At Time Warner, Time for Change

Challenges lie ahead for Jeff Bewkes, new CEO of the stagnating media behemoth. May we suggest bringing New Line Cinema into the fold?

by Ron Grover

No one knows better than a media executive that first acts have to wow the audience. And for Jeff Bewkes, the freshly minted Time Warner (TWX) chief executive officer, it's darn near show time. His media empire is in need of a drastic overhaul, and Wall Street can be a very demanding audience. The expectation is that Bewkes, who began his 29-year career as a financial wonk at HBO, will make major changes at the $44 billion behemoth.

Bewkes has told analysts he'll likely spin off more of the company's capital-hungry cable system than the 16% already jettisoned by his predecessor Dick Parsons. And Microsoft's Feb. 1 offer to buy Yahoo! (YHOO) (BusinessWeek.com, 2/1/08) has suddenly moved AOL, the Mother of All Corporate Mistakes, to the top of his to-do list. Before the deal, Bewkes was considering spinning off AOL. Now he may have to find a partner to help it fend off Microsoft (MSFT). Bear Stearns (BSC) analyst Spencer Wang writes in a research note that he's counting on Bewkes to "aggressively" restructure some businesses to boost the company's languishing stock. And Wang is not alone.

Well, here's another idea for Jeff, who clearly isn't asking for my advice. It's time to bring New Line Cinema into the fold. The one-time independent studio has operated as its own Time Warner principality since Ted Turner bought it in 1994. Not that New Line, which produced the three Lord of the Rings flicks, is stinking up the place. It made the recent hits Rush Hour 3 and Hairspray.

Room at the Top?

But the studio also churned out some major league losers, including last year's bomb, The Golden Compass, which cost $180 million to make and only grossed $68 million. (Yes, it sold more than $315 million worldwide, but New Line sold off the foreign rights to others, which means there is a big time write-off coming for Time Warner.)

It's more than just one bad flick. New Line Cinema, the studio that gave the U.S. Nightmare on Elm Street and basked in its independence for much of its 40 years, needs a change. Co-founders Bob Shaye and Michael Lynne, both in their late 60s, still run the place. Their contracts are up at the end of the year and the buzz in Hollywood is they will be gone soon. Hollywood online columnist extraordinaire Nikke Finke wrote, "It's virtually certain that the studio pair will be shown the door."

I'm not sure that's necessary. The two can still attract the A-list players to put together flicks. And Bewkes, who used to oversee the HBO production budget when he ran the pay channel, knows the value of star magnetism. But after years of operating as their own country—Shaye cut a deal with Turner, honored by other Time Warner CEOs, that he answer only to the top guy—it is time for New Line to join the rest of the company. The cost savings alone should justify the move. After all, this is Hollywood. The savings from shuttering New Line's marketing, distribution, and other operations, would be more than pocket change.

Giving the Audience What It Wants

The numbers tell the tale. New Line's 17 films last year grossed an average box office of $28.6 million, and the year before its 13 averaged $19.3 million, according to Box Office Mojo, a Web site that tracks the movie business. Compare that with Warner Brothers, which hovers around the $40 million level. Simply put, Warner Brothers would do a better job of marketing and distributing the flicks. And maybe Shaye and Lynne could use a little help. Take one of their big hits last year, Rush Hour 3. It grossed a nifty $140 million, but that's a little more than half the $226 million grossed by the 2001 installment, Rush Hour 2.

Meanwhile, the cost of making the meandering Jackie Chan-Chris Tucker action comedy jumped to $140 million from $90 million. If anyone knows something about nurturing franchises, it's Warner Brothers, which still earns a fortune from its Harry Potter series, and last year rejuvenated the Batman franchise.

Warner Brothers folks are said to be pushing for just this change. Their executives wouldn't comment. Neither would Shaye and Lynne nor Time Warner. But one of the sorry things that Jeff Bewkes inherits is a corporate culture at Time Warner that all too often creates silos in which opposing camps don't work well together. Warner Brothers distributes some of New Lines' films overseas but it should do more. Folding in New Line would save money and probably improve cash flow and the films. It's not the Wall Street-shaking move that an AOL spin-off might be, but it would show folks that Jeff Bewkes is ready to give the audience what it wants.

Ron Grover is Los Angeles bureau manager for BusinessWeek, a position he assumed in 1987. Author of The Disney Touch, Ron writes Power Lunch for BusinessWeek.com every other week.