

Nonetheless, on a return-on-investment basis, “Blair Witch” is shaping up as one of the most profitable movies ever made, putting it in the company of such mini-budget, mega-blockbusters as “The Full Monty” and “Four Weddings and a Funeral,” both of which cost less than $5 million to produce and grossed more than $250 million worldwide.

“Blair Witch,” which has grossed $112 million in less than a month of domestic release, is expected to bring in more than $200 million worldwide, industry sources say.

Artisan’s competitors contend that the company cut Haxan too good a deal, guaranteeing the group a huge chunk of the film’s profits.

The company’s three principals, Chief Executive Mark Curcio and co-Presidents Amir Malin and Bill Block, say this is precisely the kind of back-end bounty they like to use to attract talent--low upfront fees against a significant percentage of profits if a film is a big hit.

“When the filmmakers from ‘Blair Witch’ go around town waving their $2-million checks from Artisan, that’s the best publicity we can get,” says Malin, referring to the film’s co-writers and directors Daniel Myrick and Eduardo Sanchez and their three former film student pals who served as producers.

“We deliberately set up deals that if we make money, they make money,” adds Malin, a former partner in October Films. “It’s a great calling card for us and opens the eyes of the creative community. They’re going to have to compete at our level.”

Malin, who is based in New York and oversees marketing, acquisitions and distribution for Artisan, predicts that Haxan will easily see $50 million in profit from its participation in “Blair Witch” and have similarly rich deals for any sequels. (The next installment could be out as quickly as next summer.)

Industry sources expect “Blair Witch” to top out domestically at around $150 million and earn potentially $50 million more or so internationally. (Its initial overseas opening in France was modest.)

Artisan, which pre-sold the foreign rights through Summit Entertainment, a foreign sales outfit in which it has a minority stake, will see more overseas profit only if the film exceeds the minimum guarantees paid by local distributors.

Artisan is expecting as much as $25 million in profit from all foreign revenue, depending on the film’s box-office performance in key territories.

The company, however, should easily realize $20 million from its U.S. broadcast TV sale to Fox based on escalators that were built into its initial $10.5-million purchase price.

Artisan’s cable TV deal with Showtime could yield an additional $13 million or so and a pay-for-view pact as much as $5 million. Licensing and merchandising, which includes the sale of T-shirts, mugs, backpacks, trading cards, “stickmen” items and a series of comic books, is expected to generate as much as $7 million.

But the film’s biggest ancillary profit will come from home video. Artisan’s Halloween release of the video at $22.98 retail could net more than $60 million if the movie sells 6 million to 8 million copies as expected. Artisan also plans to ship around 250,000 DVDs, which would translate into about $6 million.

“Blair Witch” represents a huge windfall for a young company such as Artisan, which for the last two years has been trying to get a foothold in a highly competitive independent film market dominated by such studio-financed companies as Walt Disney-owned Miramax Films.

Yet Curcio said that while “Blair Witch” is “a defining moment” for Artisan, “it does not represent more than 25% of the profitability of the company.”

For fiscal 1999, he projects revenue of $375 million and potentially more than $50 million in net profit. Before the unexpected success of “Blair Witch,” profit was anticipated to be around $32 million.

“We had a great business without ‘Blair Witch” and an extraordinary business with it,” says Curcio, noting that Artisan’s 1998 revenue had risen to $175 million, with a profit of $23 million. When he and his two partners led a buyout of the company in July 1997, revenue was $120 million and the operation had losses of about $2 million.

A year earlier, in 1996, Live Entertainment, as the company was then known, posted revenue of $151 million and operating profit of $8 million.

In mid-1997, majority shareholders Bain Capital and Richland Gordon & Co. paid $120 million to acquire Live Entertainment, installing Curcio, Block and Malin as the new management team. The company is also backed by a small group of equity investors, including Allen & Co. and Canyon Partners.

Curcio, a former vice president at Bain, said that he, Malin and Block are “equal partners and significant shareholders” in Artisan, which employs about 220 people with corporate headquarters in Los Angeles, an office in New York and a satellite branch in Dallas.

The company derives the lion’s share of its cash flow from its film library of 6,600 titles, which includes home entertainment rights to such hits as “Terminator 2: Judgment Day,” “Total Recall” and “Basic Instinct” and such classics as “Moby Dick” and “It’s a Wonderful Life” through its acquisition of catalogs from Carolco, Hallmark and Republic.

One of the major benefits “Blair Witch” has afforded Artisan is the opportunity to accelerate its business plan, which includes acquiring additional libraries.

The company plans to expand its family home entertainment division and acquire original characters. It is also furthering the company’s incursion into the Internet, including the launch of a horror/science-fiction site, a home entertainment site and merchandising and licensing sites.

On the film side, Artisan plans to expand its Internet marketing capabilities, which could include e-mailing trailers to Web users along with local theater times and locations and the ability to purchase advance tickets online.

“The challenge for us is to create sustaining businesses that have been jump-started by ‘Blair,’ ” Curcio said.

In addition to giving Artisan a shot of capital that will allow it to compete with other top independents, which are now mostly bankrolled by major studios, the film’s phenomenal success also serves as a potential launch pad for an initial public offering.

Curcio acknowledges that an IPO is a strong possibility.

“We’ve been looking at the capital markets for the last few months and potentially doing an IPO,” said the CEO, noting that Artisan’s plans before the success of “Blair Witch” were “to look at the high-yield market sometime this year and the equity markets sometime next year.”

Curcio says Artisan is now considering all options, including a combination IPO and high-yield market capitalization, which would help speed its growth and could result in such endeavors as getting its film financing off its balance sheet. Artisan’s films currently are self-financed with the help of a syndicated bank line led by Chase.

Though Artisan will now have the cash flow to step up its acquisition and production, Block says the original mandate to make six films and release 12 to 14 a year has not changed. Nor has the budget level of under $30 million.

What has changed is the company’s profile. Essentially, “Blair Witch” has made Artisan an instant player in Hollywood.

“It’s hard to expand [the players in] the industry,” says Block, a former top Hollywood agent. “A company needs that one film that shows the management team can execute.”

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Magical Profit

“The Blair Witch Project” will rank among the most profitable films in history. During the seven-year cycle of the franchise, including sequels, it is expected to generate $500 million in revenue and $150 million in profit for distributor Artisan Entertainment. Costs and revenue estimates for the current release:

Costs

Production: $450,000, including $30,000 production, $100,000 finishing costs, $320,000 for sound and color correction, 35-mm blowup

Acquisition fee: $1.1 million

Prints/advertising: $25 million

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Estimated Revenues

U.S. theatrical: $150 million

Foreign theatrical: $50 million

U.S. home video: $60 million (6 million to 8 million units wholesale)

DVD: $6 million

Broadcast, cable: $35 million

Pay-per-view: $3 million to $5 million

License/merchandising: $7 million

Source: Industry estimates