Can Edgar Bronfman Swim With The Sharks?by
He has produced a couple of movies and written a few songs. But the Hollywood education of Edgar Bronfman Jr. apparently began in earnest in the wee hours of June 5. That's when the Seagram Co. chief executive and Michael S. Ovitz, chairman of talent agency Creative Artists Agency Inc., called off their month-long negotiations for Ovitz to run Seagram's newly acquired entertainment giant, MCA Inc. In the end, the issues that kept Tinseltown's premier dealmaker from closing his biggest deal were quintessentially Hollywood--money, control, and ego.
But if Michael Ovitz proved difficult for Bronfman to land, wait until the Seagram scion settles in for a closer look at the economics of the industry he spent $5.7 billion buying into. Partly because of people like superagent Ovitz, Hollywood's salaries are increasing far faster than its revenues--and profits frequently are illusory. "The fact is, the economics of this industry are terribly out of whack," says industry lawyer Peter J. Dekom, a partner in the Beverly Hills firm Bloom, Dekom, Hergott, and Cook. "And they aren't getting any better."
Truth be told, Hollywood spending has reached Ramboesque proportions. Last year, the Motion Picture Association of America reports, the industry spent an average of $34.2 million to make a film and an additional $16 million to market it--both figures nearly double the tab of just seven years ago (chart). The result? Despite the growth of cable television and international markets, industrywide operating margins slipped from nearly 10% in 1989 to 6% in 1993, according to investment bankers Veronis, Suhler & Associates Inc.
This year is likely to be even worse. While the box office is just 1.5% ahead of last year, spending is surging faster than the runaway bus in Speed. Actress Sandra Bullock, who got $250,000 to star with Keanu Reeves in that flick, will collect $6 million from Warner Bros. Inc. for the upcoming A Time to Kill. Demi Moore is getting $12.5 million from Castle Rock Entertainment for Striptease. Sylvester Stallone has signed a $20 million contract for a Savoy Pictures Entertainment Inc. opus that doesn't yet have a script. "Everyone is making a bet that they can get the one that beats the odds and is a hit," says Armyan Bernstein, chairman of film producer Beacon Communications.
Bronfman doesn't have to look much farther than his own back lot to see that. Profit margins at MCA's $2.7 billion film unit, its largest single business, fell to 4% last year, down from 7% in 1993. This summer, the studio will release two films with $50 million budgets, Casper and Apollo 13, and it already is anticipating taking a write-down for Kevin Costner's $175 million Waterworld. In July, the company will start shooting the $75 million Daylight, for which Stallone will collect $17 million and 17.5% of revenues.
Could Ovitz have done much to hold MCA's costs in line? It seems doubtful. The odds that a Costner or a Stallone would sign with Ovitz for less than his going rate are low. "It's so much easier to say yes than no in this business," says Forrest Gump producer Steve Tisch. "Good talent wants to be fairly compensated, and if one studio won't pay, another will." With some key MCA talent already considering bolting, Hollywood sources say, Bronfman has sought to calm the situation by promising to keep the company's current management intact.
"NO PLAN B." As for MCA's CEO vacuum, Bronfman told company executives at a recent meeting that "there's no plan B." Names such as former QVC Chairman Barry Diller and Warner Bros. co-CEO Terry Semel continue to surface. But Bronfman's next big deal likely will be to sign DreamWorks SKG, the new studio being set up by Steven Spielberg, David Geffen, and Jeffrey Katzenberg, to a new contract. Sources close to DreamWorks say Geffen is fegotiating an agreement that would give MCA the right to distribute DreamWorks films, music, and TV shows, as well as to use any of its new characters in MCA theme parks. A DreamWorks accord could be completed by late June, the sources say.
That would be a sweet deal if it came off. But Bronfman will need more than a DreamWorks link to make MCA a winner. His failure to land Ovitz, who walked away from an offer of more than $200 million, taught him just how far big money goes in Hollywood these days: not very.