http://www.nytimes.com/2009/11/09/business/media/09avatar.html?_r=1&pagewanted=print
LOS ANGELES Can a movie studio make money on a film based on an original and unfamiliar story, with no Hollywood superstars, a vanishing DVD market and a price tag approaching $500 million?
That question looms large for 20th Century Fox and its 3-D science-fiction film Avatar, among the most expensive movies ever. Despite many skeptics, the studio thinks it can turn a profit, in part because the films creator, James Cameron, was the driving force behind the studios immense hit Titanic.
But just in case box-office receipts for Avatar fall short, Fox has worked hard to hedge its large bet on the movie.
Despite the estimated half-billion dollars spent on its production and marketing, Avatar may carry surprisingly little financial risk for Foxs parent company, the News Corporation, even if it disappoints. That is because of shifting industry economics, reliance on outside investors and help from a network of allied companies and in-house business units.
Foxs efforts underscore how studios generally have been able to minimize their exposure at a time of blockbuster budgets albeit at the cost of limiting their profit potential as well.
The final cost of the film has not been tallied, as Mr. Cameron, who has worked on the film for 15 years, and his collaborators, as far-flung as Weta Digital in New Zealand, continue to complete their work. Published reports have put the production budget at more than $230 million.
But the price tag would be higher if the financial contribution of Mr. Cameron and others were included. When global marketing expenses are added, Avatar may cost its various backers $500 million.
Tom Rothman and Jim Gianopulos, the co-chairmen of Fox Filmed Entertainment, declined through a spokesman to be interviewed. Jon Landau, Mr. Camerons partner in their Lightstorm Entertainment production company, also declined to be interviewed.
But Avatar did get a mention in a conference call on Wednesday during which Rupert Murdoch, the News Corporations chairman, discussed a surprise 11 percent earnings jump in the companys fiscal first quarter, which ended Sept. 30.
Im confident we will lead the Christmas season, Mr. Murdoch said. He added that he was excited and moved by Avatar.
Michael Nathanson, an analyst with Sanford C. Bernstein & Company, wrote in an e-mail message before the earnings call that investors tend to ignore the impact of a single movie on a company as large as the News Corporation.
At what point the various partners in Avatar would see profit from the film depends on what share of revenue each receives as the movie reaches theaters, then home video and other media around the world. If domestic ticket sales reach $250 million a level broken in the last year by five films, including Star Trek and The Hangover Fox and its allies would appear to be headed into the black.
Mr. Camerons Titanic, which took in more than $1.8 billion at the worldwide box office after its release in 1997, was a major corporate event for the News Corporation, then about a third the size of the current conglomerate, which has roughly $30 billion in annual sales.
Less than a year after the release, the News Corporation raised nearly $3 billion in a public offering of shares in its filmed entertainment group, partly on the strength of Titanic. (It bought those shares back four years ago.)
In 1980, the failure of Heavens Gate was enough to chase the Transamerica Corporation, which then owned United Artists, out of the movie business. But such company-wreckers belong more to history than to the contemporary film business.
With Titanic, the News Corporation was at risk for at least half of a production budget that would approach $300 million in todays dollars, and was borne partly by Paramount Pictures.
The News Corporation is carrying a much smaller share of Avatars production cost, as a pair of private equity partners Dune Entertainment and Ingenious Media pick up 60 percent of the budget, according to people who were briefed on the economics of the film but spoke on the condition of anonymity to avoid conflict with the studio or filmmakers.
Speaking by telephone on Thursday, James Clayton, the chief executive of Ingenious, confirmed his companys backing for Avatar, but declined to discuss the size of its stake. Greg Coote, the chief executive of Dune, declined to be interviewed.
In a further hedge, Mr. Cameron would give up part of his own participation in the films returns if production costs exceed a specified level, according to those who were briefed on the film. If final production costs exceeded $300 million, for instance, Mr. Cameron would effectively defer much of his payout until the studio and others were compensated, despite his years of labor on the movie.
Mr. Cameron, along with Vince Pace, a Hollywood technology master, also developed much of the elaborate camera system and digital technology for the film themselves, at cost of about $14 million. According to Mr. Pace, the systems are owned by a company that expects to recoup the investment by selling to other filmmakers with help from the Creative Artists Agency.
Were turning it into a business, as opposed to a path where everybodys supposed to service Avatar, Mr. Pace said.
While the film was largely shot in a converted aircraft hangar in Los Angeles, much of the work qualified for tax rebates in New Zealand, where Weta Digital operates under the direction of the filmmaker Peter Jackson and others.
Foxs biggest investment in Avatar may be on the marketing side, where the company is planning to spend about $150 million around the world a number that is somewhat lower than might be expected, because of recession-induced concessions on advertising prices and reliance on in-house resources. The News Corporation recently showed a new trailer for the film on Foxs NFL Sunday pregame show, and has been using MySpace to build awareness of the movie.
But here, too, the studio has looked for partners to bear some of the load. One ally, Imax, worked with theater owners to set up a special 15-minute preview last summer without significant cost to the studio. A lot of people are lending this sort of in-kind support, said Greg Foster, chairman and president of Imax Filmed Entertainment.
Panasonic, in return for using some of Mr. Camerons expertise for its own 3-D home video systems, contributed technological and marketing help, linking Avatar to its campaign for home theaters, for example.
Weve been supporting the effort, said Eisuke Tsuyuzaki, Panasonics North America chief technology officer, who spoke on Friday. Mr. Tsuyuzaki declined to put a price tag on that help, but said estimates of about $25 million were in the ballpark.
In addition, rapidly changing dynamics in the theater business have made blockbuster openings much easier to achieve.
Privately, theater owners are now predicting that Avatar may play in as many as 2,500 3-D theaters, while occupying almost as many conventional theaters over the holiday season, heightening the likelihood of a big opening. Theaters using 3-D bolster the overall box-office by commanding ticket prices perhaps 30 percent higher than those of conventional theaters.
Still, the studio has experienced some problems. Initial reaction to a conventional trailer was flat, and response to the 3-D Imax preview provoked doubts about whether Mr. Camerons movie which uses new technology to tell the story of a planet being assailed by humans was really the cinematic game-changer that had been promised.
Taking no chances, Fox is backing up Mr. Camerons movie with what an executive recently called the studios secret weapon.
That would be Alvin and the Chipmunks: The Squeakuel, set to open just a week after studio marketers get Avatar into theaters. It is the relatively safe sequel to a chipper family comedy that cost about $60 million and took in $217 million at the domestic box office when it was released two years ago.
