Hollywood's Cash Crunch

A very, very wise songwriting team (okay, it was the Abba guys) once wrote, "The history book on the shelf/Is always repeating itself." The recently announced prospect that India's giant conglomerate Reliance was planning to fund a revived incarnation of DreamWorks certainly reflects that idea.

Experience says there's always somebody with deep pockets who's fascinated to be in the film business.

Even as the Reliance-Dreamworks talks were said to be ongoing, somebody decided to heed a contrary lesson: a $450 million credit infusion from Deutsche Bank to Paramount collapsed, apparently as a result of too few takers when the bank went looking to lay off some of the deal's senior debt positions.

The two stories are not unrelated, of course--when DreamWorks departs Paramount, the studio will need a war chest to produce its own slate of features.

A good interpreter of such events is Jonathan Taplin, a seasoned film business operative (he began as the hands-on producer wrangling Martin Scorsese's Mean Streets and The Last Waltz into existence) and currently a professor at University of Southern California's Annenlberg School of Communications. He was on the Reliance story with some prompt comments on his blog:

"The movie business reminds me of that old Charlie Rich Tune, "Who will the next fool be?" The news that a unit of one of India's largest conglomerates, Reliance, is contemplating starting a new Dreamworks 2 in what the Times article hints could be horrible terms. OMG! When will the world of finance finally learn?"

Taplin's thinking isn't just based on what the anecdotal evidence clearly shows--big-shot investors will make some very disadvantageous deals based on fond hopes for a rare success (or string of successes) and the prospect of getting to hobnob at a premiere or on a film set.

"I actually think it would be healthy for the business to have a lot less outside money," he told me when we spoke this week, "Then fewer pictures would get made, and we wouldn't be having six of them opening on a given weekend where maybe two are gonna be okay but the rest are sacrificial lambs."

In general, though, Taplin said he sees a marketplace too crowded with would-be tentpole films, partly as a result of the majors cranking out twenty-odd pictures per year to feed not only the theater pipeline but an addictively robust (though less and less so) home video market: "They've gotten so used to this DVD business that it's become the tail wagging the dog. it's hard for them to wean themselves off it because they've got this gigantic distribution nut to cover and they think they can do it by making 25 films."

Taplin reserves some praise for Fox, which (although its recent slate has been getting a critical drubbing), "Knows how to control talent costs, and tries to hit a lot of singles rather than home runs. It has never fallen into the game of market share, which was a legacy from when Coca Cola owned Columbia. In the soda pop business, market share is everything; but it means nothing if you have a variable cost product--it's suicide."

Taplin also made the first serious attempt to create a viable online distribution medium with his Intertainer company about 10 years back.

What he came to realize was that after an initial burst of enthusiasm from the studios--"We had five or six thousand good films, that's a lot more than iTunes does now."--any online scheme was bound to fall prey to the system whereby TV rights must be granted their own exclusive window of time. The firm slowly descended into minor legend  as a cautionary tale about online film distribution.

Reliance and DreamWorks notwithstanding, Taplin doesn't see much hope in the near future for large-scale film financing to revive.

"Clearly ", he says, "the hedge funds are trying to go certain places to get liquidity, find the outlying revenues for some of these big slates like [Relativity Media's Ryan] Kavanaugh did. And I think they're kind  of shocked at the bids they're getting, twenty cents on the dollar kind of stuff. So I can't imagine that the smart money in the U.S. is going to continue to finance much."

Thus the Paramount deal, even if the bankers could have cobbled it together, was headed for "a price that wouldn't make any sense anymore for Paramount. It's the same reason Henry Kravis or Blackstone have not done a big deal in the last several months--the cost of junk financing is ridiculous right now. The subprime meltdown has affected every other part of the capital markets system. And money is getting just too expensive."