Universal May Have Egg on Face After Selling Foreign Rights to ‘Pie’

Selling international rights may be the surest way to raise cash for movie financing, but it also may be shortsighted. International revenue already accounts for 55% or more of a film’s total earnings, depending on the genre, and that’s growing fast.

In what many in Hollywood view as a misguided decision, Universal Pictures has sold foreign rights to its upcoming teen comedy “American Pie”--a movie that cost only $11.8 million and is being touted as a possible sleeper hit of the summer.

One rival studio executive called Universal’s move a “moronic decision. . . . They hedged their bets, but you don’t hedge your bets on a movie with an upside like this that has no risk.”

Minimizing financial risk by selling rights or taking co-financing partners is becoming a way of life at most Hollywood movie studios, but it still requires studio executives to make good decisions.

For the last two years, Universal--which until recently had a prolonged losing streak at the box office--has been decreasing its overall investment in movies. The company went into a sort of “must-sell” overdrive, peddling rights to many of its projects to cuts costs and generate extra cash for new production.

Perhaps it was this altered state of mind that led the studio to sell the rights to “American Pie.”

Studios typically share the financial risk on films with hefty budgets. But “American Pie” is cheap by today’s standards, even when you factor in $20 million or so in international marketing costs.

The R-rated film, written by Adam Herz and directed by brothers Paul and Chris Weitz, about high school seniors who make a pact to lose their virginity by prom night, has the potential to go against the convention that American teen comedies don’t perform well overseas.

As 20th Century Fox’s hit comedy “There’s Something About Mary” proved, some comedies can attract broad audiences internationally. “Mary” grossed more overseas ($187.9 million) than it did domestically ($176.5 million).

Of course, there’s no guarantee that “American Pie” will even be a hit in the U.S. when Universal releases it July 9.

As it turns out, “American Pie” was one of the hottest American titles to sell to overseas distributors at last month’s Cannes International Film Festival.

“We were successful in selling this movie in most of the territories we had. . . . It sold well,” confirmed Patrick Wachsberger, president of Summit Entertainment, which was the international sales outfit that bought most foreign rights to the movie, with the exception of Britain, Australia, New Zealand and South Africa.

Before the Cannes market got underway, Universal received calls from two foreign sales companies interested in buying “American Pie.” Because Universal owed Summit a movie under a previous arrangement, Wachsberger said, “We all agreed ‘American Pie’ could be the one.”

The negotiations were “on and off,” according to Wachsberger, because of disputes over terms and the fact that Universal insisted on retaining rights to the English-speaking territories--where American movies usually have the greatest potential overseas.

Nadia Bronson, Universal’s international marketing president, said that at one point the studio decided to call off the entire deal with Summit.

That night, by coincidence, then-Universal Pictures President Chris McGurk, who had opposed selling “American Pie,” and his wife had dinner with Wachsberger and his wife.

“I thought the deal was off,” Wachsberger recalled. “But he [McGurk] said, ‘Maybe we should do it . . . let’s see if we can put things back on track.’ ”

McGurk, who has since left Universal to become vice chairman of MGM, refused to comment.

Although all parties refuse to discuss the financial terms, sources said Summit agreed to pay Universal a minimum guarantee of about $5 million plus escalators guaranteeing the studio bonuses based on how well the film performs domestically. If the film grosses $45 million to $65 million, for example, Universal would earn an additional $1 million, sources said.

“If it’s a home run,” Wachsberger said, meaning if the film grosses $100 million or more in the U.S., “Universal will see substantially more money.”

How much money could Universal leave on the table by making an upfront deal with Summit should the film be a worldwide hit?

Obviously, said Wachsberger, “We won’t know that until we see how well it does.”

Universal defends the strategy, which it initiated a few years ago, to sell foreign rights to movies as a sure way to protect its downside.

“More often than not, selling off rights is justifiable,” Bronson said. “From a studio’s point of view, in trying to minimize our downside, we don’t look at individual movies but at the entire package. It’s like being the ‘house’ in gambling--most of the time you win. Even if you have one movie that breaks out, nine times out of 10 they do not.”

In fact, Universal looks smart to have sold the rights to such films as “Primary Colors,” “Virus” and “Black Dog,” which turned out to be flops overseas.

And based on the fact that American comedies targeted to younger audiences tend not to fare well internationally, the studio feels justified in its decision to sell “American Pie” to the non-English-speaking world.

Domestic hits such as “The Wedding Singer,” starring Adam Sandler, and “Clueless” didn’t perform well outside English-speaking countries. Paramount’s teen hit “Varsity Blues” so far has grossed just over $1 million in its initial releases in Australia, South Africa and Panama. “The Waterboy,” another big Sandler hit, will be lucky if it does a third of the business overseas that it did domestically.

Universal argues that comedy hits such as “Something About Mary” and its own “The Nutty Professor” and “Liar, Liar” were breakout hits overseas because they had a much broader appeal than pictures aimed specifically at youths.

Bronson also pointed out that even though a film such as “American Pie” may have been inexpensive to produce, its projected overseas film rental (a distributor’s cut of box office) didn’t justify what the studio would have to spend on prints and advertising costs. Although studios generally collect 50% of a film’s domestic gross, they typically see 40% overseas.

Wachsberger noted that unlike foreign sales companies, studios that must pony up marketing costs have much more at risk when a movie doesn’t work in a particular international market.

Nonetheless, it’s hard to imagine how selling off foreign rights is not short-term thinking on behalf of the Hollywood studios. This is given how the real growth in the entertainment business will come from the international marketplace because of such factors as population (1.3 billion), the proliferation of new theaters and the explosion of new channels in virtually all corners of the world.

None of the foreign distributors hold “Pie” rights in perpetuity. Those rights eventually--in some cases in 15 years--revert to Universal and the copyright becomes part of the studio’s library.

“With pictures that don’t have the highest potential overseas, why not take the cash and utilize it to make more important event movies that can ensure you success overseas?” Bronson said.

Bronson made a huge stink when Universal tried to sell foreign rights to its expensive movie, “The Mummy,” which has grossed nearly $120 million domestically. Even without seeing the film, Bronson believed it had the right elements--an action-adventure yarn with special effects--to make it a potential commercial hit around the world.

Trying to find some humor in the brouhaha over “Pie,” Bronson quipped, “Hey, we owed Summit a movie. At least we didn’t give them ‘The Mummy.’ ”