Rohit Sharma

Budding movie giant Reliance Entertainment, owned by one of India’s corporate czars Anil Ambani, is supposedly bidding for Hollywood studio Metro-Goldwyn-Mayer (MGM). If reports are true, then Reliance will be joining global media biggies like Warner Bros., Lionsgate, Liberty Media, AT&T, Summit Entertainment and Elliott Management in the race to buy and save the debt-ridden studio that made classics like Gone with the Wind and The Wizard of Oz. However, with a massive debt of nearly US$4 billion riding on its head, industry observers are skeptical if the cover of trouble clouds pass over the studio soon. MGM’s case attests the fact that hard times are on for many Hollywood studios.

The iconic MGM is accountable to nearly 150 lenders who have now pushed the debt payment deadline to March 31. “The lenders took this action in support of the company’s efforts to strengthen its financial position and to facilitate the company’s ongoing process of exploring strategic alternatives, which include continuing to operate as a stand-alone entity and evaluating a potential sale of the company,” MGM said in a statement. Even though several companies have shown interest, the company has failed to attract a decent price. Most of the offers have been less than US$2 billion, which is quite insufficient for the studio that was bought in 2004 for about US$5 billion. In its initial days the studio used to produce and distribute more than 70 movies a decade, but it has co-produced only 3 movies in 2009 and has only 2 productions in the pipeline for 2010.

Towards the end of last year, Hollywood Media Corp. -- a leading provider of online ticketing services in the US -- reported that its net revenues came down to US$ 21.9 million from US$ 25.5 million for the corresponding third quarter in 2008. Hollywood, attempting to recover from last year’s recession wave, saw movie studios bearing the brunt of flopping movies and depreciating revenues from DVD sales.

Miramax Films, which delivered hits like Pulp Fiction and Reservoir Dogs, has faded into darkness and its sale is on the cards. Owned by Disney, the studio made lesser and lesser films recently, leading to its painful downfall that left almost 80 people jobless. Suffering with diminishing popularity as losses piled at Disneyland Parks, The Walt Disney Studios reported a US$13 million operating loss last year, down US$111 million from a year earlier. Disney struggled with layoffs that included Dick Cook, Head of Disney movie studios, and its films like Confessions of a Shopaholic, Bedtime Stories, G-Force and Jim Carey starrer A Christmas Carol failed miserably.

For the quarter ended September 2009, Time Warner (parent company of Warner Bros.) reported a decline of 6% in revenues from the year-ago figures to US$7.1 billion. NBC Universal (owner of Universal studios) reported a 30% fall in profit for the quarter ended January 21, 2010 to US$602 million, down from US$865 million in 2008. NBC’s movie unit faced trouble with its DVD sales too -- quarter four sales were down to 12 million units on weaker movies such as Inglourious Basterds and Public Enemy. In December 2009, NBC’s owner General Electric (GE) announced that NBC Universal would be 51% owned by Comcast and 49% by GE. According to a Barclays Capital report by Anthony J. DiClemente and George L. Hawkey, Comcast management accepts that 2010 revenue estimates are likely to be down year-on-year due to the rights fees associated with the February 2010 Winter Olympics on NBC. The report further said that Universal film releases could prove weaker in 2010, contributing to the decline for the studio.

Saggy story

A major chunk of the problem has been the worsening economy, especially since the past two years. Putting together a film production is not the safest of investments, so studios are trying to minimize their risks whenever possible. Expensive stars wreck the finances and now studios are not caving in. A report by Alex Dobuzinskis (Hollywoodreporter.com) says, “A-listers are having trouble with salary demands in the US$15 million range or participation approaching 20% of gross profits -- deals that were once somewhat common for top talent. Instead, they are being asked to take less money upfront and greater compensation only if a film breaks even.”

Also, with the lack of creativity among Hollywood studios, audiences are increasingly opting for independent films -- Paranormal Activity being a classic case. A low-budget film with no big credentials, Paranormal raked in a massive US$142 million since its release in October 2009. However, independent film production companies also suffer from the same financial problems as the major studios, and those who are not part of the Hollywood studio system have problems finding venues for the theatrical release of their films. The belief that the independents have lesser risk factor and more potential for a box-office success is notional. For the past few years, a number of independent Hollywood films have been proving out to be damp squibs. A trend of lowering revenues shows that in 2006 indie films box office collected US$416 million, but it fell to US$330 million in 2007 and further to US$ 161 million by mid-2008 (according to Variety magazine’s Editor blog entry in 2008). The downward trend is mainly because producers of such movies have only few promotional options to rely on. One of the most viable one is to submit their movies to film festivals to attract distributors and worldwide audience. However, only a few get selected to be shown.

Online Pirates

One of the biggest threats faced by the studios is piracy, which is slowly killing their incomes - Paramount Studio got a shocker from TorrentFreak.com that said the studio’s success story Star Trek was the most illegally downloaded movie of 2009 with 10,960,000 illegal downloads. According to the Motion Pictures Associations of America, copyright industries in the US lose US$25.6 billion a year to piracy and the economy loses nearly 375,000 jobs related to the industry. The US government has earmarked US$30 million to tackle piracy in the country giving a boost to studios who continue to take on ISPs for not curbing illegal downloads. Recently, a group of Hollywood film studios lost a landmark case against an Australian internet service provider (ISP) for illegal movie downloads by its customers. The case that brought together major studios such as Warner Bros, Disney, Paramount, Columbia and Twentieth Century Fox, was seen as an ambitious step to force ISPs to act against piracy.

DVD Duds

According to US-based Adams Media Research, DVD and Blu-ray sales, including films, television shows, concert videos and other content, declined about 10% to US$13 billion last year. Sales of movies on discs has particularly been dented by the rise of low-cost rental options like Coinstar Inc.'s kiosk chain Redbox, which rents DVDs for only US$1 for a day, and online subscription services such as Netflix Inc.

Unpredictable Endings

The best example of flipping properties came in the early ‘80s when Coca-Cola bought Columbia Pictures for US$ 750 million. When the losses were just about to start piling up and shareholders were becoming wary, Coca-Cola sold Columbia to Sony Pictures for US$ 5 billion, according to The New York Times (NYT). It is to be noted that Columbia was bought at a time when its balance sheet was healthy which is not the case with MGM. The latter comes with nothing lucrative besides its film library (all the pre-1986 collections are with Time Warner) and rights to movies like Superman 4, James Bond, The Hobbit and Pink Panther franchises, according to NYT. The situation of MGM raises doubts over the viability and survival for studios as they all gear up for tough times ahead. MGM’s proud baby, legendary actress Judy Garland had once said, “Hollywood is a strange place if you’re in trouble. Everybody thinks it’s contagious.”

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