“Money Will Be Made”: Relativity Media and Hollywood’S Relationship with Wall Street
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Kimberly A. Owczarski, Ph.D. “Money Will Be Made”: Relativity Media and Hollywood’s Relationship with Wall Street Abstract Although the last three decades has been rife with the collapse of high-profile independents from Orion to Miramax, Relativity Media’s journey from financer to producer and distributor to bankruptcy in just eleven short years was a bit different than other independents. This essay examines Relativity’s status as a mini-major film studio, what factors led to its ascent, and the situations which led to its subsequent demise. Chief in this examination is Ryan Kavanaugh’s role in Relativity—as founder and chief executive officer, his position was vital in shaping both the successes and the failures of the firm. Indeed, the breakdown of Relativity ultimately demonstrates the challenges facing independent studios navigating the contemporary media environment as the Hollywood majors continue to consolidate their power in the industry. On July 30, 2015, lawyers for Relativity Media filed companies in a system that typically finds success for bankruptcy protection in a U.S. court. Despite through big-budget projects. a successful track record of releases that included Relativity entered the competitive film the big-budget action filmImmortals (2011) and market as economic conditions shifted in the Oscar winner The Fighter(2010), Relativity’s industry towards new finance models, a trait it dependence upon Wall Street investment coupled shares with many independent film companies with institutional overspending contributed to that have grown to prominence in the last few the company’s financial woes, especially after a decades. In the late 1960s and 1970s, the change series of underperforming films at the box office. of ownership in several of the major studios for As Relativity seemed poised for disintegration, the first time in their histories created instability much of the firm’s problems were attributed to the in the film market. Under different management company’s founder and chief executive officer, Ryan styles, the studios were forced to find novel ways Kavanaugh. Because Kavanaugh had a successful to become more profitable. The record-breaking track record of bridging Wall Street investment success of Universal’s Jaws in 1975 and 20th with Hollywood filmmaking in the earliest years Century Fox’s Star Wars in 1977 at the box office of Relativity—he had brokered deals with majors and in merchandize sales demonstrated the type Warner Bros., Universal, and Sony, among others— of texts that would increase profit margins for the the bankruptcy status seemed incongruous. Despite studios. Historically, studio financing has relied his investment accomplishments, Kavanaugh had on “a combination of self-supplied equity and wanted a more active role in the development film-specific bank lending.”1 Blockbuster films and creation of films. In running his own studio, particularly benefit studios because they guarantee Kavanaugh’s financial strategies were constantly income from various media forms, a necessity for questioned, especially in Relativity’s improbable studio financial stability and to secure large loans. rise and its subsequent descent into bankruptcy While blockbuster films could financially impact all in just eleven short years. Indeed, Relativity’s arms of the growing media companies, they came at collapse demonstrates the challenges facing nascent a high cost due to their production and marketing 50 The System Beyond the Studios Luci Marzola, editor, Spectator 38:2 (Fall 2018): 50-59. OWCZARSKI budgets. Studios thus reduced their output sig- throughout the 1980s and entered into financing nificantly to focus primarily on blockbusters. As and production, but its skillful release of the award- a result, the number of independent production winning sex, lies and videotape (1989) placed the companies has grown in recent decades in order to company at the forefront of independent film. take advantage of the holes left by the studios, both Miramax marketed the film to both arthouse and in terms of the number of films released as well as youth audiences, and exhibited the film in both the type of films produced. the small theaters catering to art film enthusiasts As the studios shifted their focus from and in multiplexes across the country. Alisa Perren large slates to big-budgeted blockbusters, several terms independent films that replicate aspects of independent film companies emerged to fill in the studio blockbusters (albeit on a smaller scale) as the gaps, chief among them Orion and Miramax. indie blockbusters, a hybridized genre that Miramax The cases of Orion of Miramax are instructive excelled at producing throughout the 1990s.3 comparisons for what would later happen with From the star-filled cast of Pulp Fiction (1994) to Relativity. Orion was founded in 1978 after several the high-budget period piece The English Patient top executives left United Artists due to disputes (1996), these films were critically lauded. By 1993, with Transamerica, the studio’s parent company Miramax’s track record was so strong that Disney, whose primary business was insurance. With the looking to expand its film holdings, purchased the reputation of these former studio executives, Orion company. With the infusion of corporate capital, the quickly procured a distribution and financing production and marketing budgets of Miramax’s deal with Warner Bros. which gave the fledgling films drastically increased. These expenditures led 2 company relative autonomy. The primary focus of to conflicts with Disney executives, especially as Orion was generating moderate success at the box several of these ventures failed to recoup costs. The office, with the potential for more revenue in the Weinsteins left the company they founded in 2005, emerging new media markets of VHS sales and and Disney let the division’s slate lapse, producing cable television licensing. This strategy initially only a couple of films a year until ultimately selling proved successful and based on its track record, Miramax in 2010. Orion was able to secure a much higher credit line in Although the last three decades has been rife 1985. As a result of the finance influx, the company with the collapse of high-profile independents like increased project budgets. The major studios had Orion and Miramax, Relativity Media’s history largely abandoned mid-range budgeted pictures was a bit different than these other film companies. to focus on blockbusters, and Orion was finding Its direct ties to Wall Street investment gave the success in that milieu with films like the Academy company access to large amounts of capital from the Award-winning Platoon (1986). However, as the start, limiting Relativity’s financial risk in potential production and marketing budgets quickly climbed projects. As a multimedia company stretching from for its films, Orion did not have the safety nets that music to television, and from fashion to sports, the majors did—extensive libraries of product going Relativity had multiple modes of revenue besides back decades, corporate capital, or even multiple its film studio. At the time of the bankruptcy media arms. As several mid-range pictures flopped, announcement, Relativity had a lucrative Netflix Orion’s executives were forced to file for bankruptcy in 1991, and the company ceased to function as a deal in place as well as dozens of output deals around production studio. the globe that helped finance upcoming films. The While Orion functioned as one of the largest company had established key relationships with independent studios for much of the 1980s, Universal Studios and Broadway Video (Lorne Miramax was central to shaping independent Michaels’ entertainment studio) among others to film in the 1990s. Founded a year after Orion by produce high-profile projects. There was no shortage brothers Harvey and Bob Weinstein, the key focus of press coverage of the company or of Kavanaugh, of Miramax in its earliest years was distributing who was named Showman of the Year by industry concert and foreign films to college campuses trade Variety in 2011.4 And yet, the company still and smaller art theaters. The company grew collapsed despite its various assets and strengths. THE SYSTEM BEYOND THE STUDIOS 51 “MONEY WILL BE MADE” As Relativity moved from a support institution the firm lost millions of dollars and was defunct to a mini-major (an independent company by 2002. Despite the firm’s failure and lawsuits competing with the major Hollywood studios), the from key investors in KC Capital, Kavanaugh was role of Wall Street capital significantly changed for able to launch Relativity Management in 2004 to the firm. In this essay, I examine Relativity’s status focus specifically on the film business. Between as a mini-major film studio, what factors led to its his Hollywood contacts and his background in ascent, and the situations which led to its subsequent venture capital, Kavanaugh leveraged Relativity demise. Chief in this examination is Kavanaugh’s Management as a key broker between Wall Street role in Relativity; as founder and chief executive investment and the studios. officer, his position was vital in shaping the firm. Relativity Management emerged in the midst Kavanaugh’s approach to financing was that “You of a shift in Hollywood from studio equity and can’t think of it as money….You have to think of it picture-specific bank loans towards slate financing, as math,” and was based on the insistence that all where outside investors backed several films in a films can be profitable, even if the revenues were in studio’s upcoming release schedule.7 Between 2005 smaller quantities than the Hollywood studios are and 2008, over $4 billion of hedge fund investment used to seeing.5 By focusing on the gaps left by the backed studio picture slates while another $8 studios’ slates, Relativity would be able to carve out billion was raised via private equity firms.8 Slate its existence in the competitive film landscape and financing deals offered several advantages.