July 9, 2013

What Are Legendary, Dune and RatPac and Why Should We Care?


There is tumult in the movie business, we’re told.  Reports warn that several studios as we know them are about to undergo seismic change for years to come.  And why?  Because Legendary Entertainment may shift its allegiance from Warner Bros to Universal, and consequently, Warners may take Dune Entertainment from 20th Century Fox, possibly along with RatPac Entertainment.  20th, for its part, has found a new buddy in The Selig Group, run by a former Dune partner.

Well, OK.  But… huh?

Once upon a time, movie financing was simple.  The major Hollywood studios put up the entire cost of producing and marketing their own films, and they bore any loss and kept all the profits.  It was a fully integrated business, because the studios owned the major theater chains as well as the films themselves, so they controlled what was produced, and where and for how long each played.  Creative personnel were under long-term and usually relatively low-cost contracts, providing a steady stream of reasonably-priced product.  After World War II, all of that started to change.  Television came in, and the studios didn’t own any of the networks (ironically, now most of them do). With home entertainment freely available, box office went down and costs went up, because to attract ticketbuyers, the studios had to invest in expensive items like location shooting, special effects and new technologies including Cinemascope and Cinerama.  Actors and directors became independent contractors rather than employees, and they bargained for vastly higher fees and shares of the back-end.  The courts and government forced the studios to enter into a consent decree on antitrust grounds, divesting their ownership of the theater chains.  Risks went up and revenues fell.  By the 1960s, several studios like 20th Century Fox and MGM were on the brink of bankruptcy, kept afloat mostly by their TV deals.

The studios needed partners, investors who would bear some of the risk in return for some of the action.  Many studio films of the 1970s were funded through elaborate tax shelter schemes that, a la The Producers, gave benefits to participants even if the films themselves lost money–sometimes especially if they did.  Those loopholes were largely plugged over the years, but the studio need to share their risk have only become more acute, especially now that it’s no longer unusual to spend $400M or more to produce and market a single tentpole release.

Enter the new financiers.  Some of them are hedge funds, private groups of high-end investors (both individuals and corporate) who pool their enormous sums of capital to be managed together in an assortment of locations, the mix designed to provide both stability and profit.  Some are individuals who obtain lines of credit worth hundreds of millions or even billions of dollars based on their other assets, and invest those funds similarly.  Others are international studios content to let their American partners greenlight movies with global appeal while they share in the result (sometimes keeping the local rights for themselves).  The idea for all of them is that by spreading their investment among large numbers of films, they can manage the inevitable risk.  The movie business, while not for the faint of heart, can be attractive to these people and groups–there’s the possibility of sudden massive hits, and money people have always enjoyed being near the showbiz heat.

Look at the credits of most major studio productions this summer and you’ll see them.  Legendary, which is run by Thomas Tull, provided a major chunk of the cost for The Hangover Part III and Man of Steel, and reportedly is covering 75% of this week’s Pacific Rim.  Dune, as part of its partnership with 20th, has money in The Internship and The HeatThe Great Gatsby was co-funded by Village Roadshow, an Australian studio and theater owner that also has a long-term relationship with Warner Bros.  Fast & Furious 6 partnered Universal with Relativity Media.  Skydance Productions, headed by David Ellison, co-financed World War Z and Star Trek Into Darkness with Paramount (Ellison’s sister Megan runs Annapurna Pictures, a somewhat artier operation that’s been behind films like Zero Dark Thirty).  These companies provide the blood that keeps studio hearts pumping.  (Disney, by the way, largely self-finances its films, which is in keeping with its franchise mentality.  This works out wonderfully when the movie in question is The Avengers, less so when it’s The Lone Ranger.)

The terms of the studio/financier deals differ.  Dune’s arrangement with 20th is reportedly a “slate” deal, in which Dune automatically invests in every studio release (with certain specified exceptions) and has a share of all the profits and losses–if 20th has a good year, so does Dune, and vice versa.  The Warners deal with Legendary reportedly allowed both companies more flexibility as to what films to include and how much Legendary would contribute, and that is apparently one of the factors that led to Legendary wanting to move on, because Warners kept the Harry Potter movies for itself, since those were sure things, and similarly only allowed Legendary to take 25% of The Dark Knight Rises, even though the company had paid for 50% of the preceding movies in the Batman trilogy.  (Reportedly Dune’s new deal with Warners will be a slate deal, meaning such issues shouldn’t come up.)  Another point of negotiation is the amount of fee the studio is allowed to take off the top of any revenue before splitting with the financier.

One of the things that sometimes happen with these arrangements is that the people running the fund start looking around and wondering why they’re putting up half the money (or thereabouts) and have no creative control and limited input, when the studio heads they deal with, based on the evidence, have no particular magic.  (The studios, of course, would prefer that the money people remain seen and not heard.)  Sometimes financiers transform their funds into full-fledged studios, which is what’s happened with Relativity, a funding company that has itself become a distributor (although as with Fast & Furious 6, it sometimes still acts as an investor).  It appears that this was also part of the issue between Legendary and Warners, as Tull wanted more of a creative say in the films Legendary was funding.  (Legendary put up all the money for 42, which was a passion project for Tull.)

What is all of this going to mean to audiences?  The effects may be subtle but meaningful.  It’s not clear whether the combination of Dune and RatPac (a new fund headed by director Brett Ratner and Australian financier James Packer) will fully replace the capital Warners was getting from Legendary–or, particularly since Ratner is involved, whether the new money will come without creative strings.  That may directly affect the movies that Warners is able to get made.  Similarly, if the reports are true that Tull wants more control over Legendary’s projects, Universal may find itself with a partner who’s going to influence the studio’s slate of releases as much as Universal’s senior executives do.  In effect, these funds may become co-studios.  That’s not necessarily good nor bad–it’s not as though the studios (other than Disney) have much personality these days, and who knows whether a given individual will make creative decisions for the better or worse.  While the tendency is to see these entities as pushing a global franchise agenda even more than it is already, because it appears to provide the safest route to profitability, that certainly wasn’t true of 42.  But the next time we look at what’s playing at the multiplex and can’t find anything worth seeing, there may be new people to blame.


About the Author

Mitch Salem
MITCH SALEM has worked on the business side of the entertainment industry for 20 years, as a senior business affairs executive and attorney for such companies as NBC, ABC, USA, Syfy, Bravo, and BermanBraun Productions, and before that, at the NY law firm of Weil, Gotshal & Manges. During all that, he has more or less constantly been going to the movies and watching TV, and writing about both since the 1980s. His film reviews also currently appear on and In addition, he is co-writer of an episode of the television series "Felicity."