Cruise may have been undone by DVD slowdown

Tom Cruise

LOS ANGELES - The public rupture this week between Paramount Pictures and Tom Cruise generated plenty of dramatic headlines.

But the breakdown in the negotiations over renewing a 14-year deal between the Viacom-owned studio and Cruise's production company, Cruise/Wagner Prods., might have been the result of something as mundane as DVD sales.

That, at least, is the view of a number of executives and analysts who offered their take on the situation yesterday, a day after Viacom Inc. chairman Sumner Redstone stunned Hollywood with his comment to the Wall Street Journal that he did not think "someone who effectuates creative suicide and costs the company revenue should be on the lot."

While egos, star power and box office clout all may have been part of the equation, flagging DVD sales could have served as the tipping point that led Paramount, headed by chairman Brad Grey, to make an offer that would have scaled back Cruise's rich package of compensation for the films he headlines for the studio.

Even though this year's Mission: Impossible movie fell short of its two predecessors, no one is arguing that Cruise hasn't amassed an impressive box office record at Paramount. But he also enjoyed a famously rich deal that guaranteed him about 20 per cent of box office revenue as well as a piece of DVD sales -- a perk few stars have ever commanded.

During the past 18 months, growth in the DVD market has slowed dramatically. As a result, home video isn't automatically providing the same guaranteed upside to films that might not have performed spectacularly in theatres. In turn, the studios are becoming less willing to strike deals that give stars participation in box office revenue as well as a portion of DVD sales.

"A lot of pressure has been brought to bear on these corporations, which have to grow their stock earnings in an area that is not growing by leaps and bounds," one major talent agency chief said. "So what are their choices? They have to cut back."

Said a high-ranking studio executive: "DVD sales was a growth industry that covered a lot of sins. We've now seen the top, and we have to be more responsible about everything. When the best-case scenario won't work or you only make a 5 per cent margin on the best-case scenario, you have to take a step back. It's not the upfront money (for the talent) but the participations that are hurting us."

Redstone's observations notwithstanding, a number of Hollywood insiders believe it may have been the M:I-3 balance sheet that Paramount found unacceptable.

"M:I-3 made money for Paramount, but it made more for Cruise," Vogel Capital Management president Hal Vogel said. "In today's market, you can't have individuals walking away with the lion's share of the profit and the studio that risks the capital -- in this case $150 (million)-$200 million -- get less payment then the guy who didn't risk any capital."

The situation isn't unique to Paramount. Slowing DVD sales are contributing to the constriction throughout the entire entertainment industry, which has seen widespread layoffs at Sony, Warner Bros. and, most recently, the Walt Disney Co.

Studios also have begun backing out of high-profile films with big budgets and potentially expensive profit participants. Just recently, Fox and Sony pulled the plug on the Jim Carrey/Ben Stiller starrer Used Guys because of budget concerns. It was reported that the two stars along with director Jay Roach would have taken home 27 per cent of the box office revenue. And without explosive DVD sales, those types of deals are not as palatable to the studios, which are now divisions of huge conglomerates that are focusing ever more intently on the bottom line.

The paradox is that while the studios are cutting corners, private equity is so flush with cash that it is looking for new places in which to invest. While such private equity firms as Relativity Media and Legendary Pictures are making deals with the studios, the opportunity for private equity to deal directly with an actor and his production company could prove appealing.

Cruise's producing partner Paula Wagner said Tuesday that C/W has commitments from two undisclosed equity funds that are eager to bankroll the actor's production company.

"Actor-producer companies are the next logical step to private equity money," said David Hutkin, vp and managing director of Imperial Capital Bank Entertainment Finance. "It gets the money closer to the film, and it makes sense from the actors' side because they get more control, overhead covered and they have more alternatives. I could imagine that the studios would like it, too, because they don't want to cover overhead, and they still get the product."

For while studios might not want to finance a star's housekeeping deal, they are still willing to partner on projects that a star or producer brings to a studio with some development and financing already in place.

The studios welcome star-driven product funded by outside investors, one manager said. "The artist will find the product, acquire it with his own money, develop it outside the system, create the budget and look for the best way to sell it."

Cruise remains such a big box office force in foreign markets, one studio producer said, that "it will be cinch for him to raise production money, even with all his problems."

Said Hutkin: "There is now a lot of money chasing this business, and they are running out of places to put this cash. If they are smart about it and structure a deal that makes sense, then it will work."

But Vogel warns that if a star like Cruise thought he had executives infringing on his business in the past, working with private equity will be even more invasive. "That kind of money doesn't come with strings, it comes with ropes and chains attached," he said. "The guy who gets the first dollar gross isn't going to be Tom anymore, it's going to be the guy who puts up the money."

Private equity, though, could disappear as quickly as it appeared. Thus far, private equity companies haven't been scoring big wins with their investments. Legendary Pictures, for example, is in the first year of a five-year, 25-picture deal with Warners. The company has agreed to invest $500 million in a slate of pictures, but the first batch of movies -- Batman Begins, Superman Returns, Lady in the Water and The Ant Bully -- have had mixed results.

"The smart ones are starting to see it's a fool's game," said one Hollywood financier with knowledge of the deals. "I don't think any of these slate deals are performing that well. Studios are saying they make a single-digit return on their investment -- why does the equity think they will make a better return coming in behind the distributor and financing fees? That proposition simply doesn't work."

- REUTERS/Hollywood Reporter