HAVE PARTICIPATION DEALS ALREADY EATEN A LARGE SLICE OF A MUCH SOUGHT AFTER PIE? (NYT)

By Nancy Vialatte

The New York Times today takes a look at a new assessment of the film industry�s financial dynamics entitled �Do Movies Make Money?� prepared by Global Media Intelligence in association with Merrill Lynch. The report concludes that much of the income - past and future - that studios and writers are haggling over in the current strike has already gone to the biggest stars, directors and producers in the form of ballooning participation deals.

As Hollywood digs in for a second week of a strike, the screenwriters might want to send a few angry picketers over to Will Smith�s place. Or Steven Spielberg�s, says the NYT.

Indeed, as it turns out, the pot of money that the producers and writers are fighting over may have already been pocketed by the entertainment industry�s biggest talent.

Through the twists and turns of contemporary deal-making, major studios in theory give away as much as 25 percent of a film�s receipts under such arrangements. The actual take is lower, because of certain adjustments. (This is Hollywood, after all.) But a Hanks, Cruise or Carrey whose movie brings $600 million back to the studio from all sources might easily wind up with a $20 million salary, and an additional $50 million on the back end, while an A-list director and producer could take in tens of millions more.

Industrywide, the total tab for participation arrangements came to $3 billion or more last year, Global Media found. This helped push the business of making films, which was somewhat profitable a few years ago, into a loss.

Roger R. Smith, a former film executive who worked more than six months on the report, told the Times that the effect of participations is huge, because �they can easily be paid out on money-losing pictures.�

For the study, all films distributed in recent years by the six major studios, plus DreamWorks were examined. It included movies from the primary studio operations, along with the bigger movies from specialty film units like Warner Independent.

The study estimated that all such releases last year would yield a combined loss of $1.9 billion after collecting the revenue from an entire first cycle of sales to domestic theaters, foreign theaters, home video, pay television and every other source of income.

Total sales for last year�s slate will ultimately be about $23.7 billion, down about 4.6% from 2004. Total costs, meanwhile, rose to $25.6 billion, up 13.2%.

When he began working on the study, Smith already anticipated a harsh response from studio owners. But with writers now seeking a larger share of what they see as expanding corporate profits, Smith told the Times he was now braced for skepticism from the labor side.

But in reality, neither side should be cheered by figures that describe an industry that has increasingly doled out its wealth to star performers and filmmakers, at the expense of almost everyone else.

Part of the bad news came from a sharp decline in foreign DVD sales. Those dropped 15.5% in the period, while domestic DVD sales fell at half that rate.

But the real killer was the growth in participations. Their precise amount is difficult to reckon, because deals vary and details are seldom disclosed publicly. But Global Media noted that at Disney � unusual in that its financial reports break out annual outlays for participations and residuals � the figure had grown at a compound annual rate of 37.6 percent for the last five years, to $554 million. If the other companies are spending at a similar rate, said the researchers, they are paying out shares worth $3 billion, while piling up an almost $2 billion loss on their new films.

A relatively small part of that goes to the guilds in the form of residuals which the writers are insisting be increased for media of the future.

According to a report from the Writers Guild of America West, which represents the lion�s share of Hollywood writers, movie residuals were just $121.3 million in 2006, a mere drop in the $3 billion bucket.

A big star, by contrast, can easily make $70 million or more from a single hit, if they enjoy a first dollar gross deal.

There is a marketplace justice to such arrangements. Unlike the much-derided �net profit� deals granted weaker players � those points seldom get paid, because there is always some studio charge in the way � gross participations give valuable talent a real share of the action.

�Profit participations are negotiated between a willing buyer and a willing seller,� Steven Blume, chief operating officer of Content Partners, which buys participations in return for cash, told the NYT. The terms, he noted, can change with every movie, making them more flexible than residuals, which become locked into long-term master contracts with the guilds.

But, from the studio point of view, this sort of payment is a bit like having a mortgage that doesn�t amortize. �These participations are paid in perpetuity,� Blume said.

And therein lie new problems for studios that may have gotten too comfortable with such payouts in the last decade or so, notes the Times.

According to Global Media Intelligence, studios a few years ago could count on rising DVD sales to lift their properties into profitability in a five-year first trip through the marketplace. Then, fully paid for, the movies would provide a smaller but near-endless stream of income from library sales over the decades.

Now, however, those same releases are joining the library with multibillion-dollar losses in tow � and they continue to be weighed down by gross participations that never stop.

Even Disney�s strong corporate performance in the last year does not necessarily bode well. The company�s studio unit, which was profitable for the year, had essentially flat revenue, at about $7.5 billion. Despite a huge hit in �Pirates of the Caribbean: Dead Man�s Chest,� much profit, company executives said, came from the mining of its library with clever ploys like the �Little Mermaid� Platinum Release DVD, which sold nine million units without the burden of star participations.

Once it is understood that the biggest stars and directors can rake in dollars even from money-losing movies, it becomes easier to understand why companies dug in their heels when asked to make richer residual payments on media of the future than they offered on home video of the past. These would trigger higher payments to other guilds, and would probably create pressure from lawyers and agents in search of still fatter participation deals for their star clients.

It is also not hard to see why the situation is especially galling for movie writers, who typically do not share in the most lucrative gross deals. When it comes to finding more money, some of the stars and filmmakers who have joined them on the picket lines may be able to say where it could come from.

HAVE PARTICIPATION DEALS ALREADY EATEN A LARGE SLICE OF A MUCH SOUGHT AFTER PIE? (NYT)

By Nancy Vialatte

Related Links