Peter Bart and Mike Fleming Jr. worked together for two decades at Daily Variety. In this weekly column, two old friends get together and grind their axes, mostly on the movie business.
FLEMING: We haven’t done this column since March, when the pandemic had just begun to show the unprecedented hardship it would present for exhibitors that show films, and the studios that make them. Distribs have regarded their streaming arms as salvation for movies piling up along with interest costs because not enough theaters are open in the U.S. to justify P&A campaigns or create revenue events. The boldest move came with last week’s announcement by WarnerMedia that, in light of those hardships, it will put its entire 2021 Warner Bros film slate on HBO Max — as the films open simultaneously in theaters. They indicated the move might not be how it does business forever, but if HBO Max paid subscriptions spike and bolsters the stock the way Disney + did for its parent? Clearly, this momentum will continue, at the expense of beleaguered exhibitors who watched their stocks plummet after the WarnerMedia announcement. WarnerMedia made the move after it followed a similar formula with the Christmas Day release of Wonder Woman 1984. This will be a week where WarnerMedia has to deal with the anger of co-financiers and talent with back-end deals on the 17 films, some of whom sold projects or committed to WB films because the studio has traditionally been considered one of the best in big-scale theatrical launches.
Peter Bart: For One At Least, The Pandemic Has Made Movie Theaters An Anachronism
I’m hearing that Legendary Entertainment either has or will send legal letters to Warner Bros as soon as today, challenging the decision to put the Denis Villenueve-directed Dune into the HBO Max deal, and maybe Godzilla vs Kong as well. On the latter, Legendary reportedly had Netflix ready to pull the film from Warner Bros for around $250 million, before WarnerMedia blocked it. Sources said Legendary had no advance notice before last week’s announcement that both Dune and Godzilla vs. Kong were part of the HBO Max plan.
Legendary certainly seems to have the right to challenge WarnerMedia on its decision: Legendary and its partners provided 75% of the $165 million or so net budget of Dune, the adaptation of the Frank Herbert novel that was envisioned to be the first of multiple films exploiting the six-novel series. It put up a similar amount of the funding on the Godzilla vs. King film. Will the long-term viability of the franchises be tarnished by starting out as an HBO Max offering? It’s the same question the industry is asking about Wonder Woman. Legendary wouldn’t comment. I’m told there are three other films that have a right to believe movies they majority financed are being served up to provide a steroid shot to HBO Max’s paid subscriber base by undoing deals that were made for theatrical release and the traditional revenue waterfall.
I’ve spoken to numerous deal-makers with skin in the game here, and none were happy. They understood Warner Bros was in a tough spot; movies on a shelf accumulating interest costs (though interest is low right now), and the likelihood of half a year or more of the kind of paltry attendance that hobbled the studio’s Christopher Nolan film Tenet, before the theatrical market comes back with a glut of product. But a vaccine is just around the corner, and some said they were upset that Warner Bros announced a full year of movies to HBO Max, instead of leaving open the possibility the experiment would end if movie going rebounds after a vaccine eradicates the pandemic. They believe it was to make a statement to Wall Street about the overriding importance of HBO Max subs.
Peter, a thought here: if there was ever a reason for the Writers Guild to end its stalemate with the two biggest agencies in town, CAA and WME, this might be one. Rather than continue to waste lawyer fees fighting over the specifics of a battle that has mostly been decided — agencies are out of the packaging game with writers, and will divest at least 80% of affiliated production companies wiip and Endeavor Content — the continued brawling over timelines prevents the chance that all three talent advocates might work together along with managers, lawyers, guilds and other agencies to hammer out a deal making future where the days of huge back end talent and filmmaker paydays for over-performing movies will be supplanted by buyouts.
Because exhibitors are shut down and treading bankruptcy, they have little leverage in what is being imposed upon them right now, and these windows had to shorten anyway. Right now, they need movies. But the most finite resource in this storytelling game is talent, and reps for them said they felt slighted by the WarnerMedia move and being caught unawares. Several reps said they feared the WarnerMedia move was short-sighted, and was imposed on them with no discussion. Some wondered if Warner Bros, long considered one of the most desirable places to make movies because of its acumen for global theatrical releases, has lost that mojo forever because its tech masters will always be willing to upend the deals in the name of building HBO Max subscriptions to compete with rivals at Netflix, Disney+, and others. Some questioned if the move was entirely legal; the studio is essentially self-dealing to build its streaming service; these films were not made available to others who might bid up the price, and there is no third-party analysis to assign value in a self-dealing strategy. If Godzilla vs Kong was worth $250 million to Netflix, will the math on the HBO Max line up similarly for Legendary? I’ll tell you in a moment the formula that WarnerMedia will try to sell this week to talent and filmmakers who have back-end bonus and cash break back-end deals. But first: Peter, you’ve been on both sides of this business for a long time. What do you think about what WarnerMedia has done here?
BART: The sticking point was not just the message; it was also in who was delivering the message. Warners’ big movies henceforth would open simultaneously on HBO Max and in theaters. But likely streamed for only a month. And then that formula would change at the end of a year. Maybe. All of which left moviegoers wondering, should I see that blockbuster in a theater or wait? And binge watchers wondering, should I catch it on TV or wait for the big screen? And then there’s another group waiting in a state of angst: They’re trying to figure out what impact all this have on their revenues? Or on their sequels? Or on their careers.
Which brings us back to this question: Who’s delivering this lugubrious and ambiguous message? Answer: It’s not the chief of Warners. It’s the chief of AT&T, which runs Warners. When John Stankey and his then-boss, Randall Stephenson, acquired Warners they were dismissively called “bellheads.” Hollywood leaders puzzled how executives trained to deal with the phone business could adjust to a broader, more complex landscape? In making show business decisions, they can’t just look at data; they’d have to study people. In announcing the new distribution policies, Stankey didn’t even get his jargon right. He kept referring to “theatrical channels.” Exhibitors don’t think of themselves as a channel. And he conceded that “we don’t have great visibility yet.” Hollywood wondered, why not wait for some visibility?
The “techie” invasion of Hollywood had long been predicted. Indeed, it had even played out a generation ago. With dire results. The first invasion occurred around 1990 when both Sony and Matsushita, the Japanese giants, noticed the giant technological change about to overtake Hollywood and asked this question: Since we’re making all the hardware, why don’t we make the software, too.
Sony bought Columbia and Matsushita bought MCA/Universal. It was all very organized and conceptually sound. The invasion of Hollywood had been accomplished. Except it didn’t work. Variety’s famous banner, printed in Japanese, declared: Buyer Beware. Matsushita’s top executives immediately clashed with those of MCA. Lew Wasserman, the dethroned king of Hollywood, let it be known that the Japanese had no idea what they were doing and he wouldn’t help them. Within six years Matsushita sold 80% of its holdings taking a $1.5 billion loss. Sony was more stalwart. They had spent hundreds of millions on expensive production deals but by 1994 announced a write-off of $2.7 billion and said they were starting over. They’re still hanging in there. But with the arrival of 2000 the handwriting was on the wall. The Japanese, Chinese and Europeans had all tried to confiscate Hollywood and had concluded they didn’t have the knack. Now the techies and bellheads are having a try.
FLEMING: You’re right, we always heard the techies were coming and they might bring some outsider imagination that would help improve the business. We will have to wait and see whether Stankey, Jason Kilar and Ann Sarnoff are doing the right thing. They will say they had to do something. But they are not movie people who grew up speaking that language, and some in the days following the disruptive announcement have questioned if they understand the myriad benefits of a full-blown theatrical release that builds anticipation with P&A and sets off a revenue waterfall and a valuable library title. Warner Bros chief Toby Emmerich certainly does, but right now is he calling the shots? Overachieving theatrical releases from Black Panther to Knives Out to Joker enrich its creators in breathtaking paydays. Will that be possible if the business keeps tilting toward streaming?
Here is how WarnerMedia and Warner Bros will try to convert the movie deals into compensation reflective of the HBO Max move. Sources said that when Wonder Woman 1984 was turned into a day-and-date HBO Max film along with theatrical release on Christmas, the filmmakers and talent got millions of dollars in backend buyouts that were computed based on the reasonable expectation that the film would theatrically gross $1 billion worldwide. A conceptually comparable deal was made for director Robert Zemeckis and Anne Hathaway and others on The Witches, which went directly to HBO Max as a Max Original and bypassed theaters. Even though the 17 movies on the Warner slate come in all shapes and sizes, they aren’t going to be subject to the largesse that WW 1984 or The Witches received, given when those switches were contemplated as one-offs.
Here, Warners eyes the 2021 slate as theatrical releases, with a new window in HBO Max. For talent that has box office bonuses, Warners has accelerated the start-in point of when the talent will start to receive those bonuses, by half. Meaning, if someone had a bonus coming if the film hit $300 million of worldwide box office, that number is now $150 million to reflect the box office potential loss in the U.S. for people using their existing HBO subscription to access HBO Max, or who sign up for the streaming service and/or the impact of the pandemic. Bonuses are usually laddered, and subsequent bonuses goals are also being cut in half, meaning the distance to get to extra bumps is reduced by half.
Further, Warners, which usually makes approximately an average of 50% of theatrical box office revenue available to cash break participants, will for these 17 films include that same amount as a license fee for the 31-day HBO Max window. That money will go into the pot from which back-end is calculated with the deal definitions for talent and filmmakers remaining the same as under their respective contracts. Warners is also agreeing to minimum floors for these license fees of the greater of $10 million or 25% of the net cost of the film. Warners is also adjusting the 31-day HBO Max license fee for closed theaters when films are released.
If the number of theaters average less than 75% of the usual, rather than the HBO Max license fee being 100% of U.S. theatrical rentals thrown in the pot, it will be 125%; if less than 50% of theaters are open, the imputed license fee will be computed based on 150% of U.S. rentals; if less than 25%, then 175% of U.S. rentals.
What’s wrong with this, per the dealmakers? It’s a loss leader for everyone. Chances are the bifurcated U.S. release will probably deal with lower than normal numbers than would have been the case had the studio delayed its films until the business returns to some semblance of normalcy, or licensed each film to a third party streaming service. And the compensation isn’t at all weighted by the number of paid HBO Max subscribers that are added by this bold move, or by the benefit to the WarnerMedia stock price, which is the reason WarnerMedia has done this.
These deal-makers clearly feel the reason WarnerMedia committed a whole year’s worth of film releases to this strategy was to try and get a lift in HBO Max subscribers and thus a bump from Wall Street, similar to the way that Disney’s stock has benefited from its startling Disney+ subscriptions despite the Covid whack felt by its theme parks, live entertainment business and theatricals. To that end, why should the big star cash break participants in the films The Suicide Squad, King Richard, The Matrix 4 and Cry Macho be expected to adhere to a different formula than the WW1984 and The Witches participants received? Maybe the template described is the floor as they engage with Denzel Washington, Margot Robbie, Will Smith, Keanu Reeves, Angelina Jolie, Clint Eastwood, LeBron James and all the other stars who are represented in the 2021 slate. And are theater chains that beaten that they won’t, as they did in the past, simply refuse to run films that are issued day and date on VOD? It will be fascinating to watch all this unfold.
Disney on December 10 will announce its upcoming slate. While the studio will solidify what Deadline revealed recently — that the Tom Hanks-starrer Pinocchio, Peter Pan & Wendy and the Emma Stone-starrer Cruella will bypass movie theaters to become Disney+ releases — the studio will also announce new projects from Marvel, Lucasfilm and Pixar that will encompass TV as well as theatrical. It will be a gesture toward not abandoning the exhibitors. The WarnerMedia guys can perhaps make the same case – they took the beating releasing Tenet in the summer, and will provide a stream of films during the lean months of 2021 while other studios have abandoned the turf – but I’m not sure it has been received as the one-off plan it is purported to be.
I’m trying to recall the last time someone like Kilar and cohorts brought on this kind of change, and the closest I can recall is David Puttnam, who produced a bunch of hits and then came to Hollywood promising he would fix the movie business. You remember him, Peter?
BART: To its credit (and occasional damage) Hollywood has periodically reached out to seers and creators from overseas to introduce insights into the system. One of the most disastrous was the appointment of Puttnam as chairman of Columbia, which lasted one tumultuous year.
A former agent for photographers, Puttnam was far removed from the stuffy Eton-and-Oxford image of the British executive. He was a tough infighter with a talent for spotting stories and young directors. He made Bugsy Malone with Alan Parker, then Duellist with Ridley Scott and then scored with Chariots of Fire, the Oscar winner for which he was rewarded a year later with the Columbia title. I knew Puttnam well as a struggling young producer and was surprised by his self-presentation in Hollywood. He toured the talent agencies and production companies, lecturing them on their extravagance and reckless spending, their poor selection of projects and their overall mediocre taste. The Puttnam I knew as a tough in-the-trenches young Brit had instantly become, with the Columbia appointment, the pompous expert on everything.
Puttnam’s ideas and presentation had zero impact on Hollywood. He was effectively sent home with dispatch – another outreach that went wrong. Soon he was named and enrobed as a member of the House of Lords.
FLEMING: We’ll see if Jason Kilar turns out to be the next Selznick, or Puttnam. But in the meantime, this streamer invasion will only continue to dominate the business, and the deal-making. We hear that some other studios might take development projects they’re not crazy about and make them and flip them to streamers, because there is money in supplying the voracious streamer appetite for product.
Final suggestion to David Young, Bryan Lourd and Ari Emanuel: Get on the phone and find a way to get past the lawsuits, which seems akin to President Trump being unable to let go of the fact he lost the election. Collective focus of talent advocates and the guilds should be on this issue. This is a historic moment in the movie business, and it will be imposed unless guilds and agencies and major management companies insist on being part of figuring out this fast-changing formula with streamers who aren’t at all transparent about how their movies perform, even to talent. The WGA-CAA-WME acrimony is a tiresome distraction from a major issue.
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