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NEWS & SUCCESS STORIES
Los
Angeles Business Journal,
Nov
29, 2004 by
Michael White
HOLLYWOOD'S biggest banker never reads a script. John
Miller, head of JPMorgan Securities Inc.'s entertainment
group--and responsible for authorizing multibillion-dollar
lines of credit for DreamWorks SKG, Metro-Goldwyn-Mayer
Inc., Sony Pictures and Warner Bros.--says he often doesn't
even know the names of the films he's financing.
In 32 years of lending to the entertainment industry,
Miller, 59, has bankrolled some of Hollywood's best-known
films, including "Gladiator," "Seabiscuit" and many of the
James Bond movies. He credits his success in part to how
little he knows about such matters as plot, dialogue and
special effects.
He bases his decisions on numbers.
"The movie business on a single picture is volatile," he
said. "Odds are that if you take a slate of 12 to 15 films,
it's almost statistically predictable. It's quite amazing
how predictable it is. You can get it within percentage
points of accuracy."
Miller's group measures a film's potential for success using
a database of thousands of movies and a computer program
that allows bankers to compare each new film against the
financial performance of 200 or more similar movies that
have gone before it.
JPMorgan's scale of a successful movie weighs such
components as the genre, cast, director, budget and target
audience against the historical performance of similar
films.
New York-based JPMorgan Chase, the second-largest U.S. bank
by assets, is the lead bank in arranging 95 percent of
financing for major movie studios and independent film
producers.
Costs for making and marketing films are increasing as
revenue is shrinking, with fewer people coming to theaters.
In 2003, filmmaking and marketing costs had risen more than
fivefold to $102.9 million since 1983, according to the
Motion Picture Association of America. Expenses rose 15
percent in 2003 from 2002, and revenue from ticket sales in
North America fell in 2003 to $9.49 billion from 2002's
record $9.52 billion.
As a result, studios rely more heavily on people such as
Miller.
His computers, as well as studio executives, say the big
money in Hollywood now lies in making "event" movies that
reach across age groups and international boundaries. Such
films don't just sell tickets; they also bring in the most
money from sales of home videos and television rights in the
U.S. and abroad.
Some of the past year's biggest hits underscore the point.
Sony spent about $200 million to make "Spider-Man 2,"
according to Los Angeles-based Box Office Mojo, which tracks
film costs. Since its June 30 release, the film has taken in
more than $782 million in ticket sales worldwide.
The Lord of the Rings trilogy from Warner Bros.' New Line
Cinemas cost about $281 million to make, and has taken in
more than $2.92 billion in worldwide ticket sales.
Although ticket sales alone rarely are enough to make a film
profitable, they indicate whether it eventually will make
money from added revenue through sales of home videos and
television rights. "The ancillary rights to those films are
so valuable, they'll do three or five of those," Miller
said. "Films that don't fit into the big-budget
event-film-franchise type category usually are done by
independents. The probability of success is such that you
put a lot more money into them."
Miller's office is in Studio City, where he and
second-in-command Clark Hallren work with a staff of 20. He
also works with other bankers in Los Angeles and New York.
JPMorgan's deals range from a $200 million line of credit
arranged last year for Lakeshore Entertainment, an
independent production company whose films include the
thriller "Wicker Park," to a $4.2 billion credit line Miller
put together this year for Sony Corp.
Sony used some of the money in September to finance its
purchase of Metro-Goldwyn-Mayer. Comcast Corp., Credit
Suisse Group's DLJ Merchant Banking unit, Providence Equity
Partners Inc. and Texas Pacific Group joined in the
acquisition. The bank is currently financing about $7.5
billion in entertainment loans.
The studios themselves follow a similar process when
deciding to approve a movie. At News Corp.'s 20th Century
Fox, the group that makes the call consists of Co-Chairmen
Jim Gianopulos and Tom Rothman, Production President Hutch
Parker, Fox 2000 Pictures unit President Elizabeth Gabler
and News Corp. President Peter Chernin.
"It's mathematics plus instinct," said Gianopulos in his
wood-lined office on the Fox lot, just down the hall from
the one Darryl Zanuck occupied while running the studio from
the 1930s through the 1970s--and producing films such as the
Oscar-winning "Grapes of Wrath."
By the numbers
Only about three in 10 movies actually make money, says
Harold Vogel, an independent financial analyst and author of
"Entertainment Industry Economics." About four films break
even, and three lose money.
The odds of failure, plus the rising cost of production and
marketing, prompt filmmakers to rely on funding arrangements
to spread their risk and reduce the prospect that one box
office bomb will hurt corporate profit. That may mean
inviting other studios to join the project, casting less
expensive actors or filming in locations where
government-sponsored incentives can offset as much as 15
percent of production costs.
"There is no way you can predict if a film is definitely
going to be a hit," said Walt Disney Studios Chief Financial
Officer Alan Bergman. "Sometimes you think you really have
it, and it just doesn't happen, for a variety of reasons."
Bergman speaks from experience. In 2003, with such hit films
as "Finding Nemo," produced by Pixar Animation Studios and
distributed by Walt Disney Co., and "Pirates of the
Caribbean," Disney led all owners of Hollywood studios, with
$2.22 billion in ticket sales in North America.
But as of Nov. 9, Disney was in third place in 2004 North
American ticket sales, with $1.01 billion in receipts, after
"The Alamo" and "King Arthur" failed to attract large
audiences. Time Warner Inc. was the leader, with $1.21
billion.
Banks take on less risk than studios. Terms of the loan
agreement ensure that JPMorgan is paid from film revenue
before the studio recoups its production costs. After a film
opens, the exhibitors are the first to get their share of
the revenue.
As a rule, their take amounts to about 50 percent of the
ticket price. The distributor then takes its fee, usually 15
percent to 17 percent of the total. The remainder, known as
film rentals, goes to the studio to pay for the loan and
production costs, which include actors' salaries and the
physical funding of production.
Because of the focus on event films, movies developed and
produced by the big studios account for only about 25
percent of filmmaking annually. The rest comes from
independent production companies, such as Revolution Studios
and Ron Howard and Brian Grazer's Imagine Entertainment.
But the studio that distributes the film is paid from ticket
sales before the production company recoups costs.
"Production isn't where you get your biggest return," said
John Lee, chief executive of Entertainment Business Group, a
Camarillo-based consulting company. "It's in distribution."
Miller relies on his staff to evaluate and arrange lines of
credit for slates of 12 or more movies. For the independent
producers, the credit line is backed by a distribution
agreement with one of the studios. For Roth, Miller put
together a $400 million credit line used to finance
Revolution Studios' first slate of 15 films, including the
action/adventure film "Black Hawk Down."
In Roth's favor, Sony Pictures had agreed to distribute the
movies in the U.S., and he had already raised $250 million
in private equity. The slate performed as predicted, and
JPMorgan has financed another 20 movies for Revolution.
Following on formula
Based on the numbers, the bank decides bow much it can
safely lend. And, Miller notes, the model is always
reliable. "If you have a baseball movie that's very
American-looking, it won't work in Germany," he said.
"African-American themes won't work in Japan. Any Martin
Scorsese film is just going to be a huge success in Europe.
It doesn't matter what he shoots--the phone book--they're
going to want to go see it."
Film financing has changed since Miller began lending to
studios as an executive at Union Bank 32 years ago. In 1986,
he moved to Chemical Bank, and through a series of mergers,
Miller's group became part of JPMorgan. During his early
days, he says, he wrote loans for single movies.
In the 1980s, banks tried to develop more income-producing
ventures by writing loans for a slate of movies with one
line of credit.
Miller tries to distance himself from the glitz of
Hollywood. He routinely wears a suit--something rare in the
jeans-and-T-shirt world of the film industry--and avoids the
Academy Awards because he dislikes the long wait to get
inside as stars walk down the red carpet.
Miller does enjoy Hollywood. "I really like this industry
because of its interesting people, and it's constantly
changing, it's glamorous and it's sexy," he said. "I don't
get mesmerized by it. I feel no aspiration to be in their
world because it's a very, very tough one."
Indeed, studios are watching their expenses especially
carefully these days.
At Fox, Joe Hartwick and Mike Hendrickson spend all of their
time looking for ways to manage costs in filming scenes.
On a September morning in an office tucked among
soundstages, Hartwick, Fox's president of features
production, and Hendrickson, a vice president, were looking
at spreadsheets that showed the costs, scene by scene, for
filming "Fantastic Four," a superhero saga two weeks into
production.
Hartwick and Hendrickson focused on a scene with a spat
between two characters. Director Tim Story was budgeted to
film four shots for the scene. Hendrickson picked up a
spreadsheet and pointed to a column that shows Story took 15
shots.
The spreadsheet showed that if all of the extra shots were
used in the film, along with the special effects they
required, the scene's cost would double to about $328,000.
Given a mandate to keep costs under $100 million, spending
the money might mean cutting the film elsewhere to make up
the difference. "We have this old-school mentality here,"
said Hartwick, a former studio accountant said. "If we want
to make a film for $35 million, we don't mean $35.5 million.
We monitor the expenses very carefully."
MICHAEL WHITE
Bloomberg News
COPYRIGHT 2004 CBJ, L.P.
COPYRIGHT 2005 Gale Group
Sited:
Los Angeles Business Journal,
Nov
29, 2004 by
Michael White |
