Box-Office Boom, Profit Gloom

When top movie talent is paid a chunk of the box-office take, the flick better be a blockbuster, or the studio can go hungry

By Ron Grover

Hollywood loves to bask in box-office glory. These days, a whole lot of basking is going on, thanks to the two jumbo hits -- Spider-Man and Star Wars: Episode 2: Attack of the Clones -- that are stoking the flames of a white-hot summer. Spider-Man's take is fast approaching $400 million, and Stars Wars: Episode 2 just whipped past the $250 million mark.

Fueled by this early-summer fare, box-office receipts are 21% ahead of last year's pace, and a couple of highly anticipated movies are still to be released. That's the good news.

The bad news is, glory doesn't necessarily mean green. It's going to be tough for the studios to make any serious dough on the next two beauties coming down the pike: Minority Report, being released on June 21 by Twentieth Century Fox, and Men in Black 2, from Sony's Columbia Pictures, which opens July 3.


  Let's start with Minority Report, a futuristic thriller based on a short story by the late Philip K. Dick, the same guy who wrote Blade Runner and Total Recall. Directed by Steven Spielberg, Report takes place in the year 2054 and stars Tom Cruise as a Washington police officer in a unit that solves crimes before they happen.

To keep the budget for the special-effects-laden film under $100 million, insiders say neither Spielberg nor Cruise took any salary up-front. Instead, they'll each take an estimated 15% of the box-office take. (Fox would not confirm or supply numbers for Minority Report.)

Lest you think that means 15% after Hollywood's notoriously tricky accounting system is applied, think again. When a studio takes on a Spielberg or a Cruise, it's taking on a partner -- someone who shares in every dollar as soon as it comes in off the Brink's truck. It's called first dollar, meaning Spielberg and Cruise get 30 cents between them of every dollar Fox collects from ticket sales, video sales, whatever.

That leaves the studio 70 cents out of every dollar to cover its production and marketing costs. (Studios get about half the price of every ticket bought for the film, somewhat less for videos or DVDs.)


  One top studio executive told me he passed on the project because the way he penciled it out, Minority Report needed to generate $180 million or more in just the U.S. for his studio to make any money. How likely is that? Well, only 18 films have crossed that threshold in the past three years, so it's no sure thing, even with Spielberg's prodigious talents and Cruise's huge box-office appeal thrown into the mix.

Spielberg's most recent futuristic film, last year's A.I.: Artificial Intelligence, grossed only $78.5 million, and Cruise's much-anticipated Vanilla Sky did just over $100 million in the U.S. -- not shabby, but not $180 million, either.

Why do studios take such risks? For starters, they don't have much choice on some projects. Spielberg and Cruise can pretty much dictate where they want to work, and on what. That changes the dynamics of how things normally are run. Usually, studios have all the cards, starting with their famously screwy accounting, where overhead -- such as secretarial salaries and private jets -- eats up 15% of a film's budget.


  There's also abundant faith that the simple act of plastering the Spielberg or Cruise name on top of a marquee brings folks to the theaters, especially in overseas markets, which make up nearly 40% of a typical film's revenues. Even if their names don't attract quite the crowds the studios hoped for, they still guarantee that plenty of seats get filled with a captive audience for the trailers of those other movies the studios make.

Having Spielberg and Cruise around helps out in some ways, such as luring promotional partners like Lexus and Nokia, both of which are putting up tens of millions in advertising support for Minority Report. Of course, with stars such as those two aboard, marketing for a film also takes on a life of its own. Fox will spend tons of money on promotion to make sure the film, already a heavy financial commitment, doesn't go down the tubes.

Bottom line: This is gonna be one expensive project. Can Fox make it all back? I'm not going to bet my mortgage on it. Even in a price-inflated world, selling $180 million worth of tickets is still a big job.


  Men in Black 2 is a slightly different story. The 1997 original did an otherworldly $576 million worldwide and created a franchise of videos, toys, and an animated TV show. So, Sony made it a mission to get Will Smith, Tommy Lee Jones, and director Barry Sonnenfeld back aboard for a second trip. But it took nearly five years, in large part because the talent wanted mucho bucks for an encore.

At one point, Jones asked for $40 million, about twice his going salary. The budget leapt to $175 million back then. Sony got it down to closer to $140 million but had to ante up about half the profits. Smith got a bump from his $5 million salary for the first Men in Black to $20 million, plus 20% of the revenue, Jones got $20 million plus 12.5%. Director Sonnenfeld got 10%, and 7.5% goes to Spielberg (yup, him again), who came up with the original idea.

That's a lot of money out the door, although Sony sources say the numbers go down if the film gets to $200 million in domestic box-office revenue (the original did $250 million in the U.S.). At that point, the participants go into "hiatus," one Sony person says, then pick up when the film goes above $300 million -- in all making it closer to a 37% whack if the film does very, very well. (Sony also declined to furnish figures.)


  Can Men in Black 2 do it? This is a very, very busy summer, with a lot of muscular films vying for moviegoers' hearts and dollars. The postapocalyptic Reign of Fire, the third Austin Powers movie, and Mel Gibson's UFO-thriller Signs will be just some of the distractions that could ding Minority Report or Men in Black 2 and keep them short of their breakeven point.

Probably the best -- or worst -- example of a studio giving away so much that its margins were razor thin was the 40% chunk Universal surrendered to make The Grinch, which grossed more than $260 million domestically after its November, 2000, release. The film didn't do nearly so well overseas, however. Still, director Ron Howard, producer Brian Grazer, and star Jim Carrey got hefty pieces of the action, as did Audrey Geisel, the widow of the author Dr. Seuss (Thedor Geisel).

The irony is that this year's bumper crop started with two films for which the studios weren't on the hook. With Star Wars: Episode 2, director George Lucas paid the $145 million in production costs himself, meaning he'll also take the lion's share of the proceeds. Fox gets a 10% fee for distributing it -- not a huge figure, but then again, it had no money at risk.

Sony spent a hefty sum to make and promote Spider-Man -- $139 million and $50 million, respectively -- but when the bucks came rolling in, it didn't have any big stars or directors to pay off. In Hollywood these days, that passes as a storybook ending.

Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online

Edited by Patricia O'Connell

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