These are changing times for the specialised divisions of the Hollywood studios. Over the past two years, Fox Searchlight and Universal's Focus Features have restructured their management teams, Warner Independent Pictures has replaced its president, Disney's Miramax Films has started a new life without Harvey and Bob Weinstein, and Paramount Classics has been reinvented as Paramount Vantage.
Several of the specialised arms have begun to get involved in bigger projects and all, as competition has driven up acquisition prices, have begun to produce more of the films on their release slates themselves.
Even Sony Pictures Classics, the first studio specialised division and the one that has arguably stuck closest to its original business plan, has been, according to co-president Michael Barker, "incrementally getting bigger and spending more money and getting more involved in production, because the marketplace kind of dictates that."
The evolving strategies have in turn demanded a new approach to financing. Now, just like their studio parents, the specialised arms are increasingly seeking outside finance to help them make bigger projects while spreading the risk associated with those projects. Perhaps wary of seeming too much like their bottom line-oriented parents and not enough like nurturing homes for truly independent film-makers, the specialised divisions themselves are reluctant to discuss their growing appetite for other people's money (most of the companies declined to make executives available for interview).
Film finance experts, however, suggest the companies are simply following the strictures that have already been imposed on their studio parents. The large-cap conglomerates (ie, with market capitalisation of $5bn or more) that own the studios dislike the volatility of film industry cashflows and have told their subsidiaries to allocate risk by working with outside co-financiers, such as the hedge and private equity funds that have recently been pumping money into Hollywood. And now, say the experts, the studios are telling their specialised arms the same thing. International pre-sales have long provided studio specialised arms with one way of limiting their risk on ambitious projects. Focus Features, in particular, has used its sway in the international arena to produce sales covering above-average percentages of the budgets of such potentially tricky projects as offbeat romantic drama Eternal Sunshine Of The Spotless Mind.
Growth of in-house sales and distribution
With the break-up of UIP, most specialised arms now have the option of feeding projects through their own parent's dedicated international distribution apparatus, and some, including Miramax and Sony Classics, usually take that route when they retain all or some international rights. But several specialised arms still appear to favour the sales route.
Warner Independent, which in recent years has worked with outside sales companies including Arclight Films (on Infamous), Kathy Morgan International (on In The Land Of Women) and Fortissimo Film Sales (on For Your Consideration), is now said to be considering the launch of its own international sales unit. And Paramount Vantage is calling on the expertise of its new co-president Nick Meyer, formerly president of Lionsgate International, to build its in-house sales operation.
Working with co-financiers on a project-by-project basis is another way that specialised divisions can manage their risk. Sometimes the co-financiers are found in the international marketplace. India's UTV Motion Pictures, for example, worked with Fox Searchlight on financing both Mira Nair's The Namesake and Chris Rock comedy I Think I Love My Wife.
Sometimes, though, the co-financiers are found much closer to home. Miramax Films and Paramount Vantage, the revamped specialised division that is now Paramount's biggest single label supplier, joined forces last year to co-finance Paul Thomas Anderson's oil industry drama There Will Be Blood and Joel and Ethan Coen's Cannes Competition entry No Country For Old Men. Miramax will distribute There Will Be Blood and the Coen brothers' picture internationally, while Paramount Vantage will get domestic rights to both.
Co-financing to boost budgets
Miramax president of production Keri Putnam says her company, which has a $20m budget cap (Paramount Vantage's is reportedly $15m), is "not looking to use outside finance so that we can spend more money or get more movies. It's more about being able to find the right projects and the right way to finance individual projects that manages the risk."
The two co-financed films, she says, "were great projects for us creatively, and the idea of working with Vantage was to allow these film-makers to make the films on the scale they envisioned."
The specialised divisions' most frequent co-financing partners include an elite group of Hollywood-based financing and production companies either owned by wealthy individuals or backed by Wall Street funds. With the help of the Hollywood talent agencies, these companies have inserted themselves into the process whereby the specialised divisions find and finance their projects.
River Road Productions, headed by Minneapolis business empire heir Bill Pohlad, first worked with Focus Features on Brokeback Mountain, reportedly making $50m by covering 75% of the film's budget in return for 50% of worldwide revenues. More recently, River Road co-produced Sean Penn's Into The Wild with Paramount Vantage and is a partner on Ang Lee's Lust, Caution with Focus.
Focus, meanwhile, has also worked with Sidney Kimmel Entertainment, founded by the veteran Philadelphia businessman, on Kasi Lemmons' Talk To Me, and co-financed Terry George's Reservation Road with Random House Films and new finance entity Volume One.
Paramount Vantage - whose parent company arranged the financing for the Oscar-winning Babel with fledgling financier Media Rights Capital - is now co-financing Todd Louiso's The Marc Pease Experience with Groundswell Productions. Groundswell was launched last month by producer Michael London with $205m in backing from investment firm TPG-Axon Capital.
Among the busiest of the new co-financing operations is Participant Productions, the company launched two years ago by eBay billionaire Jeff Skoll to make socially relevant features and documentaries. The company's projects have included Fox Searchlight's Fast Food Nation, Warner Independent's Good Night, And Good Luck, and Paramount Vantage's Oscar-winning documentary An Inconvenient Truth.
Participant is now developing a project with Miramax and co-producing Errol Morris' upcoming documentary on Abu Ghraib (working title SOP: Standard Operating Procedure) with Sony Pictures Classics.
Though Sony Classics sometimes fully finances projects - such as Nicole Holofcener's Friends With Money, Morris' previous documentary The Fog Of War, and David Mamet's forthcoming Redbelt - working with Participant allowed the division, explains Michael Barker, to make the new Morris film on a $5m budget, more than three times the cost of The Fog Of War.
Financiers turn distributor
The danger for the studio specialised arms is that these new financing outfits may eventually want to set themselves up in competition with the studio-owned distributors. That has already happened with real estate entrepreneur Bob Yari's Yari Film Group (YFG). After working with a number of specialised arm partners - Focus on Prime, Warner Independent on The Painted Veil and Miramax on The Hoax - YFG last year successfully self-distributed The Illusionist and is now planning to handle all its films in-house.
Yari argues studio specialised arms do not necessarily act in the best interests of the producers of specialised films.
"The studios and their specialty arms are in the acquisition and co-finance business because there's a business model that works very well for them," he says. "They don't really have to apply their marketing and distribution expertise. They can just put a film out there and if it doesn't work it goes to DVD and it's a profitable enterprise for them. But for the production company, your film is not getting the maximum exposure or a shot at possible success."
Still, if co-finance money from YFG and its ilk does start to dry up, the specialised divisions may soon be able to replace it with funding from an even more abundant source.
Over the past six months, the Wall Street banks and funds that have recently been helping the studios' mainstream units finance their production programmes have also begun to channel money to the studios' specialised arms. Paramount Vantage became the first beneficiary earlier this year when it joined with global financial services company Morgan Stanley to unveil Marathon Funding, a $150m slate-financing vehicle. With Vantage and Morgan Stanley acting as co-financing partners, the fund is supporting the production and distribution of 15 recent and forthcoming films, including Babel, Into The Wild, There Will Be Blood and Michael Winterbottom's out of competition Cannes film A Mighty Heart.
Focus Features, meanwhile, has secured a slate-financing deal worth $200m from investment bank Dresdner Kleinwort. The Twins Financing revolving credit facility will support Focus productions and acquisitions, with the specialised arm and Dresdner splitting costs 50/50 (unless another partner is involved). Projects set for funding include Lajos Koltai's Evening, Martin McDonagh's In Bruges, and the aforementioned Lust, Caution and Reservation Road.
In announcing the deal, Focus CEO James Schamus and president Andrew Karpen asserted the financing plan "takes any and all financial guesswork out of our big picture".
Next to benefit could be Warner Independent, which is reportedly working on a 30-project fund deal with Volume One, a New York- and Los Angeles-based operation launched by financier Dean Leavitt and producer Gina Resnick (Warner refused to confirm or deny the deal and Volume One declined an interview request).
Though studio specialised arms - with their smaller slates and films whose performance is less predictable - may seem like a riskier financing proposition than their studio parents, Wall Street investors are apparently attracted by the strategies that make the specialised arms different, such as their use of international sales to offset risk and their tendency to give films platform rather than wide releases (allowing them to cut back on p&a spending if a film threatens to underperform).
"While it is a different business model, Wall Street has looked favourably on the specialty arms because of those very features," explains P John Burke, head of entertainment finance practice at law firm Akin Gump Strauss Hauer & Feld, which arranged and structured the Focus/Dresdner deal.
Wall Street companies, says Burke, "recognise that financing the specialty arms gives you a downside protection, because they're protecting your downside as well as theirs by pre-selling foreign and by going out with platform releases".
Whether every specialised company will want, or be able to attract Wall Street money remains to be seen. But Burke, for one, sees major financing deals playing an important role in the future of the studios' increasingly inventive specialised units.
"If I had to predict, I would predict that all of the studio specialty arms will have co-financiers in place in the not too distant future," he says.