Time Warner is betting its future on hot-selling films like “The Dark Knight.”
By TIM ARANGO
Published: August 9, 2008
ON an early Saturday morning about three weeks ago, Barry M. Meyer pulled a sheet of paper from the fax machine in his home office, inhaled deeply and held it up to the light of a nearby window. The number on the fax was eye-popping: $66 million, plus change.
Ka-ching. The opening-day box office receipts for the Batman film “The Dark Knight” had just set a record. And for myriad of reasons including the late Heath Ledger’s delicious turn as the Joker, the blockbuster is still filling theaters on a pace that may land it just behind “Titanic” on the list of all-time, top-grossing films.
Mr. Meyer is the chairman of Warner Brothers, the Hollywood studio behind “The Dark Knight,” and the film has had its debut at a transformative moment for his studio’s parent, Time Warner.
In an effort to focus more sharply on “content creation” (or what nonsuits still like to call movies and television-shows), Jeffrey L. Bewkes, who became chief executive of Time Warner in January, is whittling down the company’s many branches.
Its a makeover that will unravel about two decades worth of mergers that created the company in its current form, putting its trophy studio, Warner Brothers as well as the ups and downs of moviemaking more directly in Wall Street’s glare.
Time Warner, initially the amalgam of the old Warner studio and the Time Inc. magazine empire, grew to include Turner Broadcasting, America Online, a cable company and such prized cable channels as HBO. Some analysts have had a hard time embracing this goliath as it has grown into the world’s biggest media company.
So, it turns out, have some of its executives.
“Its always been frustrating that as well as we do, it becomes a blip on the screen,” says Mr. Meyer of Warner’s contribution to Time Warner’s overall bottom line. “We joke that w could have the greatest year in history, and if AOL misses its advertising target by one-tenth of a percentage point, that would be the headline.”
Up or down, Warner’s performance will stand out much more starkly in the years ahead because the days of Time Warner being all things to all media are gone.
For now, Mr. Bewkes is staking the company’s future on three big content providers: Warner Brothers, Turner Broadcasting (which includes TNT, TBS and CNN) and HBO. To ramp things up on the entertainment front, he’s also been overseeing internal discussions about acquisitions in film and television including a possible takeover of NBC Universal, should its parent, General Electric, decide to sell, according to executives and bankers who requested anonymity because they were not authorized to disclose details of the discussions.
Elsewhere in the company, it’s all about downsizing. Time Warner’s cable operation is being spun off, eviscerating the once-popular corporate notion peddled by business consultants and merger specialists that content and distribution should reside under one roof.
Mr. Bewkes is also looking to sell AOL or, more likely, find a partner like Yahoo or Microsoft to take it off his hands, leaving Time Warner with a small stake in the online company.
It is less clear how the Time Inc. unit, which publishes magazines like Time, People, In Style, Fortune and Sports Illustrated, meshes with Mr. Bewkes’s strategy. According to Time Warner insiders, the company is likely to shrink the publishing unit to just a handful of the most profitable titles. Some analysts predict that Time Warner might try to sell the publishing unit en masse, but only if market conditions improve.
What is clear is that Mr. Bewkes is tethering his fortunes to companies that are juggernauts in their respective industries and are sprawling, global brands. They also represent the antithesis of the notion that content for the masses is passe, and that popular culture has devolved into narrow niches and user-generated fare like video clips of bulldogs riding skateboards.
Get ready then, says Mr. Bewkes, for global fireworks.
“Around the world, the consumption of entertainment products is growing rapidly,” he says. “The question is how do you offer it, and how do you get paid for it?”
THE troika that Mr. Bewkes prizes faces distinct challenges. HBO is under constant pressure to remain a cultural tastemaker by finding new fare to replace hits like “The Sopranos” and “Sex and the City,” while Turner Broadcasting’s cable stable is susceptible to the vagaries of advertising and viewers who are increasingly watching video online.
For its part, Warner has to produce movies and television shows at a time when it is harder, though not impossible (see “The Dark Knight”) to attract large audiences. This is compounded by the fact that the industry’s engine of growth, DVD sales, has slowed to a near standstill. (Warner executives are quick to point out that DVD sales haven’t fallen off the cliff, however, as some analysts had predicted.)
Mr. Bewkes describes Time Warner’s new raison d’etre as “dominating niches with a clear brand strategy.”
“HBO today means “Entourage,” “Big Love,” “Flight of the Conchords” and the coming “True Blood,” he says. “There are 10 subniches below the brand. And inside Warner Brothers are a bunch of brands: Harry Potter, Batman, Two and a Half Men and so forth.”
But if Time Warner’s long-languishing share price has been driven by the ups and downs , mainly downs of AOL, is it any better to have the fickle nature of the world’s moviegoing populace drive the share price?
“The investor world that looks at studios as part of media companies will say that the studio business is supposed to be erratic,” Mr. Bewkes says. “Not at our company. Not at Time Warner.”
Among the three = units that Mr. Bewkes is betting the shop on, Warner is by far the biggest revenue generator. For the 2007 fiscal year, Time Warner’s film division including New Line Cinema, which this year was folded into Warner Brothers generated $11.7 billion in revenue. Turner and HBO, which Time Warner lumps together in its financial reports, generated $10.3 billion.
The profit picture is slightly different, because cable networks have much higher margins. Last year, Warner Brothers earned about $1.2 billion in operating income, compared with about $3.4 billion for HBO and Turner combined.
When Time Warner reported second-quarter earnings on Wednesday, Warner and the cable networks were the fastest-growing units. Overall revenue grew just 5 percent, but Warner was up 14 percent and the cable networks were up 9 percent. AOL and Time Inc. posted declines.
For Mr. Bewkes and his team, the core of the strategy is a wager that the media pendulum will swing away from distribution and back toward content.
“The last number of years, all you have heard about is new and better ways to distribute content,” says Mr. Meyer, sitting in his office on Warner’s lot in Burbank, Calif. “At some point, I think distribution gets commoditized.” Leaving, he says, “content as the more valuable component.”
He points at a television screen in his office. “At the end of it all,” he says, “it’s just a blank screen.
True, to a point. But look at the music industry and ask yourself who has made more money from the digital revolution: Apple from selling iPods, or the record labels from digital song sales?
Despite the proliferation of devices that threaten to make content a commodity and have already arguably done so with music, there are others besides Mr. Bewkes who see growing content opportunities on the horizon.
“While we are in a period of transition, there has never been a better time to be in the content business,” Philippe P. Dauman, the chief executive of Viacom, said in a recent conference call with Wall Street analysts. Among media companies, Viacom, which includes the Paramount film studio and MTV Networks, is the clearest parallel to what Time Warner is now becoming.
THE Warner lot in Burbank is a 110-acre mill of popular entertainment. Now 85 years old, it has long had a place in the fabric of Americana.
A lengthy, soon-to-be-published coffee table book about the studio’s history, “You Must Remember This: The Warner Brothers Story,” along with a PBS series, will open the annals for movie buffs. The book’s author, Richard Schickel, is a movie critic who has also produced television documentaries on Warner directors. Those projects spawned the book.
Warner’s story is crucial to the history of American movies, even to American social and cultural history “that is to me unbreakable,” Mr. Schickel writes in the book’s introduction.
Indeed, Warner has long been considered one of the most stable and durable of the major studios and largely devoid of Hollywood histrionics.
“These are honest and decent people who keep their word with both the business and creative communities,” Mr. Bewkes says.
While Warner is most closely associated with movies, the production of television shows for major broadcast networks and cable channels in some years makes up half the studio’s profits.
The bulk of Warner’s revenue, though, comes from movies. On the television side, where the most lucrative franchise right now is the CBS show “Two and a Half Men,” revenue is about $4 billion, compared with close to $7 billion from motion pictures.
Although no one denies the shifting media landscape and the enormous degree to which new technologies and the Internet are disrupting it, the revenue that Warner draws from distributing shows or movies on the Web is minuscule and is likely to remain tiny for some time.
Yet digital growth is all the rage on Wall Street. “I probably spend three-quarters of my time talking about things that are about 10 percent of our business,” Mr. Meyer complains.
That’s partly because many analysts regard Warner’s traditional businesses as mature, and therefore hard to expand.
“We are facing a marketplace where consumer spending is relatively flat,” said Kevin Tsujihara, president of Warner Brothers Home Entertainment. “Our challenge is in how we go about improving margins in this environment.”
He says Warner’s answer is to convert the DVD rental business, still a roughly $7.5-billion-a-year business for the entire industry, to video-on-demand, or V.O.D., services, which now amount to only about $1.2 billion annually.
But the margins are juicy and likely to become even more so. Studios get about 20 cents on the dollar per DVD rental. Their take on a V.O.D. sale is about 60 cents to 70 cents on the dollar. “Even if you get modest growth, you can grow the margins, which help the most important line, which is the bottom line,” Mr. Tsujihara says.
Warner executives say demand for American entertainment is growing globally as well. In television, consider this: in Germany five years ago, the only American series in prime time was the 1980s show “Quincy.” Today, “Monk,” “CSI: Miami” and “House” all reside in German prime time.
Digital piracy is also forcing studios to make shows available sooner in international markets. In Singapore, for example, Warner will offer “Gossip Girl” a day or two after it shows in the United States, compared with the usual lag of six months.
“Audiences are watching shows that are in the zeitgeist online as early as a day after the U.S. telecast on sites where people have posted them illegally,” said Jeffrey R. Schlesinger, head of international television.
International distribution is paying more these days: a few years ago, a typical show’s international revenue was about $500,000 an episode; today it is closer to $1 million. And as a percentage of television revenue, international represents 20 percent, compared with 15 percent five years ago, according to Bruce Rosenblum, president of the Warner Brothers Television Group.
For 17 of the last 22 years, Warner has been the top seller of television shows to the four major broadcast networks, despite not owning a network itself. In 1995, the government repealed rules that prevented networks from owning and producing their own television shows, and Warner has been in competition with networks’ production houses ever since.
“Our job is to be the second-favorite supplier of shows to each of the networks,” Mr. Rosenblum says. “All of our competitors have the advantages of owning television stations.”
It is this dynamic, in part, that could drive Time Warner to buy NBC Universal. G.E. has consistently said it plans to retain its TV and movie unit, but many in the industry say they would not be surprised if, after the Olympics ‘97 now on NBC ‘97 G.E. explores alternatives.
A recent analysis published by Michael Nathanson, an analyst at Sanford C. Bernstein, found that the share of independent programs (meaning not produced internally) on networks dropped to just 21 percent this year from 42 percent in 2006.
“Nonaligned third-party TV studios like Warner Brothers and Sony appear to have an increasingly harder time finding homes for their programs,” Mr. Nathanson wrote in his report.
That insight isn’t lost on Warner executives.
“In television, we have to be better than the other guys because the networks would prefer to buy from their own production companies,” Mr. Meyer says.
Although ratings for networks have declined, they are still the best place to break a new show. “For the next number of years, access to a big network is irreplaceable,” he says.
FOR such a big, ambitious movie, “The Dark Knight” had a small-town theatrical birth. Its world premiere was in Montpelier, Vt. several days before a glitzier coming-out party on the Upper West Side of Manhattan. The premiere’s site was chosen because of a friendship between Mr. Meyer and Senator Patrick J. Leahy, a Vermont Democrat.
It was a week before the movie was released more broadly, and Mr. Meyer and other executives were nervous about preventing a leak to file-sharing sites on the Internet that could undermine its theatrical debut and the studio’s profits.
People patrolled the aisles of the Capitol Theater in Montpelier, wearing night-vision goggles to detect hand-held camcorders. (No one was nabbed.) In fact, the antipiracy efforts before the release of “The Dark Knight” were so tough that Mr. Meyer himself couldn’t bring a DVD copy home to watch a rough cut.
When a copy of the film didn’t make it to the Web until 38 hours after its debut, Warner tracked a grainy camcorder copy to a theater in the Philippines, it was seen as a triumph. Those 38 hours, as well as Warner’s tactic of discouraging downloaders by flooding file-sharing sites with fake copies of the film after pirated copies surfaced, probably saved the company millions in lost ticket sales.
“With a movie like this, where the audience is technologically savvy, the threat and potential cost of piracy is huge,” says Mr. Tsujihara, who also oversees antipiracy efforts at the studio.
THOSE efforts underscore how important protecting intellectual property is to Mr. Bewkess overall strategy. Because of the difficulty of aggregating an audience consider the decline of broadcast television ratings in recent years, a big movie like “The Dark Knight” is all the more valuable.
“You just have to look at the box office numbers,” said Jeff Robinov, president of the Warner Brothers Pictures Group. “It’s more challenging to grab that audience. But when it works, like with Batman, it extends to all areas of the company.”
A few years ago, Mr. Bewkes, along with other media executives, attended a session at the Museum of Television and Radio in Los Angeles, during which a group of computer hackers demonstrated how easy it was to find first-run movies on the Internet.
When the assemblage went to lunch, Mr. Bewkes stayed behind to chat with the hackers.
“They said they didn’t feel bad about piracy because of all the money studios make,” Mr. Bewkes recalls. “I said, ‘Let me tell you what we make.’ And I said, ‘Here’s the percentage.” They said, “We’ll pay for movies if you give it to us the right way.’”
In the future, the “right way is likely to mean making movies available on every platform: theater, DVD, V.O.D. and on the Internet either at the same time or with a smaller window following a theatrical release.
But until technology forces Hollywood’s hand, Mr. Bewkes suggested that it would take three to five more years before high-definition videos are delivered conveniently over the Internet, the industry will retain its grip on sequential windows of release.
“Warner Brothers is staunchly and adamantly supportive of preserving the theatrical window,” said Alan Horn, president and chief operating officer of Warner Brothers Entertainment, mentioning a statistic he had read indicating that 17 percent of people who had seen “The Dark Knight” had gone back a second time. “I wonder how many of those would have gone out and bought the DVD instead of seeing it again at the theater.”
The future, most agree, is seamless distribution of films to television using Internet technology. But the big question facing Hollywood is, how far off is that future?
That transition will be, and is, wrenching because studio executives must walk a fine line between preserving the traditional business, which still amounts to a vast majority of revenue and profits, and experimenting with new ways of distribution. That experimentation often puts studios at odds with longtime retail partners, the biggest of which is Wal-Mart Stores and theater owners.
Some are already doing it. Sony recently announced that it would offer its Will Smith movie “Hancock” directly to consumers who have an Internet-enabled Sony Bravia television, at the same time that the film is released on DVD.
“Management’s biggest challenge is transitioning into this brave new world without trampling the massive revenue streams that have supported our businesses for so long,” Mr. Meyer says.
MR. BEWKES ultimately will be judged by how much of a boost he gives to Time Warner’s torpid stock price. On the Monday after “The Dark Knight” opened and set a record, Time Warner stock closed down 51 cents, suggesting that Wall Street still hasn’t made up its mind. On Friday, the shares closed at $15.60, down nearly 20 percent from their 52-week high of $19.42.
“Dark Knight comes out and it has a calculable earnings lift and the stock doesn’t move because the Street factors in something else,” Mr. Bewkes says.
In this case, he says, that something else is worries about the impact that Verizon’s television service, FiOS, might have on Time Warner Cable.
“It’s hard for investors to balance the pros and cons of dissimilar businesses,” Mr. Bewkes says, adding that once Time Warner’s cable unit is spun off, investors will have an easier time valuing the parent company.
And that, of course, brings Mr. Bewkes back to his central point: in a digital age, content becomes more valuable, not less, because it’s becoming cheaper to deliver. “The production of media content is a rapidly growing category,” Mr. Bewkes says. “Is that a good and promising thing for us? Yes.”
LOS ANGELES (Fortune) — Pop quiz: name the breakout digital businesses that have been spawned by traditional media giants that aren’t simply online offshoots of existing brands. There is, let’s see, Time Warner’s TMZ, and, depending on how it goes, NBC and Fox’s Hulu.com.
(Photo: http://www.newscom.com/cgi-bin/prnh/20080617/NYTU142) “Peggy and Matt both have extensive experience working with brands, agencies and media companies, which is key to Generate’s approach to creating unique branded entertainment opportunities,” said Jordan Levin, CEO, Generate. “Brands have shown significant interest in working with Generate, and we currently have large projects across the digital, television, mobile and live mediums in partnership with several Fortune 100 brands. Adding proven industry talent like Peggy and promoting Matt will enable Generate to continue to focus on developing creative marketing solutions for brands and stay ahead of the rapid changes that are reshaping the entertainment and media industries.” In her new role, Mansfield will be responsible for initiating marketing partnerships, soliciting sponsorships and negotiating deals related to development projects, online, television and mobile productions, and live events for Generate. She will work closely with Winslow, who oversees Generate’s strategic partnerships and creates integrated branded entertainment programs for the company’s multiplatform content.
