Wall St. Woos Film Producers, Skirting Studios (NYTimes, 10/14/06)

October 14, 2006
Wall St. Woos Film Producers, Skirting Studios
By LAURA M. HOLSON
LOS ANGELES, Oct. 13 — Since the birth of Hollywood, movie studio chiefs have been makers and breakers of careers, arbiters of taste and gatekeepers who decide which movies are made.
But as Hollywood power shifts more to Wall Street investors, financiers are starting to bypass studio bosses by dealing directly with successful producers.
Now, instead of deals being cut over lunch at Spago or the Grill, movies are increasingly being greenlighted in conference calls to New York.
The reason is a simple desire for more control. Wall Street financiers want a greater say over what movies they finance and who makes them; producers want more artistic independence and a larger share of the profits.
The studios themselves are nudging the trend along, too, since they are making fewer movies.
A result for moviegoers is that they could begin to see even more thrillers, comedies and horror movies at the multiplex — the types of movies Wall Street favors, because of their more predictable payoff.
Joel Silver, the producer of the “Lethal Weapon” and “The Matrix” movies, is the latest and most important Hollywood figure to cut a big deal with Wall Street.
He has just joined forces with a consortium of financiers who have agreed to provide $220 million to produce 15 films over the next six years. Mr. Silver will not only have creative control, he will own the movies outright.
“I’ve spent 20 years working for studios,” Mr. Silver said in a recent interview beside an L-shaped azure swimming pool at his Brentwood mansion, a home he referred to as the house ‘The Matrix’ built. “It was always their call.”
To his new partners, Mr. Silver seems like a good bet. In more than two decades as a producer on the Warner Brothers lot, he has produced 46 movies, which have generated $5.6 billion in global ticket sales.
Ivan Reitman, the director of “Animal House” and “Ghostbusters,” struck a $200 million deal with Merrill Lynch in August to produce 10 low-cost films. Tom Cruise and his producing partner, Paula Wagner, after splitting with Paramount Pictures over the summer, are in discussions with potential investors, as are several other producers.
“Hedge funds are picking out who they want to be in business with,” said Rob Moore, president for worldwide marketing, distribution and home entertainment at Paramount Pictures, who gets calls weekly from producers lining up money. “They don’t claim to know how to make movies. They are investing in a track record.”
But such investments are not risk-free, as others have learned. At least since the early 1980’s, studios have occasionally distributed and marketed movies financed by outsiders, some of them from overseas. In the late 1980’s, for example, Crédit Lyonnais famously backed a troubled MGM and Carolco Pictures, which went bankrupt.
Indeed, Hollywood is rife with stories of financiers who came to town with a pocketful of cash, only to leave empty-handed, except for a photograph of themselves with a smiling starlet.
But the new investors are hoping that with enough analysis, they can avoid the fate of some of their predecessors.
In deciding whether to invest with Mr. Silver, the investment firm CIT Group examined not only genre films he had produced, but similar films made by competitors, as well as a wide range of other movies. This style of movie financing has been driven by necessity. Studios have been forced to trim their slates because of higher costs, but they still need a steady stream of movies to distribute. In turn, producers need financing, because the studios are backing fewer films. And cash-rich financial institutions are looking for places to invest, hoping to earn double-digit returns while limiting their exposure to the fluctuations of the stock market.
“It’s a confluence of interests between the people with the cash, studios and producers,” Mr. Reitman said. “As Wall Street gets involved in movie financing, hedge funds don’t want to be ‘stupid money’ and want to align themselves with people who have a history of success. They are looking for a guide. They don’t want to be sold a script that’s been around for eight years.”
Studio executives, who earlier would have balked at such deals, are now open-minded. “I wouldn’t say it’s bad timing given where our strategy is going,” said Jeff Robinov, president of production at Warner Brothers, which, like many studios, is making fewer films. With Mr. Silver providing his own movies, Mr. Robinov said, he can focus on bigger films, like the “Harry Potter” and “Batman” movies.
And regardless of who finances the movies, the studios still make money from distributing them.
Two years ago, studio-slate financing was the toast of Hollywood, with hedge funds and other investors linking up with studios to co-produce films. But many of those deals have yet to pay off. In some cases, studios kept lucrative film franchises for themselves. In others, financiers picked the wrong movies to back.
“Here is a huge industry with a lot of capital,” said Wade Layton, managing director of CIT Communications, Media and Entertainment, referring to private investors. “First, they start off with studios as a way to get up to speed. Then you start to look for deals with producers.”
So far, Mr. Silver’s deal, which includes the investors J. P. Morgan and D. E. Shaw, is the most generous a producer has landed. Mr. Silver will produce a mix of horror, comedy and action movies that will cost $15 million to $40 million apiece to make. Mr. Silver’s Dark Castle Entertainment currently has enough money for eight movies and if those are successful, the revenue will be used to finance the remaining films.
The films are to be distributed by Warner Brothers Pictures, which gets a distribution fee. The first film to be released under the deal is “White Out,” an action thriller about a United States marshal who tracks a serial killer across Antarctica. It is to be released in 2008.
“I would never take a big movie to a financier,” said Mr. Silver, who also has a separate producing deal with Warner through 2009. “What do you say if you go over budget by $10 million? What do you say?”
“With these movies, 30 days and you are done,” he said, wiping his hands together.
Mr. Reitman’s Cold Spring Pictures — a venture among Mr. Reitman; his producing partner, Tom Pollock; Merrill Lynch; and two other investors — retains half the copyrights to its movies. Cold Spring must find a studio to distribute the films and put up 50 percent of the budgets. The financing is $50 million in equity and $150 million in debt. “We don’t want them telling us what to make,” Mr. Pollock said. “But we know if we don’t perform, they won’t be happy.”
Mr. Reitman’s group, like Mr. Silver, will share in 100 percent of DVD sales, which are often highly profitable, compared with an industry norm of 20 percent.
In return for giving up potential profits, financiers want to curb Hollywood’s notoriously wild spending. “We are not making investments for them to fund development,” said Michael Blum, a managing director at Merrill Lynch.
But Wall Street financiers are loath to meddle with the movie-making itself. And producers prefer it that way. “When bankers start reading scripts, you know you are in trouble,” Mr. Layton said.
Mr. Silver agreed: “I don’t mind if they come to premieres. If they want to come to the set, that’s fine — but I’m not making movies in L.A.” (Mr. Silver’s movies are filmed around the world.)
Two weeks ago, Mr. Silver invited his new backers to his estate, Casa de Plata, where they celebrated over sushi, roast beef sandwiches and cocktails. The same week, Mr. Reitman and Mr. Pollock took their partners to Cut, Wolfgang Puck’s new steakhouse, where, Mr. Reitman noted, Merrill Lynch, paid the bill.
“I don’t think any of them are in it for the glamour,” Mr. Pollock said. “They kept talking about their next big deal, which was recreational vehicles.”
But Mr. Reitman said his investors wanted the lowdown on John Belushi, Bill Murray and Dan Aykroyd in their younger days.
Did he share any gossip?
“A little,” Mr. Reitman said, smiling.