Ryan Kavanaugh's Theory of Relativity

 

Looking back, Kavanaugh says that he felt the movie business was inefficient and not taking advantage of modern business techniques. Not only did he use a sophisticated computer system to analyze projects; he also operated with fewer executives at every level. He made producers, actors, directors and writers his partners by cutting them in on a meaningful piece of the back end.

Output deals in 110 countries (more than any company in history) guaranteed a hefty chunk of each picture's budget. Then Kavanaugh cut an innovative deal with Netflix to stream Relativity's movies -- in place of traditional pay TV deals.

With financing deals across town, Kavanaugh more recently thought of expanding into distribution, in effect making Relativity a full-service studio. Overture gave him the experienced group he needed.

Today, Kavanaugh's bold thinking has placed him at the epicenter of the business, a man with co-financing deals at two major studios, Sony and Universal. And yet the industry remains skeptical about him.

Much of the skepticism surrounding Kavanaugh centers on two things: How he has continued to succeed, when many of the movies he has backed haven't; and the nature of his relationship with Elliott Management, an $18 billion New York hedge fund, which since 2008 has owned a sizable minority stake in Relativity and invested more than $1 billion in it, according to Kavanaugh. "During the past year, Relativity has continued to build a financially focused and creative studio," Elliott's Cohn says. "With an impressive upcoming slate and innovative distribution and marketing capabilities, Elliott looks forward to a successful partnership in the future."

So why do people still have their doubts?

Getting a ticket for having a DUI and living a lifestyle palling around with movie stars hasn't helped. Nor has his hesitancy to be more forthcoming about his economic model: "Our business plan," he says, "is not to tell anybody our business plan."

But then he does. Asked to explain how his films can be profitable when many seem to have performed weakly at the box office, he cites his 2009 movie "Brothers," released through Lionsgate, which grossed a modest $36 million worldwide. Kavanaugh insists it was profitable for Relativity, which sold foreign rights for about $23 million and received a tax credit of $3 million on a picture that cost roughly $25 million. Relativity, he says, was in the black before "Brothers" even opened domestically.

"No one in the press would write, 'Wow! How great this is!' " Kavanaugh complains. "But we saw we could change the model and said, 'Let's make movies in a way where, if they hit the low-end scenario, we still make money.' "

That meant keeping negative costs for most of his films down to $30 million-$40 million; keeping his organization lean; and expanding into areas from music to merchandising. But the real key, he says, was securing marquee names without paying marquee salaries or first-dollar grosses. "A business where I can lose $20 million but have to pay a $20 million bonus doesn't make any sense," he says.

What does make sense is to have more control, in all areas.

Kavanaugh is already planning to phase out financing entire studio slates.

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