Taking Major Risks, Ovitz Tries for Prime Time Again

Hollywood is giving Michael Ovitz a second chance--of sorts.

The former-super-agent-turned-talent-manager has scored an unprecedented first-year success in television. His Artists Television Group, the year-old arm of the talent management firm Ovitz formed in December 1998, has landed seven new shows on network schedules--besting every independent in a decade marked by studio domination.

Thanks to heavy spending on top-drawer talent and the salesmanship of its energetic president, Eric Tannenbaum, ATG outranks even established studios. By Fox’s tally, Warner Bros. and ATG are tied for first place in the number of new orders for the coming season, with Fox, Paramount Television and Disney trailing behind. Ovitz’s sizzling comeback after his humiliating ouster two years ago as president of Walt Disney Co. could quickly turn into a costly flameout, however.

Securing orders is only the warmup drill in the prime-time marathon. The punishing economics that have killed most independent producers come into play as production begins.

By taking the unconventional path of self-financing his television production, Ovitz must pump millions of dollars into his shows. With prime time’s 95% failure rate, there is a good chance he may never recover most of those costs. And with the season approaching, Hollywood sources say he is scrambling on a number of fronts to offset his risks.

Network executives say Ovitz’s plan could work if the financial backing is there and a hit comes quickly. The game is to find partners who can share the burden of success.

No surprise, ATG officials say they are in advanced talks with at least two potential partners who could bring strategic distribution or “revenue-enhancing” assets to the table.

Tannenbaum says ATG is under no immediate financial pressure and that its business model is sound. He’s extolling the virtues of ATG’s independence. He says it’s easier for Fox, say, to buy from ATG than from Paramount Television, which could hold the network up for big increases in renewal talks for a blockbuster hit by threatening to put it on its own CBS network.

Most important, ATG has spent aggressively to lock up top writers, producers and actors who are sought after by the networks. Just as Ovitz brought Hollywood to its knees ruling over powerful talent at Creative Artists Agency, the bet is that he will rise again using star power--rather than distribution control--as leverage.

ATG has committed an estimated $60 million to a handful of writer-producers and stars such as Steven Weber and Darren Star, the producer of “The $treet” who also is credited with “Sex in the City.”

Those numbers add up to pressure even for Hollywood studios. Fox struggled for several years to reap the benefits of its own $60-million spending spree on comedy writers.

And ATG has other expenses to worry about. Its overhead runs an estimated $1 million or more a year, industry sources say, and that does not include the world-class digs at the Wilshire Beverly Center building that house ATG and Ovitz’s management company.

ATG’s search for a strategic partner has taken on greater urgency as “The $treet,” a one-hour drama for Fox, has gone over budget. ATG will be more than $7.9 million in the hole after filling Fox’s half-season order. And the costs will grow in success until reruns are sold years down the road.

Television executives say Ovitz has made the rounds internationally and in Hollywood, but is painted into a corner by an earlier deal he did with Sony. For most of the summer, ATG has been trying to redo that deal, which gives Sony worldwide distribution rights in exchange for modest advances on ATG’s shows. Other investors are reluctant to come in without distribution rights to offset their risk.

“They need more money,” said one senior television executive who has dealings with ATG. “It’s almost like they didn’t think it through. They factored in the fixed costs, but didn’t think about what it would cost to produce the shows and keep them on the air. That’s what can kill you.”

Tannenbaum dismisses the scuttlebutt, in part because he says Ovitz is comfortable with the business plan and with drawing on his own substantial bankroll.

In fact, he’s expanding. In addition to new network pilots ATG is developing for January, Tannenbaum says it continues to spend on talent deals. Just last month, it signed actor Billy Baldwin to a $1.5-million deal.

“If you get lucky and have a hit in your first or second year, like we think we can, [our plan] will really look smart,” said Tannenbaum, who Sony released early from his contract as president of Columbia Tristar Television as part of the distribution deal with ATG.

Even so, studios must be prepared to finance production for at least four and up to six years. Only then can a hit show recoup expenses by selling reruns to TV stations in syndication. Though blockbusters such as “Seinfeld” have made billions that way, 95% of the shows never make it beyond year one or two, with losses mounting the longer marginal shows hang on.

The big studios such as Disney and Fox can justify the risks because they have broadcast and cable networks to feed and spread losses over a sea of assets. But even companies with limited distribution such as Barry Diller’s USA Networks and Sony have retrenched. ABC, NBC, CBS and Fox are relying on studio parents or production arms for an estimated 60% of their needs. With independents such as ATG, networks often demand half-ownership interests in shows.

Tannenbaum says ATG can cover the production costs of most of its shows with the licensing fees paid by networks and the Sony advances. ATG has also laid off risks on some of its shows by giving up stakes to the networks. For instance, sources say NBC’s half-ownership in “Cursed” should cut ATG’s deficit to about $100,000 an episode.

Those deficits pale against those of “The $treet,” which Tannenbaum admits has gone over budget. “There’s always one show that is more expensive than the rest,” he said, calling the Wall Street soap opera a Rolls-Royce, with a big cast and a high-priced New York location. “But it hasn’t changed our business plans or forced us to do anything we didn’t want to do.”

Tannenbaum says ATG did not ask Fox to become a partner in the show, as rumored, but admits to other discussions: “We’re talking about additional ways to make this package more attractive.”

Ovitz may have chosen a difficult path, but he has a lot to prove.

Since leaving CAA three years ago, Ovitz has been knocked off his pedestal by a series of back-to-back blows. He was pushed out at Disney after about a year on the job. He invested in Livent Inc., which was forced into bankrupt because of an alleged accounting scam by the previous management. He bungled an attempt to bring an NFL team to Los Angeles and, most embarrassingly, was linked with money manager Dana Giachetto, an alleged swindler whom Ovitz once called his “life advisor.”

Ovitz returned to his roots in the talent business with the launch of Artists Management Group, which he envisions as the foundation for a studio with animation, television, movie, music, sports and Internet production. Tannenbaum says the economics of ATG are integrally connected with the sister parts.

For instance, ATG is peddling the next TV project of client Michael Crichton, the best-selling author of “Jurassic Park” and creator of “ER.”

“It’s very hard to get shows on the air, but when I look up and we’re the only company this year with a show on all six networks, it says to me there is receptivity [to our strategy],” said Tannenbaum, who the network chiefs describe as hard-working, well-liked and respected. “We’re the only independent with this kind of roster.”

Network executives don’t disagree. “I’ve never known a network to adequately service itself by tapping into any one studio,” said Sandy Grushow, chairman of the Fox Television Entertainment Group. “ATG has a number of talented executives and creators. The agendas of independents are also less complicated than those of the major studios.”

Ovitz’s wasn’t the first to think of using talent under management to catapult a new company into TV production. A long-established management firm, Brillstein-Grey, has grown rich by both selling equity in its production arm and from producing hits. But Brillstein--Grey did not leave itself vulnerable to the risks of self-financing.

Ovitz nearly had a partner last summer. AT&T; had tentatively committed to putting up $150 million for a fourth of the company, but Chairman C. Michael Armstrong nixed the deal.

Sources say that Beta Taurus, the German production conglomerate, or Canal Plus, which recently struck a movie co-production deal with Ovitz, could be waiting in the wings should ATG restructure with Sony.

But Sony is not willing to budge. Sony likes the ATG deal because it caps its potential losses in television while keeping its distribution network full. Ovitz pays the studio a 17.5% fee for distributing the prime-time shows created in ATG’s first three years. It gives ATG advances against distribution income of $350,000 per episode for comedies and $450,000 per episode for dramas.

“We are very supportive of ATG,” said Len Grossi, president of Columbia Tristar Television. “Their success feeds our distribution pipeline.”

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The Price of Success

The biggest financial risk of Michael Ovitz’s Artists Television Group is its most promising show, the expensive drama “The $treet.” Before the big payoff in syndication sales, losses could mount quickly. A look at the math:

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“The $treet”

Production costs (per episode): $2.3 million

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Revenue (per episode):

Fox’s licensing fee: $1.2 million

Distribution advance from Sony*: 450,000

Additional distribution proceeds*: 45,000

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Total: $1.695 million

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Net deficit (per episode): $605,000

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Fox’s initial order of 13 episodes

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Estimated deficit for one-half season of “The $treet”: $7.865 million

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*Sony has sold foreign rights to “The $treet” for about $600,000 per episode. It is paying ATG a standard advance of $450,000 against that revenue. After taking its 17.5% fee of $105,000, Sony then passes along to ATG what’s left: $45,000.

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Runaway Success

Artists Television Group, the TV arm of Michael Ovitz’s talent management firm, has sold seven new prime-time shows to the networks, the best performance by an independent in the last decade. But with the 95% failure rate for network shows and the minimum four years before the rare hits begin paying off, skeptics wonder whether Ovitz’s self-financed company has pockets deep enough to survive his early success.

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ATG shows debuting this fall:

* “Cursed,” NBC, comedy: With the network as a 50% partner, this sitcom based on Steven Weber’s sophomoric humor won a coveted Thursday night time slot after “Friends.”

* “Grosse Point,” WB, comedy: The biting parody of “Beverly Hills, 90210” created by Darren Star, the red-hot writer-producer of HBO’s “Sex in the City,” follows “Sabrina the Teenage Witch” Friday nights.

* “Madigan Men,” ABC, comedy: Gabriel Byrne stars in this Friday night sitcom, 50% owned by ABC, about the dating lives of three generations of an Irish family.

* “The $treet,” Fox, drama: The one-hour evening soap opera, another Darren Star creation, focuses on the lives of young Wall Street investment bankers.

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ATG shows debuting in January:

* “The Michael Crichton project,” Fox, drama: The network is paying a rich licensing fee for a yet-to-be deter-mined hourlong show from the creator of “ER.”

* “The New Ellen Show,” CBS, comedy: A sitcom about the making of a variety show from comedian Ellen DeGeneres, whose “Ellen” ran on ABC from 1994 to 1998.

* “Off the Hook,” UPN, comedy: A late-night sketch comedy for urban ethnic audiences that has been compared to “In Living Color.”