Movie Studios Learn Sharing Burden Can Be Risky Business

If Warner Bros.’ double-barreled “The Matrix” sequels hit as big as expected, Hollywood may get schooled in one of the trickier lessons of contemporary film finance: The biggest risk of all can be sharing the risk -- which can mean having to share enormous rewards.

Since the mid-1990s, virtually every major studio has reduced financial exposure by splitting ownership of many films with partners, much as Warner shared both the cost and the returns of “The Matrix” with the small local movie unit of Australia-based Village Roadshow Pictures Ltd.

Such arrangements have brought welcome relief from the pain of box-office disasters. Village Roadshow Pictures, for instance, helped the studio, owned by AOL Time Warner Inc., suffer through “The Adventures of Pluto Nash,” “The Majestic” and, more recently, “Dreamcatcher.”

With “The Matrix,” however, the movie industry also is learning what it means to share not just the uncertainties of a new creation, but the relatively sure profit that follows when a surprise hit spawns an entire “franchise” -- and brings the financing partner with it.

“We’re delighted to see that money go out the door,” said Warner Bros. President Alan Horn, who is philosophical about the need to share both the ups and downs. “If Village is successful, that helps keep them partnered with us on lots of movies and helps mitigate the volatility inherent in the moviemaking process.”

Village will get a big bite of another Warner franchise next year, when it helps underwrite “Ocean’s Twelve,” a big-budget sequel to “Ocean’s Eleven,” which took in $446 million at the worldwide box office for the partners. Of course, sequels can bring their own risk: “Analyze That,” starring Billy Crystal and Robert De Niro, made just $57 million worldwide for Warner and Village despite the popularity of its predecessor, “Analyze This.”

Warner relies on partners for about a third of its annual 25-film schedule and fills another third by distributing pictures financed by others.

Over the last five years, the studio has co-financed 31 releases with Village and in January agreed to share an additional 40 films. Although declining to discuss specifics, executives with both companies said the existing portfolio of films has been profitable for each.

Under their deal, Warner and Village share all production and marketing costs on movies they jointly finance and split the profits once the studio takes a distribution fee of 10% to 15% off the top. Warner releases the movies worldwide except in Australia, New Zealand, Singapore and Greece, where Village’s parent company is both a major distributor and exhibitor.

Hollywood’s current wave of risk sharing followed the success of “Titanic,” which cost more than $200 million to produce but brought enormous returns for Paramount Pictures and 20th Century Fox, which split ownership of the picture. Since then, major studios and financial allies such as New Regency, Spyglass Entertainment, Beacon Communications and Lakeshore Entertainment have cultivated webs of relationships that appear to have turned the film industry into a gigantic risk-sharing family.

“The studios have tried to avoid the boom or bust of the theatrical business, which is still low-margin,” said media analyst Tom Wolzien of Sanford C. Bernstein & Co. “If you’re going to play it safe, you’re not going to get the massive upside. But on the other hand, you’re not going to tank your company with a stream of flops.”

Even the biggest companies are generally reluctant to tie up funds on an entire slate of 20 or more films in an era when the average Hollywood movie costs $60 million to produce and an additional $30 million to market.

“While we have very deep pockets, there’s a limit as to how much capital to allocate to the production process,” said Jim Gianopulos, chairman of Fox Filmed Entertainment, which is owned by Rupert Murdoch’s media empire News Corp.

Most studios still prefer not to have joint custody of their potentially lucrative franchise movies, such as Sony Picture Entertainment’s “Spider-Man” and Warner Bros.’ “Harry Potter.” “They’re not suppose to be shared,” said one studio chief, who asked not to be identified.

Five years ago, however, Warner brass didn’t see “The Matrix” as a runaway hit.

Set in a virtual-reality universe, the story was considered confusing at best. The production, originally budgeted at $55 million but ultimately costing about $80 million, was to be directed by screenwriters Andy and Larry Wachowski, young filmmaking brothers whose only directorial outing was a stylish, low-budget crime thriller called “Bound” that grossed just $3.8 million. And the movie was to star down-on-his-luck actor Keanu Reeves, who hadn’t had a hit since “Speed” years earlier.

“There’s no question it was a gamble,” recalled Bob Daly, who along with Terry Semel ran Warner Bros. for 20 years before leaving in 1999 and later becoming chairman and managing partner of the Los Angeles Dodgers. “The script was not easy to understand and it was hard to get inside the heads of these two young guys to get a feel for what their vision was.”

The studio had just signed a 20-picture, five-year co-financing agreement with Village, whose publicly traded parent is the largest entertainment conglomerate in Australia and a longtime business ally of Warner. With former Warner Bros. production chief Bruce Berman as its new chairman, Village was anxious to expand from financing low-budget independent movies made mostly for the Australian market, to bigger-budget fare such as “The Matrix.”

“The script for some people, including me, was dense and hard to understand, but this was a movie we agreed to start our deal with,” said Berman, who was head of Warner’s production division in 1994 when the studio bought the Wachowskis’ “Matrix” screenplay for producer Joel Silver.

Ultimately, the inaugural project for Warner and Village grossed $460 million worldwide and became the first film to sell 1 million DVDs. It went on to sell more than 30 million DVDs and videos and spawned two sequels, “The Matrix Reloaded” and “The Matrix Revolutions,” that are being released six months apart, on May 15 and Nov. 7.

Warner’s profit on the original “Matrix” is estimated by sources at about $250 million. Village, according to sources, made about $190 million in what turned out to be a life-altering experience.

“The first ‘Matrix’ movie allowed our company to exist for the first five years,” Berman said. “Being able to participate in a franchise like this allows you to defy the odds of staying in the game.”

And that doesn’t come cheap. Shot simultaneously over 270 days in New Zealand, the sequels cost more than $300 million to produce, and marketing costs will easily exceed $100 million.

To cover its half, Village restructured its finances, raising its revolving credit line to $1 billion through Canada-based CIBC World Markets. The increased borrowing power also is helping the company finance such upcoming Warner productions as “Catwoman,” starring Halle Berry, and director Wolfgang Petersen’s “Troy,” a $120-million epic adaptation of “The Iliad” starring Brad Pitt.

Having shared the cost of those films, Warner executives presumably will rest easier -- as long as they don’t lose sleep over the dollars that may ultimately be due their Australian friends.

“The issue that comes up on every high-budget movie is, ‘Can we accept this level of risk?’ ” said Sony Pictures Entertainment Vice Chairman Jeff Blake, whose studio carried all of “Spider-Man’s” $130 million in production costs but also kept the enormous profit from a hit that generated almost $1 billion in worldwide revenue.

“It was such a hard-fought battle to get the rights and to put together the right creative elements.... We just felt it was worth the risk.”