'Avatar,' 'Hangover' offer lessons to studios

Fox, Warners miss out on revenue due to co-financing deals

Everyone knows that 2009 was a bad year for most of us, at least financially speaking, and a great year for pictures. Boxoffice gross and ticket sales grew to more than $10 billion and 1.4 billion, respectively. Ticket sales were the most in five years, though that was below the modern record of 1.6 billion set in 2002.

As the movie business looks at the possible lessons of 2009 in hope of learning from them in 2010, here's what we know (until this year shows that we know something different):

-- When the going gets tough, the tough go to the movies;

-- The adult drama ("State of Play," "The Informant!") is over;

-- Not every toy, comic book and graphic novel works as a movie (see "Speed Racer," "Astro Boy");

-- Torture porn is done ("Saw");

-- There can be one too many vampire movies ("Daybreakers" -- even the undead have a shelf life);

-- And Sandra Bullock is back, but Meryl Streep never left.

It's instructive to remember that everything released last year was greenlighted in 2008 or before, which meansthe studios knew as much in 2008 about what would work in 2009 as they do about what will work this year. As always, it's a gambler's business, and the biggest lessons can be found in what now is the biggest picture of all time, "Avatar," and in the biggest R-rated comedy to date, "The Hangover."

The theatrical success of both was a return to the good old days, when video really was ancillary and every movie wasn't co-financed by Relativity Media.

The similarities between "Avatar" and "Hangover" are more than that one stars 10-foot blue people and in the other they dream about them. Both cost more than their studios were comfortable with but ended up being wildly successful at the boxoffice and hugely profitable for studios and talent.

They also had financing partners who will see a nice return, which means that Fox and Warner Bros., respectively, missed out on a lot of bottom-line revenue.

"Avatar" is what happens when you go all in. It's like breaking the bank -- bigger than anything Danny Ocean did to Terry Benedict (maybe in "Ocean's Fourteen," the guys should run a studio). What's interesting is that unlike 1997, when the scarily overbudget "Titanic" caused speculation that Fox brass -- studio chairman Bill Mechanic, maybe even vice chairman Peter Chernin -- were set to lose their jobs and caused Fox to sell half the pic to Paramount for $65 million, the $300 million-$400 million that "Avatar" cost (not including P&A, video costs and residuals, so add another $300 million) caused little stir.

The enormity of the decision to make "Avatar" is stunning. Beyond the money and new filmmaking technology, what "Avatar" affects most is the decisionmaking process.

In the movie business, what doesn't get you fired makes you stronger -- and more apt to do it again.

Hollywood repeats its mistakes endlessly because it forever toils under the relentless burden that it can repeat its success. The problem is, as an executive, what do you say next time to the filmmaker who has grossed everything -- twice? "Yes," I suppose. Perhaps "thank you," as well.

"Avatar" bet not only the farm but also the whole county. The good news is that Fox doesn't have to worry about saying yes to Cameron for another decade or so, but what about the successful filmmakers who are Cameron-adjacent? It's now a little harder to tell them no.

If the lesson of "Avatar" is believing too much -- because you really have to scary believe to greenlight a picture at those numbers -- "Hangover" is a case of not believing enough. Warner Bros. didn't like the no-star cast at $35 million, so they told Todd Phillips to give up his first-dollar gross in exchange for bigger post-breakeven participation with better video accounting and bring in a financing partner for half the budget.

But $467 million in worldwide theatrical gross and 9.5 million DVD and Blu-ray units later, and Phillips reportedly will make $45 million. Now every director wants the "Hangover" deal.

In hindsight, it probably wasn't such a good idea to have financing partners on "Avatar" or "Hangover." The point of co-financing is either to reduce a studio's risk on a particular project or, if it is done across a slate of pictures, to allow the studio to limit investment while still making the requisite number of pics to efficiently allocate its overhead. In the latter case, it's a business model. In the former, it's buying insurance, and the issue is more whether the right person is picking the pictures to be laid off.

For "Hangover," the cost of the insurance -- laying off $17.5 million in production costs on a broad comedy versus the multiple of that sum that goes into the coffers of Legendary Pictures -- wasn't worth it.

At Universal in the late 1990s, when Edgar Bronfman Jr. lost his taste for the movie business, foreign rights on "American Pie" -- a $10 million teen comedy -- were sold for $5 million, and Sony was brought in for half the budget and foreign rights on "Erin Brockovich," a $50 million Julia Roberts picture, after it was completed.

Conventional wisdom would say that those decisions were dumb. But in Hollywood, there is nothing like conventional wisdom, only what seems to make sense at the moment. That's the problem when you have temporary help making permanent decisions.

At the high and low end of the budget spectrum, a studio might as well take all the risk. It's the $50 million-$100 million midrange picture without stars where the real risk lies. While financing partners can shoulder a lot of the losses in failure, that's not really why you're making such pictures as "Avatar" or "Hangover." With studios being owned by large corporations, no one bad year, or two or three, is enough to sink the ship. Just the captain.

Yes, risks in the movie business are enormous, but if you're going to roll the dice at the high and low end, you might as well play to win.

Jeffrey Korchek, vp legal and business affairs at Mattel, worked for years at Universal Pictures as executive vp business and legal affairs. He is an adjunct professor in the Peter Stark program at the USC School of Cinematic Arts.
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