Dr. P.V. Viswanath
Studios' Latest Stunt: Less Risk, Less Reward
Paramount Pictures' highly anticipated fourth installment of "Indiana Jones" brought in an estimated $151 million at the domestic box office this holiday weekend, extending the studio's winning streak that began earlier this month with the blockbuster "Iron Man," which has made almost $500 million world-wide since its May 2 opening.
The early summer hits for Viacom Inc.'s Paramount are expected to continue next month with "Kung Fu Panda," a DreamWorks Animation SKG film that Paramount will release. The trio of films buttress the studio's argument that it has rebounded under studio chief Brad Grey and is prepared for the widely expected departure later this year of "Indiana Jones" director Steven Spielberg.
However, the films also reflect a reality of today's major studios. These days, an abundance of outside financing for Hollywood movies means that studios often don't always fully own or control the films they distribute -- an arrangement that limits both their risk and the money they can make, even from a big hit. Marvel Studios, a unit of Marvel Entertainment Inc., for example, owns "Iron Man," and DreamWorks Animation owns "Kung Fu Panda," and those studios reap most of the profits. Paramount gets a fee for handling the distribution of the finished films -- about 8% of revenue in the case of "Kung Fu Panda."
And although Paramount and George Lucas's Lucasfilm Ltd. jointly own "Indiana Jones and the Kingdom of the Crystal Skull," it will perform much like the other two for the studio because of a deal that awards most of the profit for the $185 million movie, if there is any, to the talent, not the studio. Paramount receives a 12.5% distribution fee.
Such arrangements mean far less financial risk for Paramount, saving it the time and expense of developing films and avoiding an investment in producing them. If such films bomb, the losses are borne by others. Paramount isn't alone in making such deals; General Electric Co.'s Universal Pictures will soon release "The Incredible Hulk," which Marvel also paid to produce.
Such deals, however, limit the profit-gushing upside that studios enjoy when they finance their own blockbuster franchises. If "Indiana Jones," "Iron Man" and "Kung Fu Panda" play out as expected, Paramount will make a total of between $200 million and $250 million from all three movies, according to a source familiar with these types of distribution deals.
That's far less than what the studio could make from a single blockbuster movie of its own -- Paramount's "Transformers" brought in about $700 million at the box office world-wide last summer.
In some cases, the studios no longer have the option of deciding whether to finance a film, a situation Paramount faced with "Iron Man." Marvel long licensed to studios the rights to make movies based on its comic-book characters such as Spider-Man and X-Men. That allowed the studios that made those films -- Sony Corp.'s Sony Pictures and News Corp.'s Twentieth Century Fox -- to reap most of the benefits.
These days, Marvel is choosing to make the films itself and simply find studios to distribute them. As a result, Marvel stands to make $140 million to $200 million in gross profit from "Iron Man," analysts estimate. That's not including licensing and merchandising deals. Marvel will make $10 million in revenue off "Iron Man" toys alone in 2008, says Drew Crum, an analyst at Stifel Nicolaus.
"This is a much better deal compared with what Marvel did previously with licensing to Sony and Fox," Mr. Crum says. "By doing their own film production, there is no studio share for the revenues and profits for the company's toys and merchandise -- Marvel keeps 100%."
David Maisel, chairman of Marvel Studios, a unit of Marvel Entertainment, says that the company sees far more financial upside by financing their own pictures. "Iron Man is the great launch to our own studio strategy," he says. "The strategy we put into place years ago was to finance on our own movies so we can have the economic upside and reap all the profits -- we don't have to share the merchandise with studio partners -- and we have control over our own destiny."
Nevertheless, landing top distribution deals like the one for "Iron Man" is also a lucrative game, and part of Paramount's current strategy, according to Paramount Vice Chairman Rob Moore. "These three films represent the culmination of Brad Grey's efforts at Paramount to get in business with the best filmmakers," he said. "To release these three films is an incredible complement to the franchises that Viacom is launching itself. Last year, we launched 'Transformers' and next year we are launching 'Star Trek' in May and 'G. I. Joe' in August."
"Indiana Jones" -- which also sold $160 million in overseas markets, for a world-wide total of $311 million -- is its own unique situation. The deal to make the film was made by a previous regime at the studio. Messrs. Spielberg and Lucas, as well as star Harrison Ford, reportedly waived upfront compensation to limit the cost of making the film. In return, however, they get the lion's share of the profit once it breaks even.
The hits for Paramount come as the studio is bracing for the expected departure of Mr. Spielberg and David Geffen, the moguls who sold their DreamWorks SKG live-action studio to Viacom several years ago. Films from DreamWorks have been instrumental in helping Paramount mount a turnaround under Mr. Grey, and Paramount is now intent on proving that it can thrive without DreamWorks. (DreamWorks Animation is a separate public company, and its deal to distribute films through Paramount will continue regardless of Mr. Spielberg's status).
Even though this summer's line-up doesn't include any big Paramount franchises, it is still expected to deliver a significant financial boost to the studio.
Pali Research analyst Richard Greenfield says that these three distribution deals are turning around a studio that had been struggling to stay in the black. "Would I prefer that Paramount own all these films the way they did with Transformers, sure," he says. "But there is definitely revenue coming in for all three films and they're all very profitable for the studio. And if these films don't do well, they are low risk for the studio."