With the heads of Warner Bros. signing only two-year contract extensions, Time Warner Inc. Chief Executive Jeff Bewkes will focus on succession and how the movie and television studio should be managed in the face of tectonic shifts in the entertainment industry and a harsh economic environment.
The performance of the legendary Hollywood studio, with its rich legacy of producing cultural touchstones such as Looney Tunes and the “Harry Potter” series, will receive closer scrutiny as it becomes more important to the bottom line of parent Time Warner in the wake of its spinning off its cable TV systems.
At the same time, Time Warner must grapple with a movie and TV business that, after years of double-digit growth and spending, confronts mature markets being undercut by technology and the Internet.
For the last decade, studio Chairman Barry Meyer, 65, and President Alan Horn, 66, have jointly presided over Warner Bros. They have continued a tradition of dual management at the studio that has spanned more than three decades and four executive regimes.
Their tenure has been defined by placing bets on big-budget “franchise” movies such as “The Matrix” and costly TV dramas such as “E.R.” and sitcoms such as “Two and a Half Men,” all aimed at broad audiences and blockbuster status to reap huge rewards.
Bewkes said Tuesday that the stage for Meyer and Horn’s planned exit in 2011 -- he doesn’t rule out another contract extension, but most think it is highly unlikely -- was set last year during talks about their future. He said they agreed that the time was coming to step aside in favor of younger executives, but no definite end date had been set until recently.
“Together we decided we should extend their contracts to cover the time period,” Bewkes said.
The relatively short contracts, which are linked to each other, means that Bewkes has only about 12 months to line up possible successors at Warner Bros. Since becoming chief executive of Time Warner 14 months ago, Bewkes has moved swiftly to restructure the biggest media company in the world, which has been pounded by investors unhappy with its welter of unconnected assets.
So far, however, the onetime HBO executive has largely left the management of Warner Bros. in the hands of Meyer and Horn.
Bewkes said he would prefer to replace Meyer and Horn from within the company, but would consider outsiders. “We have a very strong bench at Warner Bros. and hope that the executives there will outrank any external candidates,” he said.
The top executives below Meyer and Horn are Jeff Robinov, president of Warner Bros. Pictures Group; Bruce Rosenblum, who heads Warner Bros. Television; and Kevin Tsujihara, who runs the studio’s home entertainment and digital initiatives.
Bewkes must also decide if he wants one chief executive to oversee all studio operations or carry on the tradition of co-chiefs. “In general, most companies do better when there’s a single source of decision-making and accountability,” Bewkes said. “But it’s not always the case,” he added, pointing to the positive experience with executive partnerships.
Meyer, who has worked at the studio 38 years, oversees Warner Bros.’ television and home entertainment groups. Warner Bros. has always boasted that it produces more TV shows than any other studio, currently more than 40 sitcoms, dramas, talk and reality shows, including “Gossip Girl,” “The Mentalist” and “The Tyra Banks Show.”
Meyer leaves day-to-day operations of the movie side to Horn, who has emphasized “tentpole” pictures that have included the lucrative “Harry Potter” and “Batman” franchises. The five “Potter” films have generated about $4.5 billion in worldwide ticket sales. Last summer’s “Batman” movie, “The Dark Knight,” grossed more than $1 billion worldwide.
The big-bet strategy, however, has a high bar for success. Warner’s most recent attempt to hit pay dirt has fallen far short of blockbuster expectations.
The R-rated graphic novel adaptation “Watchmen,” which cost the studio and its financial partners more than $200 million to make and market, has so far grossed $158.7 million worldwide.
Bewkes said Warner Bros. had delivered more than $1 billion in annual operating income for the last eight years. “They’re at the top of their game,” he said. After the spin-off of Time Warner Cable, the studio will account for 36% of Time Warner’s revenues, up from the current 23%.
The media giant’s greater reliance on Warner Bros. troubles some analysts.
“Even though the studio has been one of the most profitable of any of its competitors, the return on capital is the lowest in Time Warner’s portfolio,” said Laura Martin, a media analyst with Soleil-Media Metrics. “Wall Street would like to see Time Warner devote less money to the movies because of the high risk and low return on investment, and the current pressure on the DVD market makes the upside look more risky than any time over the past decade.”
Bewkes said it was unfair to compare the studio’s return on investment to other Time Warner businesses, such as its cable networks and magazine publishing divisions, because they require far less capital to operate.
Amid mounting financial pressure and the global economic crisis, Time Warner downsized and folded its New Line Cinema studio into Warner Bros. studio and last year shut down specialty film labels Warner Independent and Picturehouse. Bewkes estimated that those moves have saved the company hundreds of millions in overhead.
In January, Warner Bros. slashed an additional $100 million in costs by eliminating 800 jobs, or about 10% of its workforce. Despite strong DVD sales of “The Dark Knight,” Warner’s revenue for the most recent quarter dropped 11%.
Still, Bewkes, who is grappling with structural alternatives for AOL and is continuing to streamline Time and People magazine publisher Time Inc., says he is looking to expand Warner Bros. and continues to eye acquisitions of libraries and entertainment companies.
“We’re not cutting back on the investment or expansion of Warner Bros. so long as there’s a return on investment,” he said.