Strong Profit Margin at Paramount Pictures Underlines a Hollywood Shift
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| Brad Grey, left, the chief of Paramount Pictures, with Martin Scorsese at a premiere last week. |
By MICHAEL CIEPLY and BROOKS BARNES
The weather wobbled between snow and rain, with ankle-deep slush in gridlocked streets. But Brad Grey, the chief executive of Paramount Pictures, refused to fret about whether the mess would keep the Manhattan elite away from a gala premiere of Martin Scorsese’s “The Wolf of Wall Street” last Tuesday.
“They’ll show up,” said Mr. Grey, speaking from the Carlyle Hotel, where he smiled from under the bill of a baseball cap as he sipped soup.
He was also confident that the movie — despite a three-hour running time, with rampant drug use and bizarre sex — will fill multiplexes when it opens on Christmas Day, joining another new Paramount hit, “Anchorman 2: The Legend Continues,” which has taken in about $40 million since its release on Wednesday. If so, the studio will have closed a surprisingly strong year.
It will also frame a troubling paradox: The less Hollywood does, the more it profits.
Paramount ranks last among major studios (and even behind the mini-major Lionsgate) in the annual box-office race, with under $900 million to date in domestic ticket sales, down by half from its recent peak in 2011. Yet Paramount has become consistently profitable in an industry where profit margins have ranged from razor-thin to nonexistent.
Studios used to publicly beat their chests over market share, or percentage of ticket sales, but profitability is the new mantra. The film business is now in survival mode, as changed viewing habits, a long decline in home entertainment sales, and fresh competition for viewers in rich foreign film markets like China take their toll.
Those shifts have prompted Paramount to adjust as well. For the fiscal year that ended Sept. 30, Viacom, which owns Paramount, reported operating profit from filmed entertainment of $234 million, down from $325 million a year earlier. Revenue (which includes the studio’s share of domestic ticket sales, plus the foreign box office, video and other sources) slipped to $4.3 billion, down 27 percent from 2011, when Paramount was the industry’s box-office leader.
Yet even as the studio makes fewer films, and as a result generates less revenue, it sees a path to a sustainable business model. That’s because the studio’s profit margin has been 5.5 percent or more for the last three years, up from less than 0.5 percent in 2008, when Paramount released blockbusters like “Iron Man” and “Indiana Jones and the Kingdom of the Crystal Skull,” and was vying with Warner Brothers to be the box-office leader.
“It may not be popular on the West Coast, but we want Paramount to make a handful of safe, stable bets,” said Michael Nathanson, an entertainment industry analyst at the research firm MoffettNathanson. “I don’t want them making a lot of movies.”
The strategy has support from the corporate parent. “I’m thrilled with where Paramount sits today,” Philippe Dauman, Viacom’s chief executive, said in a phone interview. Mr. Dauman declined to speculate about the current fiscal year’s profit picture. But he said he saw signs of a strong year, and he predicted that the studio’s profit margin would continue to grow.
Separately, two people briefed on the studio’s performance, who spoke on the condition that they not be named because of a policy regarding statements that might be interpreted as firm profit projections, said Paramount was reaching for a margin of just under 10 percent. At the same time, the release slate has dropped to 11 films in 2013, down from as many as 16 a few years ago.
Several factors contribute to the profitability conundrum. Thinner release schedules keep studio blockbusters from chewing up one another at the box office. Also, studios can bolster profits by dropping deals that shift too much income to business partners, and by investing less and slashing overhead while hundreds of millions of dollars from library sales continue to roll in. Furthermore, long-term strategy may call for corporate deployment in stronger business sectors like television.
“As an investor, you don’t want a lot of investment going to movies, you want it going to higher-return businesses like the cable networks,” Mr. Nathanson said.
For thousands of performers, filmmakers and crew members who live and die by high-budget studio films, the prospect of further tightening can only be chilling. The number of such films fell to 94 in 2012, down 24 percent from 124 in 2006, and it appears to be headed lower.
Cuts are already in the works elsewhere, most notably at Sony Pictures Entertainment, where executives are reducing overhead, trimming the release slate and hunting for outside financing that has been elusive.
Sony is trying to obtain $750 million from outside investors, according to people involved with the arrangement, who spoke on the condition of anonymity because the terms of a proposed arrangement are confidential. A Sony representative declined to comment.
For Mr. Grey, a former talent manager who took charge of Paramount in 2005, the trick has been to pare down — and sometimes, to tell a favored filmmaker “no,” or “not yet” — without jeopardizing valued relationships with the likes of Mr. Scorsese, J. J. Abrams, Michael Bay, Will Ferrell, Brad Pitt, and now, Jerry Bruckheimer, who recently agreed to move his film company to Paramount from Disney.
Earlier this month, Mr. Pitt’s Plan B Entertainment ended an eight-year association with Paramount, to set up a deal with New Regency and RatPac Entertainment.
Mr. Pitt had just starred in, and produced, “World War Z,” which was Paramount’s biggest film this year, with more than $540 million in worldwide ticket sales. But the movie went through a studio wringer, as Paramount delayed its release and poured tens of millions into reshoots.
Mr. Grey stressed that Paramount remained in business with Mr. Pitt, notwithstanding his company’s exit, and vowed “we will make World War Z 2.”
Other tensions have affected “G. I. Joe: Retaliation,” “The Wolf of Wall Street” and the coming films “Jack Ryan” and “Noah,” all of which were delayed or given extra scrutiny as the studio used the luxury of its thin release schedule to juggle dates, and, sometimes, to retool.
Mr. Grey described the halts and do-overs as a defensive strategy that, by his count, had given Paramount an unbroken string of winners this year.
“Eight of the last eight movies have been profitable, and unless something really goes wrong in the next few days, we’ll be 11 for 11,” he said. (Paramount on Wednesday will also open Jason Reitman’s “Labor Day” in limited release.)
Having let go of a deal under which DreamWorks Animation fed the studio films, Paramount now has an animation division and expects its first film, “SpongeBob SquarePants 2,” in 2015.
Another new venture, Paramount’s recently formed television unit, is expected eventually to replace the profitable television production operation that was assigned to CBS Inc. when it was split from Viacom in 2005. But it will take decades, Mr. Grey noted, to rebuild what was lost.
Happily, said Mr. Grey, Paramount recently sold Disney its rights to new movies in the long-running “Indiana Jones” series. Disney, having acquired the film’s producer, Lucasfilm, will pay Paramount a fee based on revenue from new projects.
To close out the year with a winner, Mr. Grey and his team must persuade viewers to sample “The Wolf of Wall Street,” about the drug-fueled financial depredations of a real-life stock manipulator in the 1990s. So far, critics have largely been on board.
But even some sophisticates wonder if Mr. Scorsese, a master of outrage in small films from the 1970s and 1980s, has shot past the mass audience with a film whose explicit sexual scenes barely escaped a rating of NC-17.
“What’s different now is that Scorsese, once marginal, is making big-budget studio pictures with the brightest stars in Hollywood,” said Peter Biskind, a film historian who is writing a book titled “Adventures in Extreme Culture” for Metropolitan Books.
Still, Mr. Grey is not breaking a sweat.
“The Wolf of Wall Street,” which cost at least $100 million to make, was financed entirely by an independent company, Red Granite Pictures, he noted. The studio will handle distribution domestically, and in Japan, but it passed on the rest of the international market.
“My guess is that ‘Wolf’ will do very, very, very well,” Mr. Grey said, speaking shortly before the Tuesday premiere.
If so, Paramount will also do well. If not, the studio should still profit — and profitability, said Mr. Grey, is not optional for his century-old business.
“Unless we handle it prudently on a financial basis, there’s no way it goes to 140 years,” he said.
“They’ll show up,” said Mr. Grey, speaking from the Carlyle Hotel, where he smiled from under the bill of a baseball cap as he sipped soup.
He was also confident that the movie — despite a three-hour running time, with rampant drug use and bizarre sex — will fill multiplexes when it opens on Christmas Day, joining another new Paramount hit, “Anchorman 2: The Legend Continues,” which has taken in about $40 million since its release on Wednesday. If so, the studio will have closed a surprisingly strong year.
It will also frame a troubling paradox: The less Hollywood does, the more it profits.
Paramount ranks last among major studios (and even behind the mini-major Lionsgate) in the annual box-office race, with under $900 million to date in domestic ticket sales, down by half from its recent peak in 2011. Yet Paramount has become consistently profitable in an industry where profit margins have ranged from razor-thin to nonexistent.
Studios used to publicly beat their chests over market share, or percentage of ticket sales, but profitability is the new mantra. The film business is now in survival mode, as changed viewing habits, a long decline in home entertainment sales, and fresh competition for viewers in rich foreign film markets like China take their toll.
Those shifts have prompted Paramount to adjust as well. For the fiscal year that ended Sept. 30, Viacom, which owns Paramount, reported operating profit from filmed entertainment of $234 million, down from $325 million a year earlier. Revenue (which includes the studio’s share of domestic ticket sales, plus the foreign box office, video and other sources) slipped to $4.3 billion, down 27 percent from 2011, when Paramount was the industry’s box-office leader.
Yet even as the studio makes fewer films, and as a result generates less revenue, it sees a path to a sustainable business model. That’s because the studio’s profit margin has been 5.5 percent or more for the last three years, up from less than 0.5 percent in 2008, when Paramount released blockbusters like “Iron Man” and “Indiana Jones and the Kingdom of the Crystal Skull,” and was vying with Warner Brothers to be the box-office leader.
“It may not be popular on the West Coast, but we want Paramount to make a handful of safe, stable bets,” said Michael Nathanson, an entertainment industry analyst at the research firm MoffettNathanson. “I don’t want them making a lot of movies.”
The strategy has support from the corporate parent. “I’m thrilled with where Paramount sits today,” Philippe Dauman, Viacom’s chief executive, said in a phone interview. Mr. Dauman declined to speculate about the current fiscal year’s profit picture. But he said he saw signs of a strong year, and he predicted that the studio’s profit margin would continue to grow.
Separately, two people briefed on the studio’s performance, who spoke on the condition that they not be named because of a policy regarding statements that might be interpreted as firm profit projections, said Paramount was reaching for a margin of just under 10 percent. At the same time, the release slate has dropped to 11 films in 2013, down from as many as 16 a few years ago.
Several factors contribute to the profitability conundrum. Thinner release schedules keep studio blockbusters from chewing up one another at the box office. Also, studios can bolster profits by dropping deals that shift too much income to business partners, and by investing less and slashing overhead while hundreds of millions of dollars from library sales continue to roll in. Furthermore, long-term strategy may call for corporate deployment in stronger business sectors like television.
“As an investor, you don’t want a lot of investment going to movies, you want it going to higher-return businesses like the cable networks,” Mr. Nathanson said.
For thousands of performers, filmmakers and crew members who live and die by high-budget studio films, the prospect of further tightening can only be chilling. The number of such films fell to 94 in 2012, down 24 percent from 124 in 2006, and it appears to be headed lower.
Cuts are already in the works elsewhere, most notably at Sony Pictures Entertainment, where executives are reducing overhead, trimming the release slate and hunting for outside financing that has been elusive.
Sony is trying to obtain $750 million from outside investors, according to people involved with the arrangement, who spoke on the condition of anonymity because the terms of a proposed arrangement are confidential. A Sony representative declined to comment.
For Mr. Grey, a former talent manager who took charge of Paramount in 2005, the trick has been to pare down — and sometimes, to tell a favored filmmaker “no,” or “not yet” — without jeopardizing valued relationships with the likes of Mr. Scorsese, J. J. Abrams, Michael Bay, Will Ferrell, Brad Pitt, and now, Jerry Bruckheimer, who recently agreed to move his film company to Paramount from Disney.
Earlier this month, Mr. Pitt’s Plan B Entertainment ended an eight-year association with Paramount, to set up a deal with New Regency and RatPac Entertainment.
Mr. Pitt had just starred in, and produced, “World War Z,” which was Paramount’s biggest film this year, with more than $540 million in worldwide ticket sales. But the movie went through a studio wringer, as Paramount delayed its release and poured tens of millions into reshoots.
Mr. Grey stressed that Paramount remained in business with Mr. Pitt, notwithstanding his company’s exit, and vowed “we will make World War Z 2.”
Other tensions have affected “G. I. Joe: Retaliation,” “The Wolf of Wall Street” and the coming films “Jack Ryan” and “Noah,” all of which were delayed or given extra scrutiny as the studio used the luxury of its thin release schedule to juggle dates, and, sometimes, to retool.
Mr. Grey described the halts and do-overs as a defensive strategy that, by his count, had given Paramount an unbroken string of winners this year.
“Eight of the last eight movies have been profitable, and unless something really goes wrong in the next few days, we’ll be 11 for 11,” he said. (Paramount on Wednesday will also open Jason Reitman’s “Labor Day” in limited release.)
Having let go of a deal under which DreamWorks Animation fed the studio films, Paramount now has an animation division and expects its first film, “SpongeBob SquarePants 2,” in 2015.
Another new venture, Paramount’s recently formed television unit, is expected eventually to replace the profitable television production operation that was assigned to CBS Inc. when it was split from Viacom in 2005. But it will take decades, Mr. Grey noted, to rebuild what was lost.
Happily, said Mr. Grey, Paramount recently sold Disney its rights to new movies in the long-running “Indiana Jones” series. Disney, having acquired the film’s producer, Lucasfilm, will pay Paramount a fee based on revenue from new projects.
To close out the year with a winner, Mr. Grey and his team must persuade viewers to sample “The Wolf of Wall Street,” about the drug-fueled financial depredations of a real-life stock manipulator in the 1990s. So far, critics have largely been on board.
But even some sophisticates wonder if Mr. Scorsese, a master of outrage in small films from the 1970s and 1980s, has shot past the mass audience with a film whose explicit sexual scenes barely escaped a rating of NC-17.
“What’s different now is that Scorsese, once marginal, is making big-budget studio pictures with the brightest stars in Hollywood,” said Peter Biskind, a film historian who is writing a book titled “Adventures in Extreme Culture” for Metropolitan Books.
Still, Mr. Grey is not breaking a sweat.
“The Wolf of Wall Street,” which cost at least $100 million to make, was financed entirely by an independent company, Red Granite Pictures, he noted. The studio will handle distribution domestically, and in Japan, but it passed on the rest of the international market.
“My guess is that ‘Wolf’ will do very, very, very well,” Mr. Grey said, speaking shortly before the Tuesday premiere.
If so, Paramount will also do well. If not, the studio should still profit — and profitability, said Mr. Grey, is not optional for his century-old business.
“Unless we handle it prudently on a financial basis, there’s no way it goes to 140 years,” he said.
How ‘Wolf of Wall Street’s’ Producers Revive Movies That Died in the Studio System
Red Granite’s Riza Aziz and Joey McFarland bankrolled ‘Wolf of Wall Street’ in spite of studio reservations
While the excess makes for one of the year’s most fun movies, it is also a risky business proposition.
That’s one reason Warner Bros., which had developed a script based on Jordan Belfort’s memoir, killed the project. Yet Red Granite was willing to take the risk, and convinced Warner Bros. to let them take it off their hands.
“When they decide to not make a movie, they don’t want anyone else to be successful with it,” McFarland told TheWrap. “I don’t know if they thought we’d be successful in making it, but given the long-term relationship between Warner Bros. and Leonardo, they didn’t want to stand in his way.”
As the movie’s Christmas Day debut approaches, Aziz and McFarland’s bet looks like it will pay off. The movie is tracking to perform well at the box office, and has received strong reviews from most critics.
TheWrap spoke with the two financiers and producers about finding movies in the studio trash can, whether “Wolf of Wall Street” is a comedy, and Matthew McConaughey’s similarity to Darth Vader.
TheWrap: Red Granite fully financed ‘Wolf of Wall Street,” but it didn’t originate with you. How did you first get involved with the project?
McFarland: This goes back to 2009 when Riza and I decided to join forces and build Red Granite. One of our sweet spots is we look at movies that have died in the studio system and not been made for one reason or another. ‘Dumb and Dumber To’ is another example of that. These are movies with great talent attached and a studio’s attention, but for budgetary reasons, scheduling or content, couldn’t get greenlit.
What stalled its progress at Warner Bros.?
Aziz: The material was out of the studio’s sweet spot. The studio wanted to set a very specific ceiling as to how much to spend for Leo and Marty to do justice to the movie. Marty and Leo looked at the numbers the studio was putting forth and they were not comfortable with it.
McFarland: I don’t think a lot of people ‘got it.’ They saw it as another Wall Street movie. The real substance of the material went over people’s heads. I can’t tell you how many times people said I didn’t get it, but now that I’ve see the movie I get it.
The constant drug use and nudity couldn’t have helped.
Aziz: Studios are more comfortable with special effects and blockbusters. But I still think there’s a very strong marketplace for adult-oriented drama and comedy.
McFarland: We want to be extremely artist-friendly. We want to do something a little different, but attract talent and work with studios at the same time. With that mentality, you have to take risks. This was risk for a lot of people. For us, it’s an opportunity.
And you convinced Warner Bros. to hand it over?
McFarland: It was Leonardo’s favorite character he’d never gotten to play. We went to Jordan Belfort and met him numerous times. Over the course of about 6 months of negotiations we purchased the underlying rights to both of his books. We circled back to Warner Bros. and began the long, long process of extracting the script, which was not easy to do.
When they decide to not make a movie, they don’t want anyone else to be successful with it. I don’t know if they thought we’d be successful in making it, but given the long-term relationship between Warner Bros. and Leonardo, they didn’t want to stand in his way.
This movie is one of many opening this year where you have a prominent filmmaker working with outside financiers. Studios are still distributing these movies, but a lot of the top filmmakers of this era are having to secure financing outside the studio system.
Aziz: I don’t see independents like ourselves as competitors to studios. We’re complementary. We can take a lot of risky things they have sitting on the shelf and get it made. Studios can then put those together with their other franchises.
What was riskiest about this?
McFarland: The sex, drugs and rock ‘n’ roll. We all rely on the worldwide box office. Certain content is more accepted in certain parts of the world than others. When you decide you want to push that envelope and creatively free Marty and Leo, and you show the amount of drug use and language and sex, you have to know what you’re getting into. We know what our risk tolerance is, and we feel very confident we’ll be very safe on Christmas.
Aziz: In the hands of a less talented filmmaker, it would be tough to strike the balance between showing the world and going overboard – shock value for the sake of it. Marty can strike a balance between showing that world for what it was, but also portraying the world as authentic as it wants to be.
Aziz: I don’t see independents like ourselves as competitors to studios. We’re complementary. We can take a lot of risky things they have sitting on the shelf and get it made. Studios can then put those together with their other franchises.
What was riskiest about this?
McFarland: The sex, drugs and rock ‘n’ roll. We all rely on the worldwide box office. Certain content is more accepted in certain parts of the world than others. When you decide you want to push that envelope and creatively free Marty and Leo, and you show the amount of drug use and language and sex, you have to know what you’re getting into. We know what our risk tolerance is, and we feel very confident we’ll be very safe on Christmas.
Aziz: In the hands of a less talented filmmaker, it would be tough to strike the balance between showing the world and going overboard – shock value for the sake of it. Marty can strike a balance between showing that world for what it was, but also portraying the world as authentic as it wants to be.
Was Scorsese attached when you bought the script from Warner Bros.?
McFarland: No, but he was attached six years ago with Leo when it died at the studio. He had helped develop it, so we felt very confident we could reconnect him. Marty is 71; he’s very selective. But we had a New York story, Leo, content he helped develop and Terence Winter [the screenwriter who created “Boardwalk Empire,” the HBO show for which Scorsese directed the pilot].
Grantland’s Wesley Morris proclaimed your movie the “funniest American movie of the year.” Were you surprised that the Hollywood Foreign Press nominated “Wolf of Wall Street” as a comedy?
MacFarland: If you were to ask Marty, he’d say ‘Goodfellas’ was a comedy. When we looked at our movie, we never looked at it from a genre perspective as a comedy. We always knew it was funny.
Aziz: The decision to cast Jonah [Hill] was a strong signal this is not a drama from the 1990s.
Jonah is exceptional. This movie has such a strong cast, but some of the choices are unexpected. Was there any particular choice that you fret over the most?
McFarland: The one role that was groundbreaking and flat out genius was Matthew McConaughey. The Mark Hanna role is a very small role; it’s a cameo role. But I looked at it as a Darth Vader-type who brought Luke to the dark side. Mark Hanna represented a lot of the negative attributes of Wall Street. It had to be an iconic moment. It had to be an actor we all believed in and wanted to emulate.
Matthew is coming off a massively awesome year with ‘Mud’ and ‘Dallas Buyers Club.’ Marty looked at Matthew, looked at his work and were really blown away. Little did we know Matthew could come in and smack it out of the park. He changed the entire movie.
How so?
McFarland: That chant you see where he beats his chest, Leo brings it back later in the movie. He created a battle cry for these guys. He created a cult-like ritual among thousands of young stockbrokers.
You saw Jordan being transformed into a mini Mark Hanna, and then saw Jordan transforming an army of brokers into mini Mark Hannas.
Do you think ‘Wolf’ will appeal to a broad audience?
McFarland: When you have Marty and Leo — their brand is so strong – coupled with this material? I think it will be a huge shot into pop culture and is immediately going to invade every sector of people’s lives.
Aziz: It stands up to repeated viewings.
Did you have any hesitation about its length?
McFarland: Length is not about minutes but about how you feel. My partner and I watched a movie last night, we won’t say what it was, but it was two hours and 20 minutes and felt like four hours.
When you watched a 2-hour and 59-minute ‘Wolf,” you feel like you watched a movie that’s two hours long.
What about the people who go on Fandango and don’t know that? All they see is two hours and 59 minutes.
McFarland: Those people who don’t go see it, their friends will tell them how they loved it. It’s a big commitment for some people that aren’t cinephiles. The good news is it’s opening at Christmas when people are off work and on vacation. You have to go see the movie on Christmas Dy with your family and friends.
Aziz: It plays way better when you see it the second time around.
McFarland: No, but he was attached six years ago with Leo when it died at the studio. He had helped develop it, so we felt very confident we could reconnect him. Marty is 71; he’s very selective. But we had a New York story, Leo, content he helped develop and Terence Winter [the screenwriter who created “Boardwalk Empire,” the HBO show for which Scorsese directed the pilot].
Grantland’s Wesley Morris proclaimed your movie the “funniest American movie of the year.” Were you surprised that the Hollywood Foreign Press nominated “Wolf of Wall Street” as a comedy?
MacFarland: If you were to ask Marty, he’d say ‘Goodfellas’ was a comedy. When we looked at our movie, we never looked at it from a genre perspective as a comedy. We always knew it was funny.
Aziz: The decision to cast Jonah [Hill] was a strong signal this is not a drama from the 1990s.
Jonah is exceptional. This movie has such a strong cast, but some of the choices are unexpected. Was there any particular choice that you fret over the most?
McFarland: The one role that was groundbreaking and flat out genius was Matthew McConaughey. The Mark Hanna role is a very small role; it’s a cameo role. But I looked at it as a Darth Vader-type who brought Luke to the dark side. Mark Hanna represented a lot of the negative attributes of Wall Street. It had to be an iconic moment. It had to be an actor we all believed in and wanted to emulate.
Matthew is coming off a massively awesome year with ‘Mud’ and ‘Dallas Buyers Club.’ Marty looked at Matthew, looked at his work and were really blown away. Little did we know Matthew could come in and smack it out of the park. He changed the entire movie.
How so?
McFarland: That chant you see where he beats his chest, Leo brings it back later in the movie. He created a battle cry for these guys. He created a cult-like ritual among thousands of young stockbrokers.
You saw Jordan being transformed into a mini Mark Hanna, and then saw Jordan transforming an army of brokers into mini Mark Hannas.
Do you think ‘Wolf’ will appeal to a broad audience?
McFarland: When you have Marty and Leo — their brand is so strong – coupled with this material? I think it will be a huge shot into pop culture and is immediately going to invade every sector of people’s lives.
Aziz: It stands up to repeated viewings.
Did you have any hesitation about its length?
McFarland: Length is not about minutes but about how you feel. My partner and I watched a movie last night, we won’t say what it was, but it was two hours and 20 minutes and felt like four hours.
When you watched a 2-hour and 59-minute ‘Wolf,” you feel like you watched a movie that’s two hours long.
What about the people who go on Fandango and don’t know that? All they see is two hours and 59 minutes.
McFarland: Those people who don’t go see it, their friends will tell them how they loved it. It’s a big commitment for some people that aren’t cinephiles. The good news is it’s opening at Christmas when people are off work and on vacation. You have to go see the movie on Christmas Dy with your family and friends.
Aziz: It plays way better when you see it the second time around.
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