David Halbfinger’s long piece on MGM does an excellent job looking at what the situation over there is. And he puts together a lot of the underreported elements from the last few years of the story of the studio. This piece was heavy lifting indeed.
But as is so often the problem with the NYT rotating smart reporters with no knowledge of the past of this industry, it is missing the full perspective on the story (which to his credit, Peter Bart got right to on his blog). This is a clear case of déjà vu.
What they are now doing at MGM was done, almost exactly, by Chris McGurk and Alex Yemenidjian over and over and over again until the market was right and they finally found the right suckers/buyers to cash them and Kerkorian out.
As I wrote about for years, it always seemed to me that the amount of money being spent by MGM was directly related to how close they thought they were to a sale. Kerkorian was always looking to sell, before McG&Y came aboard and every minute thereafter. The big asset was always the library, but the bait, the argument was, the idea of a major studio.
Yemenidjian and McGurk came into Kerkorian’s life in 1999, when he bought the studio one last time (we think) and was looking to do what he had done before… raise the perceived value and get someone to hand him a billion dollar profit for his trouble.
1999 was not their mess, 2000 saw just three wide releases, including Supernova, which the boys got Coppola to re-cut before giving him a deal to run United Artists with a budget of $100 million over two years covering five films. Tom Cruise needed five times that to get into business.
2001 leapt to seven wide releases, including wannabe star vehicles Original Sin (Banderas/Jolie), What’s The Worst The Could Happen? (DeVito/Lawrence), Heartbreakers (Weaver/Hewitt), and Bandits (Willis/Thornton/Blamchett). The foursome grossed $131m domestic combined. The savior was one of the lower budget hopefuls, Legally Blonde, though MGM didn’t have the juice to convert the event film for teen girls into a $100 million grosser domestically. And the one mega-hit was Hannibal, the awful Silence of the Lambs sequel, that grossed just over $350 million worldwide.
But no buyer for the price Kerkorian was looking for…
2002 also has seven wide releases. The big one was Bond in Die Another Day. Great. Barbershop was the underdog success with a $76 million domestic gross… and just over $1 million overseas. Still, a winner. After that… red ink. Windtalkers, The Crocodile Hunter: Collision Course, Hart’s War, McTiernan’s remake of Rollerball, and Deuces Wild… $114 million domestic… it’s getting worse.
2003, the money dried up. No more movie stars, thanks. The only one MGM had in their eight wide releases that year was Denzel Washington in Out of Time… unless you count the sequel to Legally Blonde as a star turn… I count it as a sequel. The studio did nicely with cheap no-star kids movies Agent Cody Banks and Good Boy!. But the also-not-terribly-expensive, low wattage efforts to find teens (Uptown Girls, Bulletproof Monk, and A Guy Thing) all stiffed.
In 2004, Kerkorian put a part of the company’s cash in his own pocket – to the tune of somewhere around $1.4 billion – with a stock dividend scheme. The timing was most surely in line with Kerkorian interest in making his cash out with a sale – which could come five months later, in September – as tax-burden-free as possible. The cash-out represented about a third of the total value of the eventual deal to sell the company.
As for the studio, they had gone strictly low rent, with six wide releases, 2 of them cheap sequels, 1 a remake of a studio property, 1 failed attempt at another black franchise, 1 teen girl flop, and one non-starting thriller.
Throughout all of these years, whether the two aggressive years or the three fallow years that followed, the theme was “we’re in business… we’re a real studio… we’re in the game.”
But Kirk’s Boys had found a magical opportunity that no longer had anything to do with whether the studio was operational. Blu-ray and HD-DVD. The owner of the largest library in Hollywood – not just MGM’s but many others acquired over the years – was in the cat bird seat as Sony (pushing Blu-ray) and the HD-DVD group, led by Microsoft and Toshiba, were battling for position in a new technology. Sony, which had gotten beat on Betamax two decades before, primarily by maintaining its equipment as proprietary, but in some minds because they didn’t dominate and control the software.
So now we are in HarrySloanLand. What does he do? He lashes together a coalition of independent distributors – most of whom are now effectively out of business – to take advantage of the one significant asset MGM actually had, a Showtime cable output deal at a rate higher than anyone else could negotiate on their own. (Irony cubed… no Weinstein Co titles released by MGM and then on DVD by Genius have come out in any high definition format.) But Sloan was just treading water until he could grab back complete control of the MGM brand, which was blurred by the shockingly brief active Sony relationship.
In the process, according to what Halbfinger unearthed in the company’s filings, MGM’s current owners, led by Sloan, have added about $1.7 billion to the $2 billion in debt they assumed buying the company from Kerkorian almost four years ago. So far… just like Kirk would do it.
Starting from that deep hole, it’s been setting up a UA deal for Tom Cruise and Paula Wagner, with a different mindset, but not dissimilar to tying the UA name to Coppola earlier. (Coppola’s deal fell apart before it was “complete,” but the UA brand was really resurrected, in the end, but Bingham Ray, who led a team (some now with McGurk at Ovation) that made small films with some Oscar heft, including Hotel Rwanda and Capote.)
Next, it was setting up the idea that MGM was still seriously in the movie business. Hiring Mary Parent was a legitimate power move (making her the Michael Nathanson of this situation). Cale Boyter is a solid high-profile hire. Money is being spent.
The problem remains the same as it was for Kerkorian, as it was for DreamWorks, as it was for New Line, as it was for Zoetrope, as it is for any small studio. You are vulnerable to the vagaries of the industry weather. With a bigger company, not only do you have a large infrastructure that supports the business if a picture of any size fails, but you have all kinds of opportunities to created additional value in the production you create, especially the big hits.
I am not saying that a Valkyrie will shut down UA if it doesn’t work at the box office… but the hard reality is that if it were to bomb too badly, it could shut the studio down. Conversely, if it hits modestly, say $180 million worldwide, then it means nothing to the studio’s future in a particularly positive way. When you are small, you are always fighting the negative and rarely get to enjoy the success… unless it’s Rings-level crazy success or Wedding Crashers or The Mask costing virtually nothing and hitting big.
I am not saying that Mary Parent needs a $100 million domestic grosser in 2009. But she does have to balance what she spends and what she earns. Bond is an existing major asset that the studio really doesn’t control… never has. Pink Panther will be profitable, but its profits won’t cover the executive contracts that Harry Sloan just signed.
On the other hand, there absolutely are advantages to a smaller company. There is an intimacy, a camaraderie, and a focus on the few films the company releases. A big part of handicapping DreamWorks as a stand-alone studio was losses they had chasing television production. That shouldn’t be a big issue for MGM.
That said, birds gotta fly, fish gotta swim. Setting up – finally! – serious marketing and distribution arms at MGM means that they need movies to sell and push out into theaters. Terry Press, if she ends up taking the marketing job, can tell them clearly. Those six-movies-a-year years at DreamWorks were brutal. There was this sense of revving this very powerful engine that had been created, waiting… waiting…
What DreamWorks did to make things work better was to find a franchise that consistently won… animation. But MGM doesn’t have a Katzenberg. And Bond only comes but once every three years. Even then, the franchise is still looking to its next film to be its first $600 million worldwide grosser, just as it took until Casino Royale to crack $500 million. The franchise is very valuable, but it’s not a studio maker. After all, Lord of The Rings – which grossed $2.9 billion in three films – couldn’t save New Line, at least not after the franchise ended.
What Mary Parent is likely to be able to deliver is a bunch of doubles, some of which can be stretched out to triples. Typical is the notion of taking a Ludlum novel and putting Denzel Washington in it. Great actor. Could be a great Bourne-like property. But Denzel has never had a $300 million worldwide grosser… ever. And Bourne went $215m, $290m, $445m worldwide over its 3 film run. And maybe this could be Denzel’s $300m break-out… in a second sequel in 2016.
Like Bond, a franchise that can be counted on to crack $200m each time out is a good, good thing. But Hannibal ($350m worldwide) and Legally Blonde ($142m ad $124m worldwide each) didn’t find a buyer for MGM. Blu-ray did.
And that buyer paid way, way, way too much. Of course, if you measure by the inanity of $900 million for the DreamWorks library of 59 titles…
But looking at that deal, which is not likely to be profitable for Paramount on the ongoing movie side, they paid $700 million for DreamWorks as an ongoing asset, beyond the library. MGM production might be worth something near that right now, as an investment, based on the Bond franchise, a percentage of The Hobbit and the Mary Parent and Tom Cruise businesses. If the library is legitimately worth $2.5 billion, then add another $700 million and the investors who currently own MGM can’t cover the $3.7 billion of debt they are carrying with a sale at a reasonable value today, much less the additional $2 billion they spent buying the assets.
Moreover, while I believe there is still going to be significant money in quality libraries, the value headed down based on what looks to be the new economies of ancillary delivery. There simply is no scenario that suggests that we are ever going back to $19.95 DVD level costs of “owning” a film or even – most likely – $15.
As a movie lover, I love the idea of chasing that long tail, but the industry has to start getting used to the idea that the more that’s available, the more easy the access, the more relentless the pricing battle will become. Some little known doc or indie will end up being sold a million times for $2.50 a pop and make its makers/marketers a nice chunk of change, but these are not the kinds of numbers that pay for studio overhead.
When Kerkorian bought MGM for the third time in 1996, he paid $1.3 billion. The one big shift in value that occurred over the last decade was DVD. And MGM’s library was there to take advantage of the opportunity. Kerkorian nearly tripled his investment. Genius… since the studio is overpriced at $5 million, much less the apparent $6.7 million it now on the books.
The Consortium could not have bought at a worse time… not unlike DreamWorks getting into the studio business and trying to build a TV business at exactly the worst time, when showrunners were being paid massive amounts upfront by everyone in town. For Sony, the investment, however oversized, would pay off if the deal led to Blu-ray winning the format war. (I would argue that the deal did help… but that Sony continues to drag its feet on hardware pricing, which is fighting an ever-narrowing window for cheaper HD home delivery, both by cable, satellite, and to a much smaller extent, internet. When the hardware price point drops under $150, the non-Blu-ray values of a PS3 – or whatever it’s called by then – will make them the standard and Blu-ray DVD sales may become the standard for a significant percentage of buyers. But the idea of buying DVDs could also be passé by 2012 – or earlier – so they better hurry.)
Thing is, building positive assets is building positive assets. Would The Consortium be happier with a way overpriced asset that is building more positive assets or one that lays there like a lox and demands a multi-billion write down?
If Sloan, with Parent, can keep this thing afloat for a couple of years, hitting for percentage, then there will be the big moment. Parent will get bored and she and her people will find The Home Run Shot and want to take it. And that one film may be the “yay” or “nay” for MGM as a production entity.
Meanwhile, the Titanic of MGM already sank. Harry Sloan and Mary Parent and everyone else over there are already on a very luxurious lifeboat. They don’t really have to bail water. They aren’t like to make it any worse in a hurry. And positives are positive, so bless them. But there are still icebergs out there. And all it takes is one.

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