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Ryan Kavanaugh's Theory of Relativity

Ryan Kavanaugh's secret to success
Relativity's Universe: The companies that orbit Kavanaugh's empire
Hits and Misses: Relativity Media's five best and worst box office showings
Timeline: Ryan Kavanaugh

It's late afternoon in the middle of the week and Ryan Kavanaugh leans back in a glass-walled Beverly Hills office, dressed in his usual uniform of jeans, white shirt, white socks and blue sneakers, unfazed about the "s*** [people] talk about me."

His casual clothing has come to define him as much as Armani suits once defined CAA. Jesse Cohn, his mentor at Elliott Management (Relativity's primary Wall Street backer), recently presented him with a puppet replica of Albert Einstein sitting in a director's chair, wearing the same outfit. Cohn also wrote a check for $50,000 to one of Kavanaugh's favorite charities, Art of Elysium.

At 35, this former hedge-fund operator has made and lost far more than that $50,000. Now a multimillionaire and unexpected power broker, he has become one of the primary financiers of Hollywood feature films and is launching his own distribution company. It is for his boldness in approaching the movie business that The Hollywood Reporter this year has named him the recipient of its Leadership Award.

He's an unlikely leader, by his own admission -- not remotely like the man he idolizes, Einstein, whose theories gave rise to his company's name, Relativity Media.

"Einstein was the revolutionary of his time," Kavanaugh says. "It's not just that he created different formulas in physics; he did it against everybody telling him it was impossible -- which is kind of how we feel about [show] business. Everybody is telling us -- particularly when I started -- 'You'll never be able to do this. You're crazy.' "

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His relaxed manner and easy charm are a striking contrast to the scope of his ambition; after all, it's hard not to be slightly taken aback by a man who compares himself even tangentially to Einstein.

But with investments in more than 100 feature films, including "Hancock," "Mamma Mia!" and "Salt," Kavanaugh is just beginning: He recently absorbed Overture Films from Starz (contrary to reports that he paid $10 million for the division, he simply assumed the overhead); and he aims to move away from co-financing other studios' films, in which he has invested hundreds of millions, toward producing and releasing only his own.

Surrounded by posters, memorabilia and a snow-globe collection, it's hard not to see him as an incipient Citizen Kane, though a far more laid-back one.

If there is any Rosebud to Kavanaugh's career, it lies with his family and their Holocaust roots.

Along with a string on his wrist, given him by a natural healer, and two braided bracelets, the only jewelry he wears is a chain made from gold that his late grandmother somehow kept hidden while in the Bergen-Belsen concentration camp where she was interred during World War II.

"I think back to my grandmother, 14 years old in a concentration camp," Kavanaugh reflects, "and say, 'Yeah -- and I'm worried about this director who's threatening to walk off a movie?!' "
[pagebreak] His family's drive to succeed clearly shaped him. When he was 6, his father Jack made him put part of his allowance in a piggy bank. "Every day," Kavanaugh recalls, "I would have to read the Wall Street Journal and write down what stock I liked. He'd drive me once a month to see my 'stockbroker' and I'd go with my little piggy bank and $30 or $40 and buy some stocks."

By 14, he had begun his own business, selling pepper spray for self-defense. Then he brought vending machines into his mother's office, until he realized that the endless refilling for mere pocket change was "a really annoying business."

Less annoying were the charts he helped his father create for mergers and acquisitions, early practice in the sophisticated computer programs he now uses to calculate his investments.

While a student at Brentwood High in Los Angeles, Kavanaugh played guitar and performed in several bands; at UC Santa Barbara, while continuing some of his entrepreneurial projects, he remained focused on music. Indeed, he might have continued down that path were it not for two changes that shifted his thinking.

First was a summer course he took at Oxford University, which pushed him to aim higher intellectually (he's one of the few Hollywood moguls who can converse in passable Japanese). Second was a deal he struck with his father.

When Kavanaugh's dad pushed him to take an internship at the stock brokerage firm Dean Witter, he agreed, but only if his father promised never to interfere with his career choices again. And so in 1996, the budding rock star cut his hair, pulled out all but one earring, and went to work.

It was while at Dean Witter, where he soon was offered a full-time job, that he began to make the connections that would eventually help him in Hollywood. Part of his task was to generate lead-lists of wealthy people in show business, and among his early contacts were studio chief-turned-producer Mark Canton and producer Charles Roven ("The Dark Knight").

Canton and Roven became investors when, at a mere 21 years of age and without having finished his degree, Kavanaugh launched his first hedge fund, raising about $500 million. But soon the fund crashed when the Internet bubble burst.

What followed might surprise some skeptics: While the Internet implosion wiped out his company, Kavanaugh gave most of his ownership stake to his investors, leaving him nearly broke but hugely enhancing his credibility with Canton and other investors.

It was Canton who came through when Kavanaugh transitioned to the movie business.

"I introduced him to people at the studios, all the power players," Canton says. "He was very much original about what he thought needed to be done."

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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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His current deal at Sony is likely to end when their contract expires in 2012, but Kavanaugh doesn't seem to mind. Relativity, he says, wanted better terms. He says the two parties may still do one single-picture financings together.

Bob Osher, COO of Columbia Pictures Motion Picture Group, who brought Kavanaugh to Sony, confirms that talks stalled but says the studio remains open to doing other kinds of deals with Relativity.

"Quite frankly, our industry right now is seeing an upheaval in terms of new technologies, distribution, a changing audience and a rather large recession," he notes. "Ryan has shown an openness to trying new things, which is important. He is someone who's comfortable taking a different path."

That path has been helped by the kind of computer modeling his father first taught him.

The first stop when a project is brought to Relativity is a massive database Kavanaugh has created over the past decade, with information on the cost and performance of thousands of movies. The database, which requires four full-time people to operate it, helps Kavanaugh and his team analyze a movie's prospects against more than 10,000 variables, before the project is given a grade rating its financial potential. Movies the computer system believes have about a 75% chance of success then face a more traditional analysis centered on budget, cast and marketing.

But Kavanagh's thinking isn't all about computers.

He argues in favor of "incentive alignment," insisting that others must benefit as well. Veteran TV producer Tom Forman ("Extreme Makeover: Home Edition"), who joined with Kavanaugh two years ago to form RealityReal, the company's fast-growing TV division, says: "He doesn't want to close a deal unless it makes everybody happy. Even when we are in a position to squeeze a producer, he knows that will become someone we don't want to work with."

Michael Joe, now president of Relativity, was on the other side of the desk, negotiating for Universal in January 2009, when Kavanaugh closed another deal, the acquisition of Rogue Pictures. Universal president Ron Meyer says Rogue wasn't for sale until Kavanaugh came calling, when the studio decided the deal would deepen a valued relationship, as well as bring it money. (Universal continues to release the Rogue movies and distribute its 20-film library.)

"Ryan was looking for a library and a company, and frankly, we had assets that at the time made strategic sense for us to sell," Meyer says. "It turned out to be mutually beneficial."

What Universal didn't envision was that Kavanaugh would take Rogue well beyond movies, turning it into a lifestyle brand with a robust Internet presence and a growing line of products, including a whole new series of fashion and clothing items.

"When we launched IAmRogue.com, the idea was to give our audience a place [where] they could connect with our movies, talent and directors," Kavanaugh says. "We wanted them to get invested in our movies early on."

"Ryan is constantly reinventing, challenging us, but not in a negative way," Relativity president of production Tucker Tooley says. "He's challenging all of us to think outside the box. That's what he does on a daily basis. He finds new and innovative ways to do deals and address creative problems. That's the inspired thinking of the company."

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Kavanaugh's team will need all the inspiration they can get as they move from investing into producing and distributing their own films. Kavanaugh's goal is to "grow a full-size studio slate of our own movies. If we could really scale what we had been doing up to 10 or 20 movies a year in this risk-adjusted model, rather than needing a movie to do $80 million [at the box office] to break even, we would only have to do $30 million."

It's a grand vision, a mogul's way of thinking in an era that has little room for moguls.

There are doubters, of course.

"The performance of his slate deal at Universal to date has been miserable," says one Hollywood financier. "He says his plan is to make money by laying off most of the risk, but that is completely implausible. He is doing all this with smoke and mirrors, and Elliott has bought into it, but it will catch up with him."

Kavanaugh seems unperturbed. "People like to speculate, twist and turn," he says. While he acknowledges that Sony, like Universal, has had bad years as well as good during his time with them, he adds, "It approximately equals out. Of the last five Universal movies, all but one made money, and we made a fortune on 'Despicable Me.' "