Edgar Bronfman Jr, president of Canadian drinks company Seagram has a new hobby: Hollywood. On August 1, Seagram will close its $5.7bn deal to buy MCA, Universal Studios’ parent, from Matsushita of Japan. A family business which brings in $6bn a year selling alcohol, Seagram unarguably has deep pockets to fund Jr’s latest toy. It will certainly need them as Hollywood and the rest of the entertain-ment business approaches a crossroads.

Bronfman should look no further than Time Warner to see the problems besetting the film industry. The company is riding high on the remarkable opening weekend box office takings from Batman Forever (see box) but is being torn apart by internal strife.

Political in-fighting resulted in the removal of senior executives from its music divisions Atlantic, Electra and WEA last year, and only last month music division head Doug Morris departed. The company is now reported to be considering the sale of its music division to reduce some of its estimated $15bn debt.

Time Warner is grappling with a key issue facing entertainment groups, movie studios and broadcasters everywhere: how to position themselves for the home entertainment business of the future. But there is a problem. No-one yet knows if this will be based on movies and programming being piped by cable TV companies or through the telephone industry’s fibre-optics.

Construction of the much-hyped information superhighway is nowhere near completion. Pressure is on top executives to second guess not just future technology, but consumer demand. Small wonder, then, if Time Warner chief executive Gerald Levin is feeling the squeeze. Rumour-mongers suggest he may soon be replaced by Mike Ovitz.

At present, Ovitz runs Creative Artists Agency, the Hollywood talent agency whose clients include Tom Cruise and Coca-Cola. Such is the reputation of CAA for deal-making that last week Ovitz’ partner Ron Meyer quit to join MCA as president, following Seagram’s decision to buy Matsushita’s 80 per cent stake in the company.

The industry believes Ovitz has the answers. He certainly has foresight and is now involved with Microsoft chairman Bill Gates. Gates recently completed a volte face by declaring that entertainment – and not information or business applications – will be the driving force along the information superhighway. He has set up a Hollywood office and invited Jeffrey Katzenberg, co-founder – along with Steven Spielberg and David Geffen – of Hollywood’s newest studio, DreamWorks, to Microsoft HQ to see how software and entertainment can fit together. DreamWorks is being financed with $500m from Microsoft co-founder Paul Allen.

For simply producing a feature film people want to see is no longer enough. Today’s movie moguls chant a new mantra: “Copyright. Branding. Leverage”. Gone are the days when a movie could be judged solely on box office success or failure. Now the question is how well it can be “leveraged”, through vertical and horizontal integration, new media and old. Which is why there is far more resting on the collective shoulders of Batman, Pocahontas and Judge Dredd, which opens this week, than simply recouping multi-mil lion dollar production costs.

“Maximising the value chain,” is how Scott Sassa, president of Turner Entertainment Group in the US, recently described the task ahead. Film, TV, print and music publishing, licensing, merchandising and computer games software all have a vital role to play.

Partly, it’s due to the massive cost of creating the “killer property” – the hottest movie which can lend itself neatly to many levels of exploitation, guaranteeing a revenue stream for years to come. Partly it’s due to the segmentation of the global entertainment business as a whole: into massive, multi-million pound blockbusters like Jurassic Park and the small gems made on a fraction of a shoestring, like Four Weddings and a Funeral. To play with the big boys, a company must have not only the capital to create a property, but also the capital to fully exploit it.

“Hollywood is very heavily into franchise movies. Studios increasingly pick what they develop on what will make just one movie and what will make a series,” says Clive Hill, UK managing director of licensing specialist Leisure Concepts International, which handles the rights for properties including Baywatch and James Bond (MW July 7). “As media merges, the more complicated it gets, but the more potentially lucrative it is for the studios.”

The hunt is on for the “killer application” to thrust down all distribution channels, he says. “Increasingly, the marketing machine is involved earlier in the day.” Of course, licensing and merchandising can help recover production costs but it cannot salvage a movie that bombs on release.

Even before it opens in August, Kevin Costner’s aqua-epic Waterworld is tipped to become the biggest flop in movie history. With a budget exceeding $200m, analysts predict it must gross at least $500m to break even. Assuming its box office performance is poor, no amount of merchandise or licensing can make up the difference without consumer interest.

But it’s more than a matter of recouping investment. With more outlets for films and programmes, consumers enjoy increasing choice. This poses a problem for entertainment producers: just how to ensure their product stands out from the crowd. The answer lies in the notion that movies themselves are brands, which must be nurtured, protected and developed for long-term exploitation and reward. Studios must work harder than ever to convince Nineties consumers why they should watch one blockbuster rather than another.

“It’s a question of trust,” says Robert Mitchell, director of marketing at Buena Vista International, Disney’s distribution division. For Disney, the name itself has become the brand endorsement. “Disney characters become as big as the movie – the merchandise sold before a film has even opened is massive.” For other studios, it’s a matter of cultivating a successful series, as with Batman (see box).

Leverage is long-term business. Take Casper, a movie based on a comic book and TV series about Casper The Friendly Ghost. Stephen Spielberg has now made a live action movie which opens in UK cinemas later this month. Even before its opening, a remake of the TV series is already planned to exploit the “new Casper”. And that’s not to mention the multi-tiered licensing and merchandising programme which involves the usual array of branded products and themed merchandise.

“The plan is to build Casper into a classic character,” says Keith Isaac, senior vice-president, international at MCA/Universal Merchandising, which handles licensing for Casper in the UK. “A video will be released at Easter, then a sell-through video release, followed by Casper the TV series – 26 half-hours which will run on UK TV in 1996.”

At MCA, licensing and merchandising is on the agenda even before a movie goes into production. Toys and software licences are core contracts to secure, around which a full licensing programme can be constructed (see box). The aim is to time each launch just a matter of weeks before the movie opens, Isaac says. Like all studios, MCA is increasingly making use of tie-ins with fmcg products to amplify promotion in-store and at point of sale. Creating a “classic” character guarantees all these activities a longer shelf life and can also have an effect on whether a sequel is made.

“The lifespan of a medium-sized, standalone movie can be about six weeks in the cinema. To build a franchise over a longer period is a stronger proposition for all concerned,” says Hill. LCI handles UK and overseas rights for James Bond and is now striking deals for the 17th Bond movie, Goldeneye, starring the new Bond, Pierce Brosnan. Bond licensing has only been actively exploited in the past 18 months, he says. Now, LCI is striking deals around Brosnan’s six-year commitment to making a further three films. Goldeneye opens in December. So far 25 companies have signed up.

Thinking – and acting – big reassures the growing number of promotional partners now tied to any top movie’s release. “People are still nervous of films unless they are underwritten by a large company with a history, a track record which shows it will deliver the finished film, and on time. It can be a rocky business when that doesn’t happen,” says Hill.

Companies that provide “content” will have the competitive edge in the new digital world, according to a report published by Price Waterhouse in June. Yet most have missed a trick by preoccupying themselves with the changing technology instead of paying attention to exactly what will encourage consumers to buy into the technology, the report warned.

The entertainment, media and communications business’ primary goal for the latter part of the Nineties must be to de-velop the “software” consumers want and, more importantly, will pay for. For the likes of MCA and Time Warner, the stakes are high and getting higher.


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