Economic retrenchment may hurt specialty movies

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On a cold February day in Manhattan, Picturehouse president Bob Berney was just sitting down to lunch in a small Greek restaurant when his BlackBerry buzzed.

Berney never got the chance to eat. And if he had known why he was being summoned to the midtown offices of Picturehouse co-parent New Line Cinema, he may well have lost his appetite. That afternoon, a tearful Bob Shaye informed New Line's executive committee that he would be exiting the company he had founded decades before.

"It was very emotional," Berney recalls, "and in typical Bob Shaye fashion, he was very cheerful and sad and highly emotional and crying."

A lot more people would be crying soon.

The downsizing of New Line was the first sign of a massive retrenchment at nonmajor film companies that continues to roil the sector and has left a question mark about where the money will come from for future art house films. Within weeks, Time Warner had dramatically shrunk New Line and pulled the plug outright on Warner Independent Pictures and Berney's own Picturehouse.

A bit later, Paramount severely slashed its specialty label Vantage, bringing distribution, marketing and physical production under the studio fold -- and pink-slipping most of its 100-odd staffers. This month, MGM's United Artists parted ways with CEO Paula Wagner amid industry concerns -- denied by the studio -- that Merrill Lynch might find a loophole to back away from its $500 million commitment.

"This is like a 7.1 earthquake, and it's going to do a lot of damage," says Mark Gill, the former head of Warner Independent and president of the upstart production house the Film Department. "It is going to be a much smaller business. There will be a lot of lost jobs and opportunities, and it's going to be calamitous and wrenching."

The shift has led to some awkward situations behind the scenes.

Most Vantage staffers learned they were getting the ax via media reports. After the firings, president Nick Meyer had to summon his remaining employees to Paramount's Sherry Lansing Theater for a pep talk, noting the company's strong international sales and promising that the division would still make two prestige films a year -- much less than before.

"We created a brand, got 26 Oscar nominations and helped Al Gore get a Nobel Peace Prize," says one disgruntled departee. "It's sad that it all comes down to how (former Vantage topper) John (Lesher) overspent. We were in Year 2 of a five-year plan and we were on target, but the company didn't have the stomach to stay on course for five years."

Meyer calls that assessment a "gross simplification," citing the importance of flexibility in a tight credit market and a struggling economy.

While Melrose Avenue habitues were grousing about Vantage, Burbank insiders were buzzing about the final days of the Time Warner divisions.

As late as the week before Picturehouse and WIP were folded, Warner Bros. president/COO Alan Horn and Warner Bros. Pictures Group president Jeff Robinov were entertaining several scenarios. Perhaps Picturehouse would merge with WIP under the joint leadership of Berney and WIP's Polly Cohen. They responded with several presentations to the Warners brass, using spreadsheets to pitch why it made financial sense to keep the two companies, whose joint operating expenses were less than the cost of a few days' shooting on "The Dark Knight."

With a staff of about 30, WIP cost roughly $7 million a year to run, sources say; Picturehouse, with 43 employees, had operating costs of around $9 million. Nor was either spending vast sums on making films.

"They just didn't want to be in the indie sector at all," Berney believes.

Across town, studio sources were blaming Wagner's departure on losses from UA's one and only release under Wagner and Cruise.

"They lost $50 million on 'Lions for Lambs,'" says one rival executive. "They are worried. Part of the reason for all the paralysis there was not just Paula's inability to get things going, but also their fear of triggering something that would cause the money to go away." (Reps for UA declined to comment on that figure.)

The fear is spreading to other indies, with good cause. Despite a recent influx of money into the movie business, some companies are having trouble accessing it.

First Look Studios owes Prentice Capital Management around $30 million, which is accruing nearly $2 million in interest per year, according to Avi Lerner, co-chairman and CEO of Millennium/Nu Image, which owns a big chunk of the company. First Look, which has downsized from 150 to less than 80 employees, also owes money to some eight to 10 producers of films it has released. Last week, Lerner asked Merrill Lynch to help Prentice convert the money it is owed into stock to eliminate the debt.

Similar cash-flow problems have plagued David Bergstein's ThinkFilm and Capitol Films, and the Weinstein Co. is rumored to be hurting -- though it has been helped by signing a pay-TV deal with Showtime.

Even so, "when Harvey and Bob start looking for co-financiers for a Quentin Tarantino movie, you know they are in trouble," quips one former colleague, referring to the upcoming "Inglorious Bastards," which will be only half-funded by the Weinsteins and released by Universal. "Harvey said many times, 'This is the house Quentin built.' If it is, why are they selling the film?"

Actually, the house Quentin built is Miramax Films, the Weinsteins' former company and one of the few specialty labels that seems secure for the moment.

The Walt Disney Co., which has cut back on its feature film releases over the past few years, has strongly backed the division and its president, Daniel Battsek, who survived a string of prestige bombs in 2006-07 to score a run of financial and Oscar-winning successes like "The Queen" and "No Country for Old Men."

Fox Searchlight, the most successful specialty division, has had a great year thanks to its $143 million-domestic-grossing baby "Juno" and its avoidance of dark, auteur-driven dramas like "A Mighty Heart," which won star Angelina Jolie kudos but cost $16 million and left Vantage on the hook when the film did little business.

Universal's Focus Features also appears to be hanging in there. Its CEO, James Schamus, insists it is profitable, despite rumblings among high-level agents that it is slow to greenlight movies.

"For the past five years, Focus has consistently produced and fully financed in-house far more movies than any other specialty division," Schamus says.

Focus also has the backing of David Linde, the Universal Pictures co-chairman who used to be Schamus' partner. But even there, marketing and distribution for genre division Rogue Pictures was transferred to Universal, a move that Focus president and Rogue co-president Andrew Karpen says capitalized on its parent's strength in genre releases.

Sony Pictures Classics is doing what it has always done: scooping up a surprising number of titles this year for bargain prices.

But many observers believe these labels' corporate parents are looking at them more carefully than before, concerned that the cost to make and market a specialty release is more than twice what it was when most of the divisions were launched in the late 1990s and early 2000s.

The price of those movies helps explain why there is less enthusiasm about the specialty business -- even though overall boxoffice returns have been better than most recognize.

Boxoffice from the nonmajors rose 24% from July 2007 through June 2008, compared with the year before, far surpassing their 10% rise in releases. And even if one removes the top three earners from each period (including "Juno"), there is still a 19.5% boxoffice jump.

Perhaps to protect themselves, the specialty divisions that remain in the business are increasingly pursuing a diversified slate -- and bypassing the festival circuit to move into genre product.

Fox Searchlight COO Steve Gilula says the poor acquisitions market is not due to a lack of interest from distributors.

"We're in a down cycle of creativity," he shrugs. "That's the real thing no one wants to talk about. I wouldn't call it a creative crisis, but there seems to be a creative malaise."

It's not lost on rival execs that seven of the top 10 all-time hits for Searchlight have been comedies. Or that genre films are a traditional powerhouse in the DVD/ancillary market. Or that the top indie distributor is the lower-budget, genre-heavy Lionsgate.

Not surprisingly, Miramax, which lost its genre arm, Dimension, to the Weinsteins when the brothers departed Disney in 2005, is developing its first Battsek-era horror film with Guillermo del Toro and has several other upscale genre titles in development.

"I'm always looking for films that have the ability to cross over from the art house to the mainstream," Battsek says. "Certain movies are not as likely to perform, and one has to keep those to a minimum."

And there's the rub. In keeping those unlikely performers to a minimum, will the specialty divisions end up making the kind of safe, commercial movies that typically come from their big brothers? Is the art house film going the way of the silent movie?

Schamus says no, though he acknowledges that even the talent is opting for more accessible fare.

"A lot of it is our talent saying, 'This is what we want to do,'" he says.

So far, companies like Focus are continuing to back provocative films such as "Milk," the story of assassinated San Francisco politico Harvey Milk, which is expected to be an Oscar contender this year. But Focus has three comedies, two animated films and a foreign-language thriller dominating its current non-Rogue release slate.

Other companies like the newly expanded Summit Entertainment and Overture Films are also stepping into the fray. Summit is expected to launch a specialty-style division of its own, and Overture, which had an indie hit with this summer's "The Visitor," is mulling a venture that would take advantage of its video sibling companies for smaller-budget films.

If the specialty business does diminish further, or even entirely, there may be a silver lining: less competition for other deep-pocketed companies.

"There is the anticipation that the absence of these companies will create distribution openings for other companies' product," says Independent Film & Television Alliance president and CEO Jean Prewitt.

However, "the fact that there's a lot of fear in the independent film world probably means that there's going to be a lot less movies over the next 12-18 months," says producer Michael London of Groundswell Prods.

Stephen Galloway contributed to this report.
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