‘The Hobbit’ to James Bond… MGM Status Leaves Films and Fans in Limbo

The other day Brad sent me an e-mail asking if I’d like to delve into the status of MGM with an editorial of some sort. You know, MGM, the once great studio that currently holds the rights to the James Bond franchise and Peter Jackson’s The Hobbit films. The studio sitting on Red Dawn and Joss Whedon’s Cabin In The Woods.

“Something has to happen, right?” he asked.

Well, yes and no. Yes, the lenders will eventually sell the studio for what they can get out of it. No, they don’t have to do it anytime soon. That’s because the lenders now control the studio.

Under normal circumstances a studio like MGM, with its crushing $4 billion debt would be forced to sell off its assets to pay off its creditors. Unfortunately for movie fans the creditors in this case decided to buy up the debt for 60 cents on the dollar. Meaning they paid slightly over $2 billion to take control of the company. They then tried to sell the company to get back their money, assuming they would at the very least get their $2 billion back.

Well, you know what they say about assumptions. Recent events have made a sale very difficult. First of all, MGM’s biggest asset is their library. Film libraries are not all that valuable in an era of declining DVD sales.

Then there’s the way Hollywood currently does business. A film these days has to make so much money just to break even that even a successful film like Inception may have trouble breaking even… at least when you look solely at the box-office sales.

Here’s why. The actual production budget for Christopher Nolan’s film is reported to be in excess of $200 million. (I know, I know. The studio says different. But they would be lying.) The average Hollywood publicity budget for a summer blockbuster is $50 million. It cost another 10 to 15 million to strike prints for 3000+ screens. Taking this information into consideration, it tacks on an additional $60-65 million onto a major summer tentpole. In 2010 films ranging from Furry Vengeance (3,002 theaters) to The Twilight Saga: Eclipse (4,468 theaters) are the highs and lows of the 3000+ theater count films looking at these kinds of additional costs.

Studios currently get about 55% of the gross box office back from theaters. Sometimes they get a little more if they can muscle the theaters on a big blockbuster, but that’s rare. But let’s just say 55% for arguments sake. That means for Inception to get into the black the film has to make in excess of $550 million just to break even.

That’s not even taking into consideration that Christopher Nolan and Leonardo DiCaprio more than likely get 5 to 10 gross points. That means that you have to take 10 to 20% of the gross box office off the top because Warners will never see it. That dough goes to Nolan and DiCaprio. That’s why Paramount lost money on Mission Impossible 2 and 3. Tom Cruise used to get 22% of the gross.

Inception will end up doing just fine, but the margin of error on a film like that is very small. That’s why so many films lose money these days. Despite record box-office totals year after year.

The same thing would be true for MGM with films like The Hobbit or the next installment of the James Bond franchise. There’s a possibility these films wouldn’t make very much money despite huge built in fan bases. I’m sure that’s also why they scrapped a film like the proposed Robocop remake. A film like that would be very expensive in this day and age.

So far MGM’s lenders, Anchorage Advisors and Highland Capital Management have only had one serious buyer. Time Warner, who offered $1.5 billion. If they took that deal, Anchorage and Highland wouldn’t even get back the money they laid out last year to buy out their own debt. Let alone the money that was owed to them in the first place. Which means they have no incentive to sell the studio at this time.

Or any incentive to release Red Dawn or Cabin In The Woods.

Neither film is a guaranteed hit. Joss Whedon may be a god at Comic Con and on the Net, but the fact is the only hit film he’s ever been involved with is the original Toy Story. As for the Red Dawn reboot, I never thought it was a great idea. MGM would have to shell out $70 to $100 million to properly release both films with no guarantee they will make that money back. That doesn’t make any sense for a company that is already $4 billion in the hole.

The situation is likely to get worse before it gets better. Anchorage and Highland are not well versed in the entertainment business. If they were they probably wouldn’t have bought out their own debt. Unlike other studios in town, MGM has little in the way of assets other than their back catalogue. They don’t own any major cable channels and they don’t have a lot of other holdings other than a film library that is declining in value every day.

The lenders have had talks with various film industry veterans about taking over the company. A quick look at the various suspects can’t be reassuring to potential buyers. Names like Joe Roth, whose Revolution Studios went broke in a matter of years producing such gems as the animated film Lil’ Pimp, the way over budget bomb Tears of the Sun and of course, Gigli. We also mustn’t forget Terry Semel, the former music industry exec who helped broker the disastrous AOL-Time/Warner merger before driving Yahoo! stock into the ground and being forced out by angry stockholders, and the execs at Summit Entertainment who would already be out of business if they didn’t have the Twilight franchise to fall back on.

Then there’s MGM’s current placeholder CEO, Stephen Cooper. Cooper is supposed to be a wiz when it comes to restructuring faltering companies. His reputation is based on his work with Enron and Krispy Kreme Donuts. That’s right. One company that no longer exists and another company that lost $4 million in fiscal 2009. With successes like that, I’m not sure I want to see what failure looks like.

There is a chance that MGM will allow another studio to release the films currently in MGM’s pipeline. Sony is releasing the Kevin James starrer, The Zookeeper. That film is getting high marks from preview audiences so I’m pretty sure MGM got a good deal from Sony to distribute after their $146 million success with James’s Paul Blart in 2009. Can they get the same favorable terms from another studio willing to release Cabin In The Woods or Red Dawn? Will Warner Bros. somehow step up and magically get MGM to make The Hobbit, or perhaps buy them out and go it alone? Would MGM even allow that considering the profits to be made on that pic?

It’s anyone’s guess if and when any of MGM’s other product will see the light of day. Which is really annoying for film fans. We just want to see Cabin In The Woods and Red Dawn come out in theaters. We just want Peter Jackson to give us those two new Hobbit flicks. We just want to see Daniel Craig kick ass as James Bond, potentially with Sam Mendes (Road to Perdition) at the helm.

Unfortunately, the Chinese may cash in their treasury bonds and take over America by the time Red Dawn hits theaters. And Daniel Craig may have his AARP card before he reprises James Bond. It’s anyone’s guess, but right now the frustration for film fans runs high.