Category: Entertainment Industry

I’d love to read a detailed story about how WB renegotiated all of their backend deals to make it possible to release their whole 2021 slate direct to HBO Max and not alienate A-list directors, movie stars, and co-financiers. That’s a very complicated situation.

— Keith Calder (@keithcalder) December 4, 2020

So let’s give it a whirl then, shall we?

Warner Bros. is a primarily a distribution company and to some extent acts like a bank. 

Generally most of their contracts are written to protect themselves and their financial interests at the highest end, not the interests of the producers or production companies that work for them. 

Usually they’re acquiring content from production companies and the acquisition doesn’t tie them down to particular release patterns, marketing dollars, or other preconditions. Producers can consult on some of the decisions, but usually the studio is going to do what it wants.

This is done, in part, because it’s in everyone’s general interest that the picture makes the maximum amount of money. Usually the studio is putting (at least some of) their own money up in advance, so it doesn’t behoove them not to maximize their return.

Production companies, directors, writers, and actors all rely on them having skin in the game. In this case, they’re the ones left physically holding the bag.

With this move, the studio is covering its (and everyone else’s) best interest by attempting to recoup as much as they can. Since they control the release from top to bottom on their own platform all the money goes into their own pockets instead of giving a sliding percentage of it away to so many of the popcorn and carbonated sugar syrup grocery stores that masquerade as movie theaters these days. 

One also needs to keep in mind that it’s quite common for talent contracts to fester for long after the start of principal photography and some never get to the point of receiving wet signatures. I’ve seen dozens of contracts get wet signatures long after their films’ theatrical releases.

So it’s entirely possible that they could be waiting until now to drop the bomb. But what is the talent going to do? They’re not going to fail to show up and support their work, that’s for sure. Everyone knows the business is in the hole and not coming back any time soon.

The finance costs of some of these movies would completely eat the studios alive if they don’t do something. What else can they do? The best they can. Grin, bear it, and keep the gears turning.

And let’s not forget about the total turkeys which can be illustrative. There are many movies that get made and acquired and don’t get a release at all. Sometimes the studio makes the determination that it’s in their interest to sit on a film and never release it because the cost of prints and advertising is just too great.

Here’s a great example. Do you remember the 2000 blockbuster hit The Third Wheel starring Ben Affleck and Luke Wilson?

What?! Never heard of it? Affleck shot it between Reindeer Games and Bounce while starting talks for doing Pearl Harbor for Bruckheimer at Disney.

His star was on the rise after Good Will Hunting and Armageddon and it was generally obvious to Mirimax and the producers (which included Matt Damon and Ben Affleck), that an incredibly mediocre film starring him might potentially end his career or the pairs’ producing careers.

So, what the heck? We only spent a few million on it, so we’ll eat the cost of production and maybe release it in a handful of foreign territories in a cheap dub a few years down the road and no harm, no foul. Right?

But what about all the other crappy movies that come out and tank at the box office? It’s often not until your film has had a test audience screening that the studio truly slots its release date. Any dates prior to that are just flexing to scare the competition. 

After a test screening, the last thing you want to hear is that it’s coming out in late August or February. Studios don’t release movies in those time periods—they escape! Those slots are the kiss-of-death because no one goes to the movies then.

The studio knows that but generally needs to recoup some money. Typically they’re also paying interest on production loans or bridge financing which they can’t sit on forever.

So in an effort to clear the books, they push the movie out with the least amount of P&A so that they can begin bundling their films into all the follow up release windows in hopes that those will at least cover their cost.

If there are law suits after-the-fact, they’ll likely be over the back end deal segments that provide bonuses for talent for box office performance. But guess what? Usually creative finance on the studio’s part is done to prevent these bonuses from being paid out in the first place.

And shame on the agents and attorneys of the talent for not adding in bonus payouts for performance of releases in each window segment of the pictures lifespan. You can bet those clauses will be baked into contracts going forward.

I’ve got some first look and producing deals as well as some acquisition paperwork kicking around the office here, but without looking through them, I’m pretty sure that there’s nothing in those contracts that requires the studio(s) to actually release anything.

Of course it only hurts the studio to buy material and just sit on it, so can you fault them for doing the best they can? 

My guess is that with the givens, they’ll get a massive bump in (recurring–everyone’s favorite) subscription income and it will either mostly or completely cover a large part of the gap. And likely better for their part, it’s harder for talent to audit internal numbers and machinations within a studio to prove that the movie made it to profit levels necessary to pay off points on the back end.

If there is a contractual obligation lurking around somewhere, they’ve always got a force majeure clause in there somewhere that would certainly cover the issues they’re living with.

Some of the more interesting questions relate to the studios’ relationships with exhibitors which generally aren’t owned by them. That may be a slightly harder question, but what are theater owners really going to do? They can’t guarantee the box office turn out that they might have before, and a poor box office turn out is more likely to do irreparable damage to a film’s release in all the subsequent windows. 

Generally with a sliding scale of box office receipts going to the exhibitors, they’re really in the business of selling popcorn which is where they make all their profits, but as we all know, that’s not doing very well for them right now either.

It’s actually more likely in the studio’s interest to pull their films. Their smaller budget releases in January and February are far more likely to overperform by being released during the pandemic to audiences who can pay a premium for them and who may feel a dearth of new entertainment options.

Meanwhile all the parents who couldn’t afford the $100+ for the babysitter and incidentals are likely to appreciate their HBO Max subscription all the more.

But wait! There’s more! I’ve completely buried the lede! Peter Kafka alludes to it in his interview with WarnerMedia CEO Jason Kilar earlier today, but I suspect he is completely unaware of it. (This is likely why Vox gets the interview in a soft presser and not a senior legal journalist with The Hollywood Reporter or Variety.) For the careful viewers at home, let’s not forget that the 1948 Paramount Consent Decree died quietly earlier in August this year. This essentially makes it much easier for studios to become vertically integrated again. The studios can now own the entirety of the finance, production, distribution, and exhibition chain like they could in the “Golden Era” of Hollywood. If you want to ask questions about something, this is the area to focus on! 

Give it another couple of years and studios will eventually own talent agencies again… Who’s going to be the next Lew Wasserman?

If only we had a President who was also in the entertainment business who could monkey around with this arrangement the way Reagan did…