The Hot Blog: Who Was On Watch, Man? (Landed In LA)

August 19, 2008

Who Was On Watch, Man? (Landed In LA)

I find the Watchmen situation very interesting.

The first striking thing is that for all the claims that so many make to journalism in this town, once again we have a major story - studios actually suing other studios is a rare occurrence – that didn’t actually break until a lawsuit got to the public release of a judge’s preliminary decision. And even then, you can be sure that the “news” was not unearthed, but delivered.

Perspective.

As for the suit itself, no one on this side of the table has the slightest idea what the real answer is.

Comparisons to the Dukes of Hazzard situation are specious… other than to bring WB Legal under the microscope again. It’s one thing to not have paid the guy who owned underlying rights. In this case, everyone knew that Larry Gordon’s Largo Entertainment was in bed with Fox at the start of the company’s life and extreme caution should have been exercised. At the very least, the first thing development execs normally consider on a project that’s been bouncing around is whether there is any money out there against the project. Someone decided to simply listen to Larry Gordon’s people and not to do due diligence and ask Fox, lest they get the wrong answer.

You can bet dollars to donuts that WB’s position will be to blame Gordon and to try to hide behind whatever indemnification and claims his contract offered the studio.

But it’s also very unlikely that any judge will simply allow it to pass on that because it was unreasonable of WB Legal to simply proceed on that basis. Fox will argue that it is standard industry business procedure to “follow the money” and that a call should have been made.

It appears that, had they asked, the price tag could have been $1 million or so for development expenses and some small piece of the film’s net. After all, the movie has proven to be a tough one to get made. But Warners instead made their collective self a very attractive target. And it is easy to imagine this becoming a $50 million unexpected windfall for Fox… and that would be getting off cheap, if the suit holds up.

Another reason this interests me is that my first serious investigative piece on Hollywood, which was never published, was about a very similar case. And the story, the details of which remained private, didn’t get published because it was too hot to handle in the day.

The movie was The Flintstones. And the punchline was that the studio, Universal, had made the film with Amblin based on the first live-action screenplay, written by Steven DeSouza. The problem? They didn’t own that screenplay, which had been commissioned by an out-of-business production company whose assets had been sold and re-sold and re-sold over the years, so that none of the companies in the chain of ownership knew whether they actually held the rights to the script.

The reason there was so much heat in the story was that there were all kinds of payoffs going on, involving union tampering and cover-ups with the knowledge of people who should have known better. And like Watchmen, the film had a number of false starts before it was finally made. Things had gone so far as Universal having plans drawn up for the Flintstones section of Universal Studio Tours theme park… which were thrown out when the problem of ownership cropped up again.

I’m not going to name names and throw out specific accusations here and now. There were threats of lawsuits back then, though I had the goods, on the record. I couldn’t prove every payoff… only the actions of some very well-known folks who coincidentally did exactly what some lesser known folks - who admitted what had happened - had done… actions which on their face were not in their self-interests.

But even that story, while it involved hubris, didn’t involve an ongoing business that had invested hundreds of thousands into something and could not be reasonably expected to sit quietly while someone else capitalized on that expenditure. The original copyright owner was long out of business. As I just wrote, the multinationals that might have had rights didn’t even see a blip on their radar about it… until I called asking questions.

There are literally scores of thousands of film projects that are in “permanent” turnaround, encumbered by so much in development money that they are unlikely to ever resurface. Some truly great scripts… mostly not. No studio would ever think it could just pick up the script and greenlight it without figuring out what was owed against it, no matter what the producer’s lawyers said.

And keep in mind, Fox is the company that bought an entire finished movie of The Fantastic Four so it could bury it and start their franchise.

And what, dear reader, of Paramount, the owner of the foreign rights to this project? And Legendary, which likely footed about 25% of the overall cost of the film?

300 did 6.6% more at the overseas box office than at home. The film is due for near day-n-date release in most of the major international markets. If Fox prevails, they have dibs on all of that too. So all of a sudden, even if the domestic/world split is 50/50, the math gets uglier for WB.

Made Up Numbers - $400 million worldwide. Fox gets 10% of the gross rentals... $22 million. $11 million of that is Paramount’s. $5.5 million is Legendary’s. But WB can’t take that money from them under their deals, it would seem likely. So, WB’s $55 in rentals is now $33 million (and $20m in distribution fees) against their share - about $90 million - in P&A and production. The $37m left over can surely be made up in DVD and other ancillaries, though again, WB is looking at a quarter of the revenue minus a full – guessing – 10% that it has to eat for all the funding entities and give to Fox. So you’re looking at about 15% of the post-theatrical net, putting the breakeven for WB at about $400 million gross from post-theatrical… Fox gets $42 million (minimum) for suing… Paramount has a more profitable movie than any they had this summer… and Legendary continues its current winning streak.

And if the movie actually did $400 million worldwide, but it was, say, a 55% international split, WB being forced to keep Paramount whole would mean that a very successful movie could be an actual money loser for WB, even factoring in distribution fees.

Brutal.

And a remiinder of how narrow the margins are in the movie business.

Anyway… don’t expect the movie to delayed… expect a very expensive settlement before October’s out, almost inevitably before another major finding by this judge.

The very least that Fox can expect to get out of this is their development costs, probably doubled and interest added. But Fox is playing for keeps. They will not bury a $300 million investment by a fellow studio. The blood spilt would be too red and slippery. But don’t expect them to go away for anything less than $25 million. And they will take an amount like that now… because they don’t want to gamble either. 100% of WB’s profit could be $0.

And when it comes to alternative remedies, gross points make more sense than anything else. It would be too harsh a remedy to force Paramount out and to give Fox, say, international distribution. To eat a larger percentage of the gross would be to really encroach on the investment well before any chance of recouping.

It will be interesting. And my guess? Completely silent when it happens. Sealed by agreement, settled out of court. Rumored. Lied about. And done. Soon.

Posted by dpoland at August 19, 2008 12:58 AM

Comments

I just hope Watchmen is as good as The Flintstones.

Posted by: Josh Massey at August 19, 2008 05:16 AM

I'm sorry David, but can you please clarify this for me?

If a movie grosses, let's say 100 mil domestically, does the studio gets all of it? what about the theater? don't they keep about 50% (less at opening but incrementally later, averaging a 50%)

Or did I misunderstood the guy that told me so?

Posted by: BTLine at August 19, 2008 06:39 AM

WTF? Not released? Fox really doesn't get it. If you love the property so much, shoot the picture. If not, make your claim and grab a chunk of the profits.
I can't believe that Warner didn't have something before greenlighting this thing.

Posted by: doug r at August 19, 2008 06:47 AM

The theatre-studio split varies from movie to movie. Some start out with the studio getting as much as 90% of opening week gross. From there, it usually drops each week until the split is more in the favor of the exhibitor, which is why studios almost prefer a movie to be heavily front-loaded. A 50-50 split is usually trumpeted as what it averages out to, but it seems to me that's probably slightly more favorable to the studio, especially in the case of those front-loaded movies.

Posted by: Bart Smith at August 19, 2008 06:51 AM

Aw, and here I was hoping Dave would go for a fourth story that slams McWeeny and his Star Wars stance.

Aw, well. The day is young.

Posted by: storymark at August 19, 2008 09:04 AM

It's kind of a truism that when your lawyer tells you a deal is "closed" at most studios, that means you're done, the contracts may have a few changes here and there as the details are hammered out, but execution copies are forthcoming. But with Fox, you're not "closed" until you cash that first check as they are tough, tough bastards famous for scotching as many deals as they make.

And - I believe - this is them living up to their reputation.

But that's their job. If they can word a contract in such a way that, years later, it can mean even a $25 million win for their studio on another studio's project, they've more than earned their paycheck.

But yeah, have to agree with David's statement here:

"At the very least, the first thing development execs normally consider on a project that’s been bouncing around is whether there is any money out there against the project. Someone decided to simply listen to Larry Gordon’s people and not to do due diligence and as Fox, lest they get the wrong answer.

You can bet dollars to donuts that WB’s position will be to blame Gordon and to try to hide behind whatever indemnification and claims his contract offered the studio."

...as that's been the ever-present chatter for the past 24. Was talking to a head-of-business-affairs of a studio last night who more than concurred.

Posted by: SJRubinstein at August 19, 2008 09:19 AM

Dave wrote: "The first striking thing is that for all the claims that so many make to journalism in this town, once again we have a major story - studios actually suing other studios is a rare occurrence – that didn’t actually break until a lawsuit got to the public release of a judge’s preliminary decision."

For what it's worth, The Hollywood Reporter did run a piece in February about the filing of the lawsuit.

Posted by: AssumedName at August 19, 2008 02:03 PM

Not the case anymore, Bart.

The split is almost always 55% flat now... to the studio.

This is one of the key reasons why movies don't stay in theaters... there is no longer any motivation for the exhibitor to keep a film on a screen longer than they have to.

Wow, Storymark... bitter?

Thank you for the clue, Assumed... their piece doesn't mention or link to it, probably because it's behind a pay wall.

Here is their blog entry and a pdf of the complaint.

Posted by: David Poland at August 19, 2008 02:29 PM

Really, Fox Legal is repped? By Louis Karasik at Weston Benshoof?

Posted by: T. Holly at August 19, 2008 03:00 PM

"Unlawful Entry."

THANK YOU, Fox complaint - I've been trying to remember for days what movie the trailer to "Lakeview Terrace" reminded me of.

And I can't believe I read the whole thing, either.

Posted by: SJRubinstein at August 19, 2008 03:04 PM

Thank you Fox complaint? Who's defending WB?

Posted by: T. Holly at August 19, 2008 03:40 PM

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August 19, 2008

Who Was On Watch, Man? (Landed In LA)

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