Hollywood Execs Face Their Own Drama

This is shaping up to be a long, hot summer for Hollywood's movie moguls, where big-budget flicks fizzle like a wet firecracker, DVD sales fall flat, and no corner table is safe at upscale Mr. Chow's.

It's looking like more than a few studio executives could find themselves without jobs before the year is out. On Aug. 18 debt-strapped Metro-Goldwyn-Mayer announced it was kicking CEO and Chairman Harry Sloan upstairs, replacing him with a trio of members of a newly created Office of the CEO that includes a turnaround expert who is widely expected to help bring in new investors. That comes amid Hollywood's buzz about the futures of Universal Pictures (GE) Co-Chairmen Marc Shmuger and David Linde, who have presided over a string of flops this year including the Russell Crowe flick State of Play and the hugely expensive Will Ferrell comedy Land of the Lost.

Throw in a shakeup at Paramount Pictures (VIAB), where studio chief Brad Grey axed his two top production executives, John Lesher and Brad Weston, and the always tenuous situation at Weinstein Co., where brothers Harvey and Bob Weinstein need a strong showing from this weekend's bloody Quentin Tarantino flick Inglourious Basterds to stop rumors of its demise.

"A Humbling Year" Why the gloom and doom? For starters, the domestic U.S. film box office, which started the year strong, cooled this summer. With the exception of a few blockbusters—Paramount's Transformers: Revenge of the Fall and Star Trek, for instance, or Warner Bros.' (TWX) latest Harry Potter installment—a slew of films such as Universal's Johnny Depp flick Public Enemies performed below expectations. At the same time, the once robust DVD market, which used to cushion the impact of underperforming flicks, is expected to fall by about 8% this year, according to Adams Media Research. That's caused some studio executives to wonder whether the problem isn't more than just the recession—say, that Tivo-ed TV programs and video games may be taking the place of those shiny little discs.

The result is that even though the U.S. box office is up by 6.5% so far this year from last year's depressed numbers, studios are showing more red ink than in prior years. (Universal had two years of profits before this year's tank job.) In an interview with the Los Angeles Times, Universal's Shmuger called it "a humbling year" but said the studio is "refocusing" its efforts on making modest-budgeted comedies, which he says are the product with which "we've always historically done best." Universal did not comment for this story.

To top it off, Hollywood's fall from grace has left fuming more than a few investors who rushed into the film business at what was clearly its top. MGM's Sloan, who will remain as chairman, likely took the heat from private equity investors despite aggressively moving to restart TV and film production and to create foreign TV outlets. The problem was that investors such as Providence Equity Partners, TPG, and DLJ Merchant Banking Partners had joined in 2005 with Sony (SNE) and Comcast (CMCSA) to drop $5 billion in cash and assume debt on the company. MGM is now probably valued at about half that amount. The studio has six films in its pipeline, including remakes of the 1982 film Poltergeist and 1980's Fame.

Weinsteins' Woes At the same time, cash flow from MGM's huge library of older hits fell 5% this year, according to sources who have seen the numbers. The company faces a $250 million payment on its revolving credit in April and has hired investment bank Moelis to help it refinance $3.7 billion in debt remaining from the 2005 acquisition. In a statement, the MGM board praised Sloan for "substantially growing MGM's existing business and leading its expansion into new areas."

Like MGM, the Weinsteins also face a passel of anxious investors who helped raise $1 billion for the brothers in 2005 after they parted ways with their ultrasuccessful Miramax operation and its Disney parent. The Weinsteins have since produced a long list of lackluster films and are said to have received a $75 million bridge loan from Ziff Brothers Investments earlier this year to tide them over. In a recent interview with The New York Times, Harvey Weinstein wouldn't comment on the loan or "unsubstantiated claims from unnamed sources." Instead, he told the Times that the company's fortunes would improve with its upcoming slate of films and a library of 250 films that are still generating revenues.

It's the Hollywood way. You have to believe that there is always another hit around the corner. And Harvey believes. So do the folks at Universal, MGM, and elsewhere in Tinseltown. Or at least a lot of suddenly nervous execs are praying that they can make it so.

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