‘UglyDolls’ flopped. But STX Entertainment’s problems don’t end there

In late 2015, the fledgling studio STX Entertainment was riding high on the success of its first movie, a well-reviewed low-budget thriller titled “The Gift.” It had grossed a healthy $44 million in domestic box-office revenue, following a red carpet premiere at L.A. Live.

“The Gift” was an early confidence boost for STX, whose co-founder Bob Simonds had set out with an ambitious, if counterintuitive, plan for his new studio: Bet on mid-budget movies driven by famous actors rather than well-known franchises. Backed by cash from Silicon Valley and China, the company also promised to take advantage of the burgeoning entertainment market in Asia.

But lately, the optimism surrounding STX, best known for the Mila Kunis comedy “Bad Moms” and the Kevin Hart vehicle “The Upside,” has turned to morbid curiosity in Hollywood.

The company has released a string of box-office flops this year, including the animated musical “UglyDolls” and the Diane Keaton cheer squad comedy “Poms.” Several top executives, including veteran film executive Oren Aviv, Chief Operating Officer Tom McGrath and chief brand officer Patti Röckenwagner, have left this year.

And its leaders have been forced to address persistent questions about STX’s financial health. At a recent town hall meeting in STX’s Burbank offices, Simonds, 55, vehemently told employees that the company was on strong financial footing, according to a person familiar with the situation who was not authorized to comment.

The challenges at STX come at a time when the market for films in the motion picture business’ elusive “middle” — movies that cost less than effects-driven blockbusters and more than cheap horror movies — has become increasingly treacherous. Dramas, comedies and thrillers targeting grown-up audiences have largely become the realm of television and streaming services such as Netflix.

“The concept, to me, was flawed,” said Tom Nunan, a former studio and network executive who teaches at the UCLA School of Theater, Film and Television. “They started with this big idea that there must be room at the buffet line for more than one kind of dish. Who says? Just because those movies don’t exist at the cineplex doesn’t mean people want them.”

To be sure, the decline of the mid-budget movie is not a problem unique to STX, which aims to produce 12 to 15 films a year with budgets of $20 million to $80 million. Films such as Lionsgate’s “Long Shot” and Annapurna Pictures’ “Booksmart” have failed to draw audiences, despite critical acclaim and tens of millions of dollars in studio promotion.

But STX’s struggles have been amplified by a combination of questionable strategies and movie choices, according to multiple people knowledgeable of the company’s business who spoke on condition of anonymity for fear of reprisals. Some said the company tried to expand too quickly into businesses including virtual reality. (STX has shut down its virtual reality production business, citing weak demand.) The company was also hobbled by its decision to not buy a film library that would have provided steady income, the people said.

Additionally, there have been broader corporate setbacks. In October, STX canceled plans for an initial public offering in Hong Kong, due to stock market turbulence amid a broader cooling of the once red-hot China film market. The company had sought to raise as much as $500 million in new capital from the offering.

In a further blow earlier this year, STX co-founder and TPG Growth executive Bill McGlashan was charged in the Operation Varsity Blues college admissions cheating scandal. McGlashan was fired by TPG and stepped down from STX’s board of directors. McGlashan, who was a strong proponent of STX, pleaded not guilty in March.

STX has been in talks with potential new investors, including Saudi Arabia’s Public Investment Fund, according to several people familiar with the matter. That would be a striking move, following the public outcry over the killing of U.S.-based journalist and Saudi dissident Jamal Khashoggi that appeared to chill Hollywood’s appetite for Saudi investment.

STX executives declined to comment on the Saudi outreach but stressed that the company remains well-financed. In March, the studio secured $100 million in new equity from existing investors. The company has about $300 million remaining capital in a credit facility led by JPMorgan Chase & Co., executives said.

“Because of our unique capital structure and how we finance our films, television series and digital content, we do not require large cash equity checks to produce or release the entertainment we produce,” said STX Chief Financial Officer Andy Warren. He projects company revenues will reach $600 million this year, up 200% from 2017, fueled in part by TV projects.

Executives maintain that STX can withstand film disappointments better than other studios because of its relatively small size (it has 160 employees), lower marketing costs, and ability to reduce risk on films because of its output deals with foreign distributors and co-financing partners. They say most of their films have been profitable, including Amy Schumer’s “I Feel Pretty,” Jennifer Lopez’s “Second Act,” Jackie Chan’s “The Foreigner” and the Gerard Butler crime thriller “Den of Thieves.”

“We had confidence that we could make, market and distribute films at scale with a radically rethought, resized and reshaped overhead structure and marketing strategy,” said STX film chair Adam Fogelson. “These films, supported by a more efficient marketing approach, are the foundation of how you create a business with a company our size.”

The entertainment industry is notoriously challenging for independent start-up companies trying to compete with the major studios, which are owned by large conglomerates.

Ryan Kavanaugh’s Relativity Media declared Chapter 11 bankruptcy in 2015. The film unit of Donald Tang’s Global Road Entertainment sought protection from creditors late last year. Even well funded operations have struggled. “Hunger Games” studio Lionsgate’s stock has sagged, and Megan Ellison’s Annapurna Pictures has tightened its belt.

And yet, there was reason to believe STX would succeed. Its investors include respected names including TPG, known for backing Airbnb and Uber. It also received funding from Chinese investor Hony Capital, Hong Kong-based telecom PCCW and John Malone’s Liberty Global. The company in 2015 scored a three-year film financing deal with Beijing-based Huayi Bros.

STX launched with an impressive leadership pedigree. Simonds, a Yale University graduate, found prior success producing Adam Sandler movies including “Billy Madison,” “Happy Gilmore” and “The Wedding Singer.”

Fogelson’s track record at his previous job running Universal Pictures included such mid-budget hits as “Ted,” an oddball comedy from writer-director Seth MacFarlane about a talking plush bear that grossed nearly $550 million. Fogelson, who honed his skills as a marketing executive before getting the top Universal job, was ousted in 2013 by the studio’s owner, Comcast Corp.

Fogelson frequently cited Universal movies such as “Pitch Perfect” and “Bridesmaids” as evidence that original, smaller pictures could still succeed if made and marketed correctly. But STX’s critics say the company has suffered from poor choices when it comes to picking movies and marketing them.

In an early example, the company decided to release the R-rated coming of age comedy “The Edge of Seventeen” on the same day as Warner Bros.’ “Fantastic Beasts and Where to Find Them.” Others at the company were concerned that the smaller movie would get clobbered by the big-budget fantasy film, which targeted a similar audience. The title, they worried, would also be a problem because teens wouldn’t be able to see it without an adult guardian and adults wouldn’t be interested. “The Edge of Seventeen” opened with $4.7 million, despite positive reviews.

In another blunder, the company took a big swing on “The Happytime Murders,” a sexually explicit comedy that paired twisted Muppet-like characters with a foul-mouthed Melissa McCarthy. The film, which cost $40 million to make, received scathing reviews and flopped with $27.5 million in worldwide ticket sales.

Then there was “UglyDolls,” meant as STX’s entry into the competitive animation business.

The studio in 2017 hired “Spy Kids” director Robert Rodriguez to direct the movie. Rodriguez pitched multiple versions of a story for “UglyDolls,” based on a brand of misfit toys. But Rodriguez’s vision for the project differed significantly from the straightforward story the studio and the film’s China-based co-producer Alibaba Pictures wanted, according to people with knowledge of the situation. Rodriguez did not respond to requests for comment.

“Gnomeo & Juliet” director Kelly Asbury was later brought in to replace Rodriguez, facing a tight schedule in order to hit the studio’s aggressive May 2019 release date.

“For me, it was a ‘get it done’ situation,” Asbury said. “If I could go back, if I could rub a magic lamp, we would’ve had another year. But that was not the case, and I knew that going in.”

The $45-million movie collected a total of $26.6 million in box-office receipts. STX said last month that Aviv, who was put in charge of “UglyDolls” at the studio, would exit the company.

Executives stressed that the company is growing its budding television business with upcoming series for Amazon Studios, Netflix and Jeffrey Katzenberg and Meg Whitman’s Quibi. STX also wants to expand its film library through acquisitions and is looking to produce more movies that would be better suited for TV and streaming.

“There definitely has been a shift in the marketplace in the last six months,” Fogelson said. “The bar has gotten higher and as a company, we’ll continue to evolve and adjust.”

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