Warner Bets Big on Series

With the debut of its first “Harry Potter” movie less than three weeks away, cameras set to roll on its second “Harry Potter” movie and the screenplay underway on its third, Warner Bros. is betting hundreds of millions of dollars on a strategic expansion into the lucrative franchise business.

Warner Bros.’ ambitious long-term plans for “Harry Potter” could include seven movies over the next decade based on J.K. Rowling’s best-selling fantasy-adventure tales.

The studio also is making a major financial commitment to revive its “Batman,” “Superman” and “Looney Tunes” brands and spawn new ones with such properties as “Wonderwoman,” “Catwoman” and its recent box office hit “Cats and Dogs.”

Building perennial franchises with appreciating library value through movie sequels, prequels, made-for-videos, TV spinoffs and fat licensing and merchandising deals is a key mandate of Warner’s 2-year-old management team led by Chairman Barry Meyer and President Alan Horn.

Meyer said that creating new brands and optimizing existing ones is seen as one of the four “key growth drivers” at Warner Bros., along with expanding its international businesses, developing emerging technologies and continuing to integrate its content with corporate parent AOL Time Warner’s operations.

Historically, Warner has been able to capitalize on some of its most successful movies by producing sequels and other spinoffs. Among its best-known and most successful movie series are “Batman,” “Lethal Weapon” and “Dirty Harry.”

What’s new, Meyer contends, is management’s approach to the business and its aggressive initiative to build family and other enduring franchises. The studio has, in effect, formalized a franchise building plan, transforming what had been a reactive, picture-by-picture approach into a proactive program.

“It’s a very long-term business we’re developing now,” Meyer said. “We’re devoting more resources toward the early development of these properties and it involves every part of our company.”

The strategy is aimed at taking full advantage of AOL Time Warner’s expansive global media network.

“We’re looking to extend these properties over multiple platforms,” Meyer said.

A franchise such as “Harry Potter” could potentially generate billions of dollars in revenue over decades from worldwide box office, television, home video, DVD and record sales as well as lucrative licensing and merchandising deals for interactive games, theme park attractions and scores of products from plush toys to bedsheets.

For instance, since 1989, Warner’s “Batman” franchise, which spawned four feature films, four animated TV series, three direct-to-video titles and a licensing windfall, has netted the studio at least $2 billion in revenue.

And that was before the explosion of the Internet and the advent of DVD and video on demand.

It was also prior to Time Warner’s merger with America Online, which created a formidable combination of new and old media assets.

AOL Time Warner is well positioned to cross-promote and exploit a property such as “Harry Potter” throughout its business units.

The company owns the world’s largest Internet provider with 31 million subscribers and publishes such magazines as Time, Fortune, People, Sports Illustrated and Entertainment Weekly. It is the second-largest cable operator in the U.S. and is among the largest cable programmers with its CNN, HBO and Turner Broadcasting System networks. AOL has created an extensive online arena to help promote the Nov. 16 release of “Harry Potter and the Sorcerer’s Stone.” Web users can do everything from play an interactive “Quidditch” game to purchase a Lego Hogwart’s Express train in the Wizard’s shop.

It helps that “Harry Potter” already is a pop culture phenomenon and publishing sensation with more than 116 million copies of the first four books sold in 47 languages worldwide.

And though there’s no such thing as a sure thing in entertainment, industry watchers say the potential of the “Harry Potter” franchise is about as close as anyone can get.

“It could be massive,” said Jessica Reif-Cohen, media analyst for Merrill Lynch. “Big enough where it can move the dial on a company’s stock price and profits.”

That would be a welcome development for AOL Time Warner, given the beating its publishing, cable networks and Internet divisions have taken with an industry-wide downturn in advertising sales.

A box office bonanza would also be a nice shot in the arm for the studio, which this year has had such disappointments as “Osmosis Jones” and “Rock Star.”

That said, between its strong performer “Training Day” and expected returns from “Harry Potter,” Steven Soderbergh’s star-studded remake “Ocean’s 11” and the Jim Carrey-headlined “The Majestic,” Warner expects 2001 to be a record year.

Warner movie distribution chief Dan Fellman expects “Potter” to open in more than 3,000 theaters. “The Perfect Storm,” the studio’s largest release to date, opened in 3,407 sites. The industry record holder is “Mission Impossible II” in 3,653 theaters.

Many Hollywood insiders, including Warner rivals, believe “Potter” could score the biggest opening weekend ever and claim more than $250 million in U.S. ticket sales. (Warner’s highest grosser was “Batman” with $251 million).

“It’s going to be huge,” predicted Dick Cook, chairman of Disney’s Motion Picture Group, whose expected animated hit “Monsters, Inc.” opens two weeks earlier, on Friday.

“Harry Potter” also is expected to be huge overseas, where it opens in Britain and some other foreign markets concurrent with its U.S. release.

Reif-Cohen and other media analysts predict “Harry Potter” could pump more than $1 billion of profit into Warner coffers from worldwide sales in all media.

UBS Warburg analyst Christopher Dixon forecasts that over the next year alone, “You’re looking at a property that could generate $350 million in profits” from theatrical, home video and DVD sales, “to say nothing of its ongoing ability to realize a lot more.”

And that’s from just one movie.

Warner owns all rights (except for the frozen theatrical stage rights) to Rowling’s first four books with options on the remaining three. The fifth book, which the author is writing, is expected to be published next summer, which would coincide with the video/DVD release of the first movie.

Though “Potter” could make a fortune, it’s not without risk.

The studio is making the first two movies back-to-back and has already commissioned screenwriter Steve Kloves to begin the third installment, “Harry Potter and the Prisoner of Azkaban,” expected for release as early as November 2003 and no later than the first quarter of 2004.

Horn said the first production cost “north of $125 million” and subsequent movies will probably be “comparable in cost.” With no major stars in the cast, the biggest expense is extensive special effects.

The production costs, Horn said, would have been even higher had Warner not realized “economies of scale” by shooting both movies in England in essentially the same locations and with the same sets and costumes. The sequel, “Harry Potter and the Chamber of Secrets,” begins shooting in London on Nov. 18 and will be released in November of next year.

“This allows us to take the enormous expense and amortize costs over two, maybe three movies,” Horn said.

Warner also was able to make what appears to be a bargain purchase of the rights.

“We just happened to buy ‘Harry Potter’ before it was ‘Harry Potter,”’ Horn said.

In 1997, Warner paid then-unknown author Rowling $500,000 for rights to her first book just after its publication in the United Kingdom and well before it hit the U.S. and became a worldwide sensation. That was far more than Warner had been paying to buy works by unproven authors. The studio spent $25,000 for “Bridges of Madison County” before it became a bestseller and $125,000 for “The Perfect Storm.”

For the first four books, Warner will have laid out about $2.5 million, with each exercised option costing a bit more than the prior one.

Just as Warner has long-term plans for “Potter” with various sequels and likely spin-offs, it is also developing multiple ideas for other potential franchises.

On parallel tracks, ideas are being hatched for “Batman Year One,” a prequel, “Batman vs. Superman” and “Batman and Superman.” Five different “Looney Tunes” concepts are on the boards, as are ideas for “Catwoman,” “Wonderwoman” and “Charlie and the Chocolate Factory.” Two sequels to the studio’s hit “The Matrix” are due out in 2003.

“The difference in our philosophy is we now look at building these franchises as a long-term business rather than a one-off business,” Meyer said. He says he doesn’t want the studio to repeat such past missteps as failing to follow up its 1996 comedy “Space Jam,” starring basketball great Michael Jordan and the classic Looney Tunes characters, which grossed $230 million worldwide, with other product.

“In retrospect, I think we probably missed an opportunity,” Meyer said.

It is not something Warner is likely to do with “Harry Potter,” its most promising franchise.