The Economics of Independents : Specialized Movies Are All the Rage These Days for Major Studios

While Hollywood obsesses over “event” movies, most major studios also have a thing these days for lower-cost specialized products.

It’s once again in vogue either to own a distribution company that markets and releases independently made, sophisticated movies--as Disney has with Miramax Films--or have an in-house unit that fulfills the same purpose--as Sony has with its Classics division, and Fox has with Searchlight Films. And PolyGram owns Gramercy Pictures, which was formerly a joint venture with Universal Pictures.

With such recent critically acclaimed films as “Shine,” “Secrets and Lies,” “The English Patient,” “Fargo” and “Lone Star,” studios like Universal--now under new management--and Paramount are the latest to want to jump on the bandwagon, and each is devising strategies to be in that business.

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Universal is in talks with independent distributor October Films (“Secrets and Lies,” “Breaking the Waves”), a New York-based operation looking for a capital infusion.

Despite erroneous reports that they too have held talks with October, Paramount officials say they want to enter the specialized market and recently came close to signing the management of Sony Classics before they decided to stay at Sony.

Warner Bros., which never followed the trend of having a “classics” division, is the only Hollywood studio that has no interest in aggressively pursuing the independent business other than releasing the occasional specialized film. (Warner’s parent, Time Warner, is in the process of trying to sell its autonomously run New Line, which has a specialized film unit, Fine Line Features.)

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“Our plate is full,” says Warner Bros. co-Chairman Robert Daly. “We’re not in the market to buy something and have no intention of setting up a separate distribution organization. . . . When you’re a major betting as big as we’re betting, we want management focused on those 25 or 30 movies, but obviously we’d love to have two or three [specialized films] a year.” The studio has released some successful independent films over the years, including “Driving Miss Daisy” and “Chariots of Fire,” though it recently missed with the widely panned “Surviving Picasso.”

Is this, in fact, a business that makes financial sense for the majors, whose resources, as Daly says, are heavily focused on making and marketing expensive, highly exploitable movies that have the potential of generating hundreds of millions of dollars worldwide?

Studio executives say that as long as expectations are realistic and costs controlled, it can work. There also are good reasons to be in the business: It’s a conduit to interesting filmmakers; there’s a cachet to be associated with festival-driven and often Oscar-winning titles; and it can add value to existing specialized libraries for exploitation around the world.

“A lot of companies want this type of product because it brings in new talent, and, if done in a fiscally responsible way, it can make some money,” says Michael Barker, who, with Tom Bernard and Marcie Bloom, runs Sony Classics.

“The business is low risk and prestigious,” says former Sony Pictures executive Fred Bernstein, who used to oversee Sony Classics and, before that, Gramercy when he was a senior executive at Universal.

Bernstein added, “It’s basically a break-even business year-in, year-out--assuming you keep costs under control. But, the only way to make real money is to get lucky,” Bernstein says.

Call it luck or good taste and instincts, Miramax, considered the premier specialized movie company, is very profitable and no longer suffers from the cash flow problems it had as a stand-alone operation, according to Disney.

The New York-based operation, founded in 1979 by feisty brothers Harvey and Bob Weinstein, spends more money than its competitors. But it’s also had a higher level of success. Still, in any given year, a number of the company’s titles falter at the box office, and last year it lost big on the expensive period piece “Restoration.”

It has been breakout films like Miramax’s “The Crying Game” ($62 million), “The Piano” ($40 million) and “Pulp Fiction” (more than $200 million worldwide), and Gramercy’s “Four Weddings and a Funeral” ($250 million worldwide) that make studios realize specialized films can have commercial appeal and attract wider audiences. Miramax’s current release “Scream,” a low-cost horror film made by its genre label, Dimension Films, has grossed $65 million to date.

But such hits are few and far between. Most movies today, whether they’re cheap or expensive, don’t make money.

The economics of independent and studio business differ vastly. The average cost to make and market a major studio film today is more than $50 million, with $100-million productions becoming almost commonplace.

Specialty films rarely cost more than $20 million, usually far less. Miramax’s average production cost is around $12.5 million. Its average acquisition cost is $4 million and average marketing cost is around $5 million. Sony Classics and most other specialty labels don’t spend nearly as much to acquire or market their films.

If studios can muster a few big hits a year, those can more than cover the losses. The specialty labels can’t count on that scale of profits, so must minimize their risks on each film.

In the last few years, the economics of the movie business have shifted, with the costs of making and marketing films rising significantly.

“More and more specialized companies competing for the gems out there have overpriced the market,” says Weinstein, acknowledging Miramax is also responsible.

Consequently, “the movies that should be profitable, aren’t,” observes Weinstein, who warns that if the majors with specialty divisions aren’t careful, “they’ll take their eye off of what they do and they’ll ultimately lose big money.”

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Historically, that’s been the case. In the early 1980s, four of the six studios had classics divisions to distribute foreign-language and American independent films. Twentieth Century Fox, Columbia and Universal followed the lead of UA Classics, launched as a division of United Artists in 1979. Francois Truffaut’s “The Last Metro” and “The Woman Next Door” each returned several millions of dollars.

“When UA became a viable place, the studios fell in line to have classics units,” recalls Barker.

Ultimately, with the exception of Orion, all the other studios abandoned their classics divisions.

“All those businesses failed because they didn’t know what it meant to be in that business,” says one veteran studio executive. “They were treating it with rules of a regular movie business rather than a specialized business.”

Small independent movies are review and publicity driven and need much more nourishing to stay alive in the marketplace.

Independent producer Ira Deutchman, who once headed Fine Line, says, “You don’t have to spend a lot to release these movies. The true art in releasing them is in publicity, not in paid advertising.”

In the early 1990s, the success of films like “sex, lies and videotape” and “Howard’s End,” each of which grossed about $25 million, once again prompted the majors to pay serious attention to the specialty market.

Gramercy was formed in 1992 by Universal and PolyGram. A year later, Disney paid $75 million to buy Miramax. And the following year, News Corp.-owned Fox formed Searchlight Pictures.

Today, studio executives say they view the specialized market as a good business, albeit a different one from their core movie operations.

Universal, which recently sold its half interest in Gramercy to PolyGram, wants to have a foothold in the specialized market, whether through an association with October or some other way.

“You can have it every way if you do it right,” says Universal Chairman Frank Biondi. “It’s a business that if you stick to the fundamental economics of that level and don’t go crazy, [these companies] have shown an ability to stay consistently profitable.”

Paramount Motion Picture Group Vice Chairman Robert Friedman says, “We believe there’s a market for specialty films if they’re handled properly and allowed to breathe and find their way to the public through the crowded marketplace.”

Friedman says it’s good for studios to work with independent filmmakers who “often have a fear of the plotting giants . . . and we are trying to change that so they’re comfortable.”