Risky busi­ness? CEO says it’s all Rel­a­tiv­ity

Ryan Ka­vanaugh’s com­pany shifts from co-fi­nanc­ing movies to be­com­ing a stu­dio.

Los Angeles Times - - Business - Ben Fritz

For the last five years, Ryan Ka­vanaugh has been one of Hollywood’s go-to peo­ple to share the risk on movies.

The chief ex­ec­u­tive of Rel­a­tiv­ity Me­dia has in­vested in 138 films, most of them at Sony Pic­tures and Uni­ver­sal Pic­tures, where his com­pany has long-term agree­ments to co-fund 75% of both stu­dios’ film slates.

Co-fi­nanc­ing movies can be an easy way to lose money — a large rea­son the flood of pri­vate eq­uity funds that flowed into Hollywood sev­eral years ago dried up. And Rel­a­tiv­ity has seen the down­side in the last cou­ple of years through its as­so­ci­a­tion with a string of money losers from Uni­ver­sal, in­clud­ing “Land of the Lost” and “The Wolf­man.”

But backed by more than $1bil­lion from New York hedge fund El­liott As­so­ci­ates, Rel­a­tiv­ity has hung in and is turn­ing into a self­suf­fi­cient stu­dio. In July it took over the mar­ket­ing and dis­tri­bu­tion op­er­a­tions of Over­ture Films, al­low­ing it to di­rectly re­lease the grow­ing num­ber of movies it pro­duces.

Over the sum­mer, Rel­a­tiv­ity be­came the first stu­dio to sign a deal ex­clu­sively

pro­vid­ing all of its movies to Net­flix dur­ing the pay-TV win­dow his­tor­i­cally re­served for chan­nels such as HBO and Show­time. It also made a pact with Richard Bran­son’s Vir­gin Group to jointly pro­duce pic­tures.

This Fri­day Rel­a­tiv­ity has two movies hit­ting the­aters: Face­book drama “The So­cial Net­work,” which it co-fi­nanced with Sony, and vam­pire drama “Let Me In,” which it acquired from Over­ture.

Ka­vanaugh spoke to Com­pany Town about why he thinks Rel­a­tiv­ity can do a bet­ter job mar­ket­ing and dis­tribut­ing movies than the stu­dios and the fu­ture of his co-fi­nanc­ing deals. Why move from the risky busi­ness of co-fi­nanc­ing movies to the even riskier busi­ness of fi­nanc­ing and re­leas­ing them?

It ac­tu­ally elim­i­nates a sig­nif­i­cant amount of the risk from a con­trol and fi­nan­cial per­spec­tive and takes the mar­gins on the busi­ness from just OK to very good.

When we were mak­ing two or three movies a year, it was easy to use third­party dis­tri­bu­tion and pay them a fee. When you start get­ting into the vol­ume of movies we’re do­ing — 12 in the next year — you’re get­ting to a level where no mat­ter how much the stu­dio likes you, they can’t treat your movies the same way as theirs. So how will Rel­a­tiv­ity be dif­fer­ent from other Hollywood stu­dios?

We have the ad­van­tage of start­ing from scratch in the world of dig­i­tal dis­tri­bu­tion and mar­ket­ing, uti­liz­ing vi­ral and other on­line as­sets and com­mu­ni­ties. These are sys­tems and struc­tures that

did not ex­ist 10 years ago, and cer­tainly weren’t an idea 80 years when stu­dios were formed.

Our Net­flix deal is by far the best pay-TV deal in the busi­ness, and un­like other pay-TV deals it doesn’t re­strict us what­so­ever on dig­i­tal sell-through. That cre­ates a new rev­enue stream which most other stu­dios are re­stricted from and thus gives us an ex­tra profit boost. For the last cou­ple of years you have been tied to Uni­ver­sal, which has had some poorly per­form­ing films. How much of a drag has that been on your bot­tom line?

Ev­ery stu­dio has up years and down years. That’s why we en­ter in longterm, multi-stu­dio deals. We have a deal with Uni­ver­sal and a deal with Sony. One may have a good year and one may have a bad year, but they bal­ance out. Uni­ver­sal also had “Mamma Mia,” “Fast and Fu­ri­ous,” “Wanted” and “De­spi­ca­ble Me,” all of which we made good money on. Your deal with Sony is sched­uled to end in 2012 and with Uni­ver­sal in 2015. Do you think you will con­tinue co-fi­nanc­ing films at those stu­dios? And how might Com­cast’s pend­ing own­er­ship of Uni­ver­sal af­fect your deal?

We’re ea­ger to see what hap­pens with the merger, and no de­ci­sions as to our co-fi­nanc­ing fu­ture with them have been made. Our busi­ness has been in­vert­ing so we cur­rently make more movies than we co-fi­nance. I don’t want to say we won’t ever co-fi­nance again. How­ever, it will not be in the same man­ner that you’ve seen in the past.

Does El­liott sub­si­dize your busi­ness? And would you con­sider team­ing up on an­other large po­ten­tial ac­qui­si­tion like MGM?

We are self-suf­fi­cient and don’t need or use El­liott’s cap­i­tal to op­er­ate. That said, they are fan­tas­tic part­ners who have ob­vi­ously in­vested a sig­nif­i­cant amount of money. Go­ing for­ward, if we find large ac­qui­si­tions that would be in ex­cess of our cash re­sources, we would part­ner with El­liott. Now that you’re mak­ing more of your own movies, what are your cri­te­ria?

We don’t say that we don’t make this genre or this bud­get. We just fo­cus on cre­at­ing com­mer­cially ap­peal­ing prop­er­ties whose worst-case sce­nario is a break-even. You broke even on the box-of­fice flop “MacGru­ber”?

There are movies we’ve lost money on, no ques­tion about it. Un­for­tu­nately, our busi­ness is judged on who’s No. 1at the box of­fice, but that is not an in­di­ca­tor of suc­cess. It used to be, when home video and video on de­mand and other win­dows didn’t ex­ist, but now it’s 20% of your pie or less.


Alex J. Ber­liner BEI­mages

RYAN KA­VANAUGH “We cur­rently make more movies than we co-fi­nance,” he says.

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