The
Hollywood Economist
The
numbers behind the industry.
Inexplicable Decisions
of the New Moguls
While
it is a decidedly minority view, the proposition that inner
Hollywood is a pretty rational place run by intelligent
people is one that I am dedicated to. They fully grasp the
new reality (even if the outside world doesn't get it) that
what used to be a business focused on movie theaters is
now one centered around television sets and DVD players
in the home. Even so, I have to admit that some decisions
made by the new moguls seem to defy this logic—or
any explanation other than personal pique or ego gratification.
Consider,
for example, the near-suicidal decision of Blockbuster Entertainment
in 1998 to turn down Warner Bros.' offer to entrench a DVD
rental window. Warren Lieberfarb, who headed Warner Bros.'
home video division, which, along with Sony, then provided
the vast majority of DVD titles, offered Blockbuster CEO
John Antioco a deal to insulate the rental business from
retail competition by delaying putting DVDs on sale for
a few weeks after their release. Warner Bros. (and presumably
the other studios) would provide rental copies of new titles
on DVD to the 10,000 Blockbuster stores and, in return,
receive 40 percent of the rental revenues that Blockbuster
earned from them.
At the time, Blockbuster was a powerhouse, accounting for
nearly 50 percent of the studios' video revenue. Indeed,
Sumner Redstone, the CEO of Viacom (which owned Blockbuster),
had told Lieberfarb, "The studios can't live without
a video rental business—we are your profit."
Yet, even though Lieberfarb was only asking that the 40
percent revenue-sharing arrangement that Redstone himself
had pioneered for video be extended to DVD, Antioco turned
him down. Warner Bros.' response was to offer DVDs as a
traffic-builder to Wal-Mart, Best Buy, and other mass retailers.
As it turned out, the studios could not only live without
a video rental business, they could thrive. By 2004, the
studios were raking in $20.7 billion a year from DVDs while
Blockbuster Entertainment, its rental business decimated,
was hemorrhaging losses. Why did Antioco turn down Lieberfarb's
offer? According to an insider privy to the Warner Bros.-Blockbuster
negotiations, Antioco's decision proceeded not from any
financial analysis of the offer's merits but from his "massive
ego," which made it difficult for him to accept Lieberfarb
as an equal in the negotiations.
Or,
consider Paramount and Universal's inexplicable decision
this summer to effectively kill their jointly owned United
International Pictures, even though it was the dominant
international film distributor. UIP dates back to 1970,
when Lew Wasserman found that his Universal Studios lacked
the clout overseas to profitably book movies into foreign
theaters. With the help of lawyer Sidney Korshak, another
consummate Hollywood insider, he combined Universal's foreign
distribution operation with that of Paramount and MGM, the
other two weak sisters of international distribution. The
muscle that three studios could bring to bear provided enormous
leverage overseas, where U.S. antitrust law did not prevent
the consortium from block-booking whole slates of their
movies into chains. UIP indeed became so dominant in getting
bookings in the key European markets that the European Union
has attempted (unsuccessfully) over the last decade to force
it to disband.
In
2000, after MGM dropped out of the consortium (and was subsequently
acquired by Sony), the two remaining partners, Paramount
and Universal, changed the overhead cost-sharing split from
one based on "intensity of use" to a simpler 50/50
split of the operating costs. When Universal attempted to
further renegotiate the overhead-splitting formula this
spring, Paramount's new regime, led by MTV founder Tom Freston
and former TV producer Brad Grey, dug in their heels. According
to one executive, they became so exasperated with Universal's
nitpicking refinements to the formula that they told Universal,
"Let's just split it up," and the consortium Wasserman
had so carefully engineered disappeared in a fit of new-mogul
pique.
Although
Paramount executives justify the move on the grounds that
it will now have its own overseas arm instead of having,
as one Paramount executive put it, "half a studio,"
the immediate consequence is that Paramount will go from
being the dominant international theatrical distributor,
with all the rewards that entails in getting play dates,
to an also-ran at the bottom of the pack. Nor will Paramount
save any money since its new international operation will
cost an additional $35 million a year. Why would Paramount
and Universal accept this outcome? "It is stupid, stupid,
stupid on every possible level," answered an insider
who had been involved with UIP. "The great thing about
the UIP deal is that when it's your movie's turn in distribution,
UIP is essentially 100 percent your leverage. Paramount
didn't get half the leverage, it got 100 percent—and
when it was Universal's turn, it got 100 percent."
So, without much ado or analysis, a win-win game became
a lose-lose game for two studios.
These
decisions, as baffling as they may seem, pale in comparison
to what may be the most inexplicable decision in the annals
of modern Hollywood: Edgar Bronfman Jr.'s decision, in 1999,
to trade most of Universal's television assets, including
the USA cable channel, to Barry Diller's company, renamed
USA Networks, in return for $1.2 billion in cash and a minority
interest of 56.7 million shares in Diller's company. While
the transfer of Universal's television interest no doubt
reflected Bronfman Jr.'s high esteem for Diller's business
acumen, it also deprived Universal of the properties that
are the bread-and-butter profits for a movie studio. So,
when Bronfman Jr. sold Universal to the French conglomerate
Vivendi in 2000, it had to buy back these television assets
from Diller for $10.3 billion, and then, to completely reverse
Bronfman Jr.'s deal, Diller also got back the 56.7 million
shares and an additional $2 billion. So, while this deal
fully demonstrated Diller's brilliance in deal-making, it
resulted in a loss for Universal and Vivendi of over $10
billion (part of the larger $40.6 billion write-off taken
by Vivendi-Universal).
To
be sure, such inexplicable blunders are relatively rare
in Hollywood—especially if one does not count mere
financial contretemps such as Time Warner's $99.7 billion
write-off from its AOL fiasco, or Murdoch's News Corp.'s
$7.2 billion write-off from its Gemstar fiasco, or Sony's
$2.7 billion write-off from its initial employment of Jon
Peters and Peter Guber when it took over the Columbia-TriStar
studio. But if Slate readers have further candidates, I
will happily add them to the list
.
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