'The Hobbit:' Inside Peter Jackson and Warner Bros.' $1 Billion Gamble

9:00 AM PST 10/17/2012 by Kim Masters
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"The Hobbit"

An army of filmmakers in New Zealand worked to bring J.R.R. Tolkien's world back to life -- on some 99 sets, with hundreds of props and truckloads of Russian hair because, the filmmaker tells THR, "we felt a certain ownership over Middle Earth."

This story first appeared in the Oct. 26 issue of The Hollywood Reporter magazine.

On a sloping slab of artificial woodland surrounded by enormous green screens stands an old wizard and 13 elaborately bearded dwarves. Bilbo Baggins -- played by Martin Freeman, known to American audiences as Watson in the BBC's Sherlock and, before that, the lovelorn salesman in Ricky Gervais' original The Office -- eavesdrops from behind a tree as dwarf leader Thorin Oakenshield (Richard Armitage) scornfully denounces him for deserting his comrades in arms. "We will not be seeing our hobbit again," sneers Thorin at Gandalf (Ian McKellen). "He is long gone." At an imposing 6-foot-2, Armitage doesn't look especially dwarfish, but it's only late July. By Dec. 14, when The Hobbit: An Unexpected Journey unfolds on the big screen, Armitage and the others will look appropriately small thanks to a bag of old and new cinematic tricks.

PHOTOS: The Hard Road to 'The Hobbit'

Watching on a monitor, tucked out of sight, is Peter Jackson, the magician of Middle Earth. He had to overcome many reservations and obstacles before occupying the director's chair on this massive project, among them the challenge of competing against himself. The Lord of the Rings trilogy grossed nearly $3 billion, and the final installment, 2003's The Return of the King, swept up 11 Oscars, including best director and best picture.

If ever a wager on a project seemed like a safe bet, The Hobbit would be it. Otherwise, no studio would have found the will to tackle the enormous problems involved in getting these movies made. (Originally intended to be two, now there will be three.) Not only was Jackson long unwilling to commit, but the rights to the material were bound in a decades-old Gordian knot. Getting it all sorted out involved epic battles matching any spectacle that Jackson previously had put on the screen -- if you substitute executives and lawyers for elves and orcs.

The films are based on a 1937 novel by J.R.R. Tolkien (who followed with the trilogy The Lord of the Rings). The Hobbit, which recounts the adventures of Bilbo Baggins and his quest for treasure guarded by the dragon Smaug, has sold more than 35 million copies.

As the actors finish a take, Jackson's voice booms, godlike, through speakers on the set. Fortunately, he's a polite deity. "Can you just be a lot more panting at the beginning?" he asks the dwarves. "All of you are puffed." After all, they have just escaped the jaws of death. On cue, their chests start to heave. "OK," says Jackson. "Panting, panting, exhausted and action!"

Panting, exhausted and action. That could be the motto of the making of The Hobbit.

STORY: Ian McKellen Almost Didn't Return as Gandalf in 'The Hobbit'

In the easygoing harbor city of Wellington, New Zealand, the 50-year-old Jackson is the unassuming master of all he surveys. His empire is spread throughout the modest suburb of Miramar: The Weta Workshop (named for an outsized New Zealand bug) creates armor, costumes and weaponry. It also has engineered vehicles for games and movies, including a working Panzer; it even creates public art works. Jackson's Weta Digital has done effects work on Avatar, Rise of the Planet of the Apes and the Narnia movies; Park Road, set in an impeccably appointed arts and crafts-style building, is Jackson's state-of-the-art postproduction facility.

Jackson's brilliance is made manifest in this empire -- as is his penchant for control. Not that Jackson isn't collaborative -- up to a point. On 2005's King Kong, says an insider, Jackson surprised Universal by delivering a three-hour cut after the studio had thought a shorter version was locked. Jackson included 20 unexpected minutes, requiring $20 million worth of additional effects. The director split the expense with the studio, and the fact that he was reducing his own profit participation was immaterial to him. "It wasn't a big drama," says Jackson's longtime manager, Ken Kamins. "He's immensely collaborative -- final cut or no."

Of course, Jackson is among the few who have earned the right to exercise an auteur's prerogative. So he lives on the far edge of the world, thousands of miles away from meddlesome studio executives, encircled by a group of longtime collaborators, including wife Fran Walsh (with whom he has two teenage children who cameoed in Lord of the Rings) and Philippa Boyens, who serve as his co-writers and co-producers. This community might be a bit clannish, but the motives are pure. "They don't seem corrupted even though they are power conscious," says an executive who has worked with Jackson and his team. "They do love movies. They work around the clock."

PHOTOS: Meet 'The Hobbit's' Key Characters

That commitment helps to explain how Warner Bros. can feel remotely comfortable putting up the better part of $1 billion to make and market not two but three Hobbit films. A knowledgeable source says the first two installments cost $315 million each, and that's with Jackson deferring his fee. A studio source insists that number is wildly inflated and, with significant production rebates from New Zealand, the cost is closer to $200 million a movie. (The budget on the third film still is a wild card, but one reason a third movie was even discussed was because Jackson had shot more footage than two films could contain.)

Weta Workshop creative director Richard Taylor, among the many here who have worked with Jackson for years or even decades, speaks with awe of the director's ability to execute these films despite their harrowing complexity. That struck Taylor back when he first worked for Jackson as a puppet maker on 1989's black comedy Meet the Feebles. "Peter sat on his couch with his eyes closed and visualized what the movie would be," he says. "His ability to weave together [in his mind] all these invisible elements on a blue screen or a green screen was completely within his repertoire of skills even then." Jackson "sees" how invisible creatures will fill space and interact with their environment, from a cowering Gollum to Smaug. "This is a very clever filmmaker," says Taylor. "It's that simple, in my view."

PHOTO: 'Hobbit' Poster Reveals a Sword-Wielding Bilbo

This time, Jackson is seeing Middle Earth through a different lens. He's working digitally and in 3D. He also made the now-controversial decision to shoot at 48 frames-a-second, which delivers a larger and sharper focus than the usual 24 frames, creating what Jackson sees as a more vivid audience experience. That provoked some negative reactions when Jackson showed 10 minutes of Hobbit footage at CinemaCon in April, with some critics complaining that the daylight sequences were too crisp and looked more like high-definition video than film. Jackson says the new look just takes some getting used to, but the studio is releasing that version of the film only on about 400 well-equipped theaters (out of about 4,000), where it can be pitched as a premium offering.

Working with the new technology meant that many old-fashioned effects techniques -- like using forced perspective to make characters appear larger or smaller -- no longer were useful. But restocking his bag of tricks only was attractive to the director. ("The only reason I started making movies was a love of special effects," he says.) What worried him about making Hobbit was the material. There was the question of balancing the tone: Hobbit is a children's fable, while Jackson felt he was steeped in the darker shades of Lord of the Rings, which is about the dehumanizing influence of technology and valor in the face of war's horrors.

More daunting was the multitude of characters in the book -- no fewer than 13 dwarves, who had to be distinguishable to audiences even at a distance -- as they join forces with Bilbo and the wizard Gandalf. A big part of the solution was not a new computer trick but hair -- lots of it. All the dwarves wear wigs made of human hair imported from Russia, which has the right texture for characters that have a Northern European look. For the dwarves alone, there were six wigs and eight beards each (wigs for the actors, wigs for stunt doubles, wigs for stand-ins who are small in stature and who appear in scenes shot to establish scale). "I've never done such a hairy movie," says makeup and hair designer Peter King. "Everywhere you look, there are tables and racks of wigs and beards."

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