Relativity Media chief won’t just share the risk with Hollywood studios anymore

For the last five years, Ryan Kavanaugh has been one of Hollywood’s go-to people to share the risk on movies.

The chief executive of Relativity Media has invested in 138 films, most of them at Sony Pictures and Universal Pictures, where his company has long-term agreements to co-fund 75% of both studios’ film slates.

Co-financing movies can be an easy way to lose money — a large reason the flood of private equity funds that flowed into Hollywood several years ago dried up. And Relativity has seen the downside in the last couple of years through its association with a string of money losers from Universal, including “Land of the Lost” and “ The Wolfman.”

But backed by more than $1 billion from New York hedge fund Elliott Associates, Relativity has hung in and is turning into a self-sufficient studio. In July it took over the marketing and distribution operations of Overture Films, allowing it to directly release the growing number of movies it produces.

Over the summer, Relativity became the first studio to sign a deal exclusively providing all of its movies to Netflix during the pay-TV window historically reserved for channels such as HBO and Showtime. It also made a pact with Richard Branson’s Virgin Group to jointly produce pictures.

This Friday Relativity has two movies hitting theaters: Facebook drama “The Social Network,” which it co-financed with Sony, and vampire drama “Let Me In,” which it acquired from Overture.

Kavanaugh spoke to Company Town about why he thinks Relativity can do a better job marketing and distributing movies than the studios and the future of his co-financing deals.

Why move from the risky business of co-financing movies to the even riskier business of financing and releasing them?

It actually eliminates a significant amount of the risk from a control and financial perspective and takes the margins on the business from just OK to very good. When we were making two or three movies a year, it was easy to use third-party distribution and pay them a fee. When you start getting into the volume of movies we’re doing — 12 in the next year — you’re getting to a level where no matter how much the studio likes you, they can’t treat your movies the same way as theirs.

So how will Relativity be different from other Hollywood studios?

We have the advantage of starting from scratch in the world of digital distribution and marketing, utilizing viral and other online assets and communities. These are systems and structures that did not exist 10 years ago, and certainly weren’t an idea 80 years when studios were formed.

Our Netflix deal is by far the best pay-TV deal in the business, and unlike other pay-TV deals it doesn’t restrict us whatsoever on digital sell-through. That creates a new revenue stream which most other studios are restricted from and thus gives us an extra profit boost.

For the last couple of years you have been tied to Universal, which has had some poorly performing films. How much of a drag has that been on your bottom line?

Every studio has up years and down years. That’s why we enter in long-term multi-studio deals. We have a deal with Universal and a deal with Sony. One may have a good year and one may have a bad year, but they balance out. Universal also had “ Mamma Mia,” “Fast and Furious,” “Wanted” and “Despicable Me,” all of which we made good money on.

Your deal with Sony is scheduled to end in 2012 and with Universal in 2015. Do you think you will continue co-financing films at those studios? And how might Comcast’s pending ownership of Universal affect your deal?

We’re eager to see what happens with the merger, and no decisions as to our co-financing future with them have been made. Our business has been inverting so we currently make more movies than we co-finance. I don’t want to say we won’t ever co-finance again. However, it will not be in the same manner that you’ve seen in the past.

Does Elliott subsidize your business? And would you consider teaming up on another large potential acquisition like MGM?

We are self-sufficient and don’t need or use Elliott’s capital to operate. That said, they are fantastic partners who have obviously invested a significant amount of money. Going forward, if we find large acquisitions that would be in excess of our cash resources, we would partner with Elliott.

Now that you’re making more of your own movies, what are your criteria?

We don’t say that we don’t make this genre or this budget. We just focus on creating commercially appealing properties whose worst-case scenario is a break-even.

You broke even on the box-office flop “MacGruber”?

There are movies we’ve lost money on, no question about it. Unfortunately, overall our business is judged on who’s No. 1 at the box office, but that is not an indicator of success. It used to be, when home video and video on demand and other windows didn’t exist, but now it’s 20% of your pie or less.

ben.fritz@latimes.com