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You have to love Hollywood ingenuity. Look at Spyglass Entertainment Group. It's the film production company that's responsible for The Sixth Sense, the Bruce Willis thriller that has grossed a remarkable $661 million at theaters around the world. If you're Spyglass, what do you do for an encore? You go public.
That has been tried before, of course, and by plenty of other companies. Last year, hard on the heels of its 1999 hit The Blair Witch Project, Artisan revved itself up for an IPO. But the company slunk off into the sunset when it couldn't convince Wall Street it was more than a one-hit wonder. Spyglass doesn't have that problem. It has had a few other hits -- though nothing on the order of The Sixth Sense -- such as Shanghai Noon and Unbreakable, along with such lesser lights as The Insider.
BOMBS AWAY. Spyglass' real problem is that, right now, the U.S. market for IPOs is abysmal and has been that way for months. So what's the company to do? Head overseas, all the way to Germany, with the goal of raising $287.5 million on the Frankfurt stock exchange. I wish it luck. The German financial markets aren't exactly cooking, either.
But more important, I wish a double dose of good luck on anyone who invests. Why? Because Spyglass is a Hollywood studio. And Hollywood studios run two ways: hot and cold -- from hits to flops. At the end of the day, Hollywood studios never seem to make much money for anyone other than the stars, directors, and the folks who greenlight the pictures.
Spyglass is run by a couple of very hot, accomplished producers -- Roger Birnbaum and Gary Barber. There's nothing about them that makes Spyglass a risky investment. It's just the business they're in. It's Hollywood.
Let's start with their big hit, The Sixth Sense. It's the very underpinning of the company. The film was made for Walt Disney, which distributes all of Spyglass' films in the U.S. According to Spyglass' financial statements, The Sixth Sense provided 57% of the company's $128.3 million 1999 revenues and 63% of the $237.2 million the company collected in the first nine months of 2000. (Figures weren't available for the fourth quarter.)
TINSELTOWN EDUCATION. Those numbers reflect the simple math of Hollywood: For every 10 pictures a company makes, you can expect only one or two to be big moneymakers, with maybe three others breaking even. The rest lose money. So Spyglass can justifiably say that it made money in 1999 -- $18.6 million, in fact. And it made an additional $89 million in the first nine months of 2000, the company said in a recent filing. Care to figure what the numbers would be like without The Sixth Sense? Maybe not be enough to send little Haley Joel Osment to college.
The company doesn't have a large library of older hits, which, thanks to cable, network, and video rights, can be licenses to print money while helping the studios that made them ride out their flops. So that puts a lot of pressure on the people who run the company to keep finding hits -- and big ones, at that. Granted, Spyglass is run by guys who have had their share of box-office bonanzas. Birnbaum has held top production jobs at both Fox and United Artists, and he had a hand in such hits as Home Alone, Die Hard 2, and Mrs. Doubtfire. Barber was at Morgan Creek, a hot production company some years ago. He was among the crew responsible for greenlighting a string of hits that included Ace Ventura: Pet Detective and Robin Hood: Prince of Thieves.
Spyglass isn't commenting, and executives declined a request for an interview for this column. But the company's financial statements lay out the numbers for what it takes to keep a hot team together. Birnbaum and Barber each make $1 million a year, not exactly big bucks by studio-executive standards -- but then they made only three films last year. Then there are the bonuses. Each man, according to the company's financial documents, qualifies for $500,000 more for acting as producer for films they put into production. There's a cap on that: They can get only another $1 million a year. But heck, when was the last time you saw an executive get paid for running both the company and working on the assembly line?
MORE MOVIES, LESS PROFITS? Only in Hollywood. Oh, yeah, then there are the discretionary bonuses, another Tinseltown trademark. Last year, each guy took home an additional $5 million in special bonuses, which comes out to roughly 5% of the company's net income apiece. Sounds like a lot to me. Indeed, Michael Eisner, who is always getting ragged on for taking home hefty bonuses, last year was given $11.5 million in extra pay, which comes out to 1.2% of the $920 million in net income his company earned.
The real problem is that with all the money that Spyglass would get from a public offering, it would do what investors should least want: ramp up production. At the moment, the company is fairly lean and mean, with 26 executives and seven other folks who help Barber and Birnbaum handle production. But all of those numbers are more likely to go up rather than down. The first thing Spyglass intends to do with new capital is make more films. In its filing, it says it intends to make seven or more films a year, instead of the three the company made in both 1999 and 2000. It doesn't take a brain surgeon to figure out why Spyglass wants to increase its output. With shareholders watching your every move, revenue growth is expected. And the only way to grow is to make more films.
But that's also tremendously risky. The history of Hollywood is filled with stories of studios that have crashed and burned by making too many flicks. Usually, what happens first is that they hire a lot more folks. Those added folks gin up all kinds of ideas, some great -- but a lot more that are pretty lame. The movies don't draw audiences, and before long, the losses are piling up. Besides, there are already too many films out there. That's one reason both Sony and Disney are scaling back production from previous year limits.
ART OF THE DEAL. Here's a final element to consider: Spyglass doesn't just want to make more films. As it says in its financial documents, the company wants to make films that "we believe have greater production values and greater potential for more widespread audience appeal." Then this: "We anticipate that in the future our costs and expenses will rise" which "could have a substantial negative impact on our financial condition." At present, the company says its average budget is $49 million a film -- some $5 million below the industry's typical cost at the moment -- and it says it doesn't intend to go much higher than $75 million a film. I think I've heard that one before.
Fact is, Spyglass is actually a pretty good production company. I like its films, I like Birnbaum and Barber. I just wish it would stay the way it is. Spyglass has a nice, comfy deal with Disney (which runs out in two years, as its documents say), and it has access to hot stars like Bruce Willis. But sorry, fellas. I wouldn't buy your stock. Maybe they'll buy it in Germany. Good luck.
Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BW Online Edited by Patricia O'Connell
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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