Warner Bros. Tries to Get in on Niche Action

As Warner Bros. President Alan Horn watched his company drift once again toward the rear of the annual Oscar race this year, he knew the time had come to take a step the studio had long been mulling over.

Over the next few months, the Burbank giant will finally launch a so-called specialty film unit, focused squarely on the sort of pictures that reap plaudits as well as profits.

“Let’s just say,” remarked Horn, who makes no secret of his frustration that Warner has lagged on the prize circuit while becoming a factory for franchises such as “Harry Potter” and “The Matrix,” “with my tickets to the Golden Globes this year, they sent me binoculars.”

When Warner, a unit of AOL Time Warner Inc., gets the new division up and running this spring, it will become the last of Hollywood’s major studios to enter a business that only a dozen years ago was scorned by all.

Viacom Inc. with its Paramount Classics, News Corp. with Fox Searchlight, Vivendi Universal with Focus Features, Sony Corp. with Sony Pictures Classics, Walt Disney Co. with Miramax, and Metro-Goldwyn-Mayer Inc. with its revamped United Artists all have joined an increasingly heated pursuit of sophisticated, low-cost films to supplement their mainstream fare.

Corporate Hollywood has often been criticized for its seeming obsession with mindless remakes and sequels. Yet these specialty units, many of them relatively new, have worked a quiet revolution by fostering varied and often brilliant films inside the media world’s biggest conglomerates. Witness, for instance, the critical accolades heaped on Focus Features’ “The Pianist” or Sony Pictures Classics’ “Talk to Her.”

“Hollywood is not stupid; they see there’s a business in these pictures,” said Michael Barker, co-president of Sony Pictures Classics. “It enhances the overall value of the studios’ libraries.”

Specialty units still account for only a fraction of the motion-picture box office. Fox Searchlight, one of the most successful, generated only about $133.8 million in U.S. ticket sales last year, with such pictures as “Kissing Jessica Stein,” “One Hour Photo” and “The Good Girl.” By contrast, 20th Century Fox -- now sometimes called Big Fox by insiders, to distinguish the studio from its independent-minded sister -- was seven times bigger at the box office, thanks to blockbusters such as “Star Wars: Episode 2 Attack of the Clones” and “Ice Age.”

Yet the rush to build specialty divisions has been driven by evolving demographics and maturing tastes: Fully 40% of the movie audience is now over 40, with aging baby boomers still a powerful market force.

The trend also owes much to the enhanced prospects that exploding DVD and cable revenue can be expected to lend to even a modest success in the mold of UA’s “Bowling for Columbine,” not to mention the lure of a breakout hit such as Sony Classics’ “Crouching Tiger, Hidden Dragon.” Two years ago, “Crouching Tiger” took in more than $128 million in U.S. ticket sales.

While studios routinely spend $200 million or more to make and market blockbusters, their small films are typically produced for $10 million or less or purchased from outside firms for prices that usually range from $100,000 to $4 million. The companies generally reduce risk by keeping their marketing costs under $5 million, unless a picture, having opened in a few theaters, appears strong enough to support the expense of wider release.

Small-film economics are sufficiently delicate that most specialty outfits operate on razor-thin profit margins, despite help from stars who often slash their fees to work in prestige projects. Even a winner such as Fox Searchlight -- which gets a boost from News Corp.’s behemoth video, cable and satellite distribution networks -- is poised to turn a cumulative profit of only about $50 million on its last 13 releases, according to industry sources. And the verdict is still out as to whether its “Antwone Fisher” will ever make a buck.

Fox Searchlight President Peter Rice, while confirming that his recent slate has been profitable, declined to discuss specifics. He noted that News Corp.’s international muscle is crucial to the unit’s health. “We’re not just trying to make money in North America, where margins are very narrow,” Rice said.

According to several executives, discipline is the key to survival in the specialty business.

“If you manage the business right, limit your investment and don’t go crazy with marketing, generally you can limit your losses” to between $2 million and $4 million in the event of “disaster,” said MGM Vice Chairman Chris McGurk, who helped put MGM, Disney and Universal into the specialized movie business. With a success, McGurk added, “you can get a nice return.”

Robert Friedman, who manages Paramount Classics as vice chairman of Paramount Pictures Motion Picture Group, agrees that the trick is to keep small films small. “If you have minor successes or minor failures, it doesn’t throw your business out of whack,” Friedman said.

Restraint is crucial because mass hits remain a rarity among niche-oriented distributors.

“The highway is littered with carcasses of films that didn’t perform,” said Amir Malin, head of Artisan Entertainment. Artisan made a financial killing by turning its $1-million acquisition of the 1999 horror “mockumentary” “The Blair Witch Project” into a $142-million box-office hit. Yet the company hasn’t had another breakout film since.

Some studio specialty units have hedged against the possibility of dry spells by paring expenses almost as ruthlessly as the toughest independents. Thus Barker and his partner Tom Bernard at Sony Pictures Classics occupy two small offices at their parent company’s Manhattan headquarters, where they share an assistant and make do with 18 employees.

“It sifts down from the personality at the top,” Bernard said of his unit’s bare-bones style. “World view has a lot to do with the execution.”

At least one conglomerate-run specialty unit -- the Fine Line Features division of AOL Time Warner’s New Line Cinema -- finds itself struggling. Fine Line President Mark Ordesky acknowledged that the 12-year-old operation “hasn’t been profitable,” though he denied speculation that it would fold or become just a label for New Line.

“In the course of the last year, we’ve completely reoriented,” said Ordesky, who added that Fine Line will more often produce films and exploit them worldwide, rather than simply acquiring U.S. rights.

As recently as the 1980s, studios simply closed their long-standing classics divisions, rather than wrestle with tricky economics that rarely produced hits to rival their action and comedy blockbusters. The market for lower-budget, adult-oriented dramas and sophisticated niche movies was eventually left to entrepreneur Harvey Weinstein and his New York-based Miramax Films, along with a few others.

In 1993, however, Disney purchased Miramax. It then validated its purchase the next year with the runaway success of “Pulp Fiction,” which racked up $212.9 million in worldwide ticket sales.

“Blair Witch,” “The Full Monty” and, most recently, “My Big Fat Greek Wedding” eventually convinced even the most skeptical studio executive that such films, driven more by reviews, publicity and word of mouth than expensive TV ads, were too lucrative to ignore.

“We have found ourselves not participating in an increasingly important part of the business,” Horn said recently of his studio’s decision to jump in.

Under Horn’s predecessors, Robert Daly and Terry Semel, Warner sometimes scored big with inexpensive, sophisticated fare -- most notably “Driving Miss Daisy,” which won four Oscars, including the Best Picture award, in 1990. But the studio had no separate apparatus for finding and selling such projects.

That will now change, in no small part because of the uneasiness Horn felt when he read filmmaker Todd Haynes’ “Far From Heaven” screenplay and passed because Warner wasn’t positioned to support small films. “We didn’t feel it would fit with our strategy of putting together mainstream movies,” said Horn, who believes that niche pictures are a key to finding fresh talent.

The drama, which stars Julianne Moore and Dennis Quaid, eventually went to Vivendi’s Focus Features, for which it has garnered four Golden Globe nominations and an armful of critics’ prizes.

By next year’s awards season, Warner’s new specialty division should be set initially to release three to five small movies annually, and will be scrambling against the rest of Hollywood for the next “Far From Heaven.”

That holds promise for viewers who sometimes crave more than big “popcorn” hits. And it even pleases Weinstein, who appears not to mind the added competition.

“It’s great to see that the contributions of smaller, innovative films,” he said, “are being recognized by the entire industry.”