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Hollywood folks can be downright crude. Like the time some years back when there were vague rumblings that AT&T or Microsoft might buy a stake in Hollywood. I remember having lunch with a powerful Hollywood studio type -- you'd know the guy if I used his name, which I can't and won't. I asked what he thought of the rumor. "We'll take their pants down, the same way we did Coke and Sony," he said, half-grinning but mostly serious.
Which is why I couldn't help but flash back to that lunch when news passed across my screen this week that French water utility Vivendi was in serious talks to buy Seagram, parent to Universal Studios. Don't they get newspapers in Paris? Haven't they read about the sorry history of outsiders coming into Hollywood with their buckets of money and dreams of synergy? Just as my lunch buddy says, they always get their pants taken down by Hollywood. And there's nothing in this deal that should give anyone hope that Vivendi will be any luckier. Heck, when the two companies announced they were in talks, Vivendi's stock fell 14% over a two-day period.
The list of companies that have charged in from the outside to try to make Hollywood work for them is already plenty long. Anyone remember Transamerica, the insurance company that owned United Artists before the infamous Heaven's Gate disaster drove them from Tinseltown? Or how about Coca-Cola, which bought Columbia Pictures and then lurched from one disaster to another? Coke's great Hollywood success was in finding an even bigger sucker, peddling the studio to Sony for nearly $6 billion. Less than five years later, Sony took a colossal $3.4 billion write-down, owing to the wild spending and less-than-stellar box-office results the studio produced.
DEMI & WOODY.
So Jean-Marie Messier, Vivendi's chairman, can't say he hasn't been warned. Simply put, Hollywood isn't a place for the weak of stomach. Producing entertainment is predicated on making big bets and on being able to tolerate not only risks but losses. Worse yet, you have to tolerate the culture, which promotes profligate spending, even waste, for the sake of working with creative folks on their next big project. Demi Moore can still command top dollar -- some say $10 million or more -- for a film, but I'm hard-pressed to remember the last one that made much money. Striptease? GI Jane? Or what about Woody Allen? Do any of his films make money?
Here's what Vivendi will learn: The problem with Hollywood is its greatest assets -- the folks who make films and TV shows or who star in them -- can walk off the lot almost any time they want. Coke found that out when it brought in famed British producer David Puttnam to head Columbia, and he decided to run the studio like a business. He refused to pay Bill Murray's price for the Ghostbusters sequel, so it didn't get made until Puttnam left. And his hard-balling with Murray rippled through Hollywood as folks took their projects elsewhere. On the other side of that equation was Sony, which entrusted Columbia to producers Peter Guber and Jon Peters, who spent like drunken sailors to build the most lavish studio they could, signing big-buck deals with hot talent. The films were better, but they all cost a ton.
Coke, Sony, and Matsushita all learned the hard way that Hollywood runs by its own rules
The Hollywood formula has always been that if you make 10 films, you hope that at least one hits -- and that it makes enough money to cover the other nine, which invariably lose a bundle. Star salaries are too high, advertising costs are through the roof. The only problem with that 1-in-10 formula is that it's hard to get it right: MGM waited the better part of two decades to do so and is only now starting to show some profits.
Even with a slate of much-better performing films this year -- flicks like Erin Brockovich and American Pie -- Seagram's film operation showed a $121 million loss in its most recent nine-month period. All Vivendi has to do is take a look at its own corporate history: Cable and satellite company Canal+, which it owns 49% of, once put money into Carolco, the big-budget film company that made Terminator 2 and Rambo. Carolco is now out of business, following a messy bankruptcy.
If the Vivendi transaction goes through, Universal will have its third owner in five years. Japanese electronic giant Matsushita owned it for a while, selling the majority stake to Seagram and its Chairman Edgar Bronfman for $5.7 billion. Even after Bronfman spent more than $10 billion to buy record company Polygram, you have to think that if he can swing the Vivendi deal for the $30 billion to $40 billion being reported, the Bronfman family will have turned a pretty fair profit.
The word is that Bronfman will be the merged company's second-in-command, although in all likelihood he and other family members will stay on the board to look after their 8% stake in Vivendi. The liquor business, which the family built its fortune on a century ago, will likely be sold to pay off Seagram's $6 billion debt load, Messier said from Paris on June 15.
NO TV.
If the buzz from Paris is right, the company would likely trim itself down to become a major media player with satellite holdings in Europe, the publishing company Havas, and a slew of wireless and other telecom properties. It's a major Internet company in Europe and elsewhere, and now will have the world's largest music company to put over those wires.
What it won't have is a major TV presence in the U.S., a key stumbling block if it wants to make use of its film library. Foreign companies aren't allowed to own U.S. broadcasters, which is one reason why Bronfman traded his entire TV operation for a 45% stake in Barry Diller's USA Networks. But Diller and Bronfman could never agree on the ultimate goal -- buying NBC -- and Bronfman's studio suffered without the certain cash flow that a TV operation would have provided.
Which gets me back to the Hollywood studio. Vivendi will soon find that it needs all the cash flow that can possibly be generated by Canal+'s cable and wireless customers. And it wouldn't hurt if it found a way to raise what it charges Parisians for their water. Hollywood is going to be a heck of a ride. Let's hope Vivendi brings a second pair of pants.
Grover is Los Angeles bureau chief for Business Week. Follow his Power Lunch column every Friday, only on BW Online
EDITED BY BETH BELTON
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