COMPANY TOWN : THE BIZ : Disney’s Spreading of Financial Risk Made ‘Sense’ Then

No one’s more surprised than Disney executives at the roaring success of “The Sixth Sense”--which led the box office for a fourth straight weekend and is on course to gross more than $200 million domestically.

Otherwise, the studio might never have brought in a co-financing partner on what has turned out to be one of the summer’s biggest sleepers.

The supernatural thriller, written and directed by 29-year-old M. Night Shyamalan and starring Bruce Willis and Haley Joel Osment, has grossed nearly $140 million to date and is expected to be a strong performer overseas as well.

Disney’s decision to “lay off” the financial risk on “Sixth Sense” was made when Willis--who commands $20 million a picture--signed on, drastically changing the economic parameters of a film that had originally been conceived as a low-budget project to be made for $15 million with no big-name stars. It was produced by Frank Marshall, Kathleen Kennedy and Barry Mendel.

Around the start of principal photography last summer, Disney decided “Sixth Sense” would be a good fit for its new off-balance-sheet financing arrangement with independent production company Spyglass Entertainment, headed by Gary Barber and Roger Birnbaum.

Disney is trying to lower its financial exposure on non-family-branded movies. And this was a $40-million-plus movie to be directed by an unproven filmmaker and to star Willis in a drama rather than the action genre in which the actor has been most successful. (Universal Pictures’ 1998 drama “Mercury Rising,” in which Willis also had a young co-star, tanked).

The Spyglass deal, made in August 1998, is structured to protect Disney’s downside by reducing its capital investment in a slate of 15 movies over five years while giving the studio key distribution rights around the world.

Co-financing partnerships have become an increasingly popular and prudent way for studios to protect themselves from huge losses. Disney, for example, protected itself from losing a ton of money on Spyglass’ first film, “Instinct,” a $55-million movie starring Anthony Hopkins that bombed at the box office.

But such arrangements can backfire on a studio when a film becomes an unexpected breakout hit. That’s because in giving up so much of the risk, the studio also gives up a great deal of the upside potential. Which, of course, is why such deals are attractive to co-financing partners.

Disney Studios Chairman Joe Roth said laying off the risk on Spyglass was no different from Warner Bros. taking independent production company Village Roadshow Pictures as its financial partner on “Analyze This” and “The Matrix”--both of which turned out to be big hits.

“The whole notion of these deals is to lay off overhead and not to risk capital expenditures on non-Disney movies,” explained Roth. Spyglass paid for the entire production cost of “Sixth Sense,” plus what sources estimate was about $15 million in overhead costs left over from Disney’s prior three-year production deal with Kennedy and Marshall.

Although Disney gave up some upside potential in the “Sixth Sense” deal, the studio still stands to make a substantial profit on the film through distribution fees and overages, after it recoups its investment of about $40 million in marketing costs and advances it put up for retaining all distribution rights to the film, excluding German-speaking Europe and Japan.

“This is a win-win for everybody,” Roth said. “The net effect is we end up with what I imagine will be $80 million to $100 million in profit. It helped get Spyglass started, and we now have a legitimate supplier that will pay for the budgets of a third of our non-Disney movies over the course of a year.”

“Sixth Sense” is expected to gross as much as $225 million domestically, putting it on track to be one of Disney’s five most profitable live-action movies of all time, and the second-most-profitable of the last year, after “The Water Boy.”

Spyglass benefits financially as well as instantly legitimizing itself as a serious player in Hollywood.

“Sixth Sense” will also be a major windfall for Willis and husband-and-wife producing partners Marshall and Kennedy, all of whom are guaranteed first-dollar gross participations in the film.

One of the biggest factors contributing to the film’s huge success, say all those associated with it, was Roth’s decision to move up its release from its original Sept. 10 to Aug. 6 so that it would get in on the lucrative summer playing time.

After seeing how well the film tested in June and how strong the early TV spots and trailers were, Roth said, “I was convinced we could compete in early August.”

Switching release dates, said Shyamalan, “was a brilliant move on Joe’s part. And it landed right on my birthday!”

The writer-director--who was born in Madras, India, to two doctors and has lived in Philadelphia since he was a baby--said in a phone interview that he attributes such cosmic timing to “part of the aura of this film.”

Although Shyamalan is, naturally, elated by the success of “Sixth Sense,” he said he is not altogether shocked, because “everything associated with the film has exceeded my expectations.”

Not the least of which was Disney executives’ agreeing two years ago to pay him a whopping $3 million for his spec script ($2.5 million for the material and an additional $500,000 to direct) in what was one the biggest such deals in recent memory.

“It was absolutely historic, unprecedented,” Shyamalan said. “And they asked for no rewrites.” Disney also agreed to let Shyamalan shoot the film entirely in Philadelphia, where he lives with his wife and young daughter.

Disney also made Shyamalan an unusual “pay and play” deal, guaranteeing him his full fee if the movie got scrapped and protecting him from getting fired without being allowed to at least start the film.

Shyamalan’s agents at United Talent Agency give much of the credit to Disney’s then-Hollywood Pictures President David Vogel for having the passion to aggressively pursue the project, which was the subject of a bidding war between Disney and New Line Cinema.

“It’s pretty unusual that a studio would spend that much money on a script and be locked into a director who may or may not be able to cast the movie,” said UTA partner Jeremy Zimmer.

Marshall was instrumental in helping land Willis for the role of Dr. Malcolm Crowe, a child psychologist who helps a young boy cope with his terrifying gift for communicating with dead people.

“When Bruce said he’d do it, we bumped up to make it an A-list crew,” said Marshall, noting that the film’s below-the-line costs were still kept to a relatively modest $15 million and that the production came in on budget and on time in 39 days.

Shyamalan said he was overdue to make a studio movie. He was fed up with the world of low-budget independent filmmaking after having two dreadful experiences on his first two movies: 1997’s “Wide Awake,” starring Rosie O’Donnell, which grossed less than $300,000, and his 1993 dud, “Praying With Anger.”

“I was so crushed after my first two films that I quickly realized that I’m not an art-house filmmaker,” Shyamalan said. “It’s not my thing.”

Shyamalan said he was alarmed when “Blair Witch Project” turned out to be such an unexpected hit before his movie opened.

“I thought, ‘Here we go again,’ ” Shyamalan said.

“I cried on Saturday morning when the call came from Disney to say we were No. 1 and had beat ‘Blair Witch’ by $2 million.”