MGM pondering new ways to win

Dec 17, 2001  •  Post A Comment

At a time when Metro-Goldwyn-Mayer is roaring into an unsettled television program marketplace with intriguing new formulas for profitability, its chairman has declared that the last independent Hollywood studio is an eager merger and acquisition candidate.
Alex Yemenidjian, MGM’s affable and driven chief executive, recently told a UBS Warburg media conference that his company “must be part of a larger organization.”
“We think MGM needs to grow though mergers and acquisitions to accelerate the double-digit growth that it has, to be vertically integrated, to diversify,” he told conference attendees earlier this month.
“The opportunities are everywhere,” he said, pointing to MGM’s recent acquisition of a 25 percent stake in Rainbow Group, which could double over time, and digital platform options in Europe.
If MGM were to sell out altogether, the scarcity value of its independent film and TV library (the largest in the world) and production operations would command a price well beyond earnings-based multiples, Mr.Yemenidjian said.
The players
Another option is for MGM to acquire or control distribution the only way it still can: by using its strengthened balance sheet to buy or to invest in any one of a handful of independently owned broadcasters who will be acquirers or be acquired in the next round of TV station consolidation in 2002.
Those station groups could include Hearst-Argyle Television, Gannett Broadcasting, Belo and Paxson Communications, if the latter’s ownership partnership with NBC unravels over NBC’s proposed acquisition of Telemundo.
The fact that MGM has constructive ties to NBC, including a 15-year agreement to distribute NBC programming abroad, makes some kind of bigger NBC-MGM-Paxson connection seem inevitable.
“Paxson is an asset that would fit very well with MGM under the right circumstances and at the right price,” Mr. Yemenidjian said, in response to a conference question about whether it might try to buy the station group.
“It [Paxson] is a valuable asset in terms of shelf space. It would take our television production operations to a different level, being able to have the combination of content and distribution, the absence of which, as you saw recently, resulted in Sony Television basically shutting down their network TV production operation,” he said.
Eliminating the need to negotiate with networks for distribution of your products is a clear advantage, MGM officials say. The trade-off would be not having a partner to share the production cost load and risk, although MGM has branded global cable channels, ancillary business and other platforms to generate offsetting revenues.
However, MGM is not waiting to buy its way into distribution, or to be bought.
MGM officials say they are determined, even in a weak advertising environment and economy, to thrive in television production and distribution by inventing and embracing new business models they are beginning to use.
MGM is learning how to better manage its downside risk by effectively leveraging its most potent weapon-its TV and film library.
In fact, some 600 titles in MGM’s film library, including many classic “James Bond” films, have supported the economic success of Turner Broadcasting’s cable networks, which has held the licenses. Most of those rights are now reverting back to MGM.
Leveraging properties
The transformation of some of these popular theatrical films into prime-time television series is allowing MGM to hammer out profitable production and distribution terms that can move industry economics to a new level. The key is having titles and products the cable and broadcast networks want bad enough to cause them to make concessions and break with old business habits.
For instance, MGM has developed a profitable economic model for the four series it produces for Showtime, including “The Outer Limits” and “Stargate SG-1.” The model shortens the wait for profitability to within one season by allowing the series to move to cable syndication (on networks such as Sci-Fi Channel) as early as the second year.
The Showtime model also eliminates deficits of $200,000 or more per episode that were not covered by traditional network license fees and that studios had to carry, hoping their series would make it to syndication profitability four or five seasons down the road.
MGM officials decline to elaborate, but analysts speculate “Outer Limits” and “Stargate” each will generate up to $60 million in profits over five or six years under this formula. The strong following for these franchises has allowed MGM to develop future theatrical releases and merchandise that will generate still more incremental profits.
MGM also is learning other new ways to leverage the television and film library franchises it owns and controls to create brand-new prime-time television series of the same name, the production and distribution terms for which make them almost instantly profitable.
MGM and broadcast network officials decline comment on the specifics. But sources close to the negotiations say “Legally Blonde” is an example. ABC already has given MGM a “put” pilot agreement that requires ABC to develop and broadcast a series pilot. If no 22-episode series order materializes, ABC will pay MGM a penalty fee that covers the studio’s downside risk. A co-production arrangement with The Walt Disney Co.’s Touchstone and ABC would likely assure MGM a 60-40 or 70-30 split, compared with a more traditional 50-50 split, sources say.
Creative deals
In other words, MGM could end up shouldering much less of the original production costs and risks, and garnering more of the back-end profits, sources said. ABC is willing to assume more risk because “Legally Blonde” is a proven, younger skewing product.
MGM also could wind up with the domestic distribution rights, which broadcast networks have been loath to relinquish. MGM may even be able to negotiate a formula for ABC to buy the broadcast network rights to the theatrical sequel in the works. Studios also are trying to negotiate as many as three different entities in the space of what normally was a broadcast network window.
Such bold and complex new formulas can shorten the wait for profitability for producing studios by one or two seasons and mean $10 million to $15 million more in overall profits, sources say.
That would mean that on MGM and ABC’s co-production deal for “Legally Blonde,” MGM could make $20 million more than if it were negotiated as a standard prime-time series deal, or a total of more than $70 million, according to analyst estimates.
MGM also is in the process of negotiating a similarly favorable co-production deal with NBC for a prime-time series version of its vintage theatrical film “The Thomas Crown Affair,” and with USA Networks for “Dirty Rotten Scoundrels.” It has other franchises, such as “The Pink Panther,” that it can develop as animated or live-action television properties.
“You’ve got to have the right property at the right time, targeted against the right demographic,” said Chris McGurk, vice chairman and chief operating officer of MGM. “We’re just trying to be smarter about it-leveraging the assets we have in order to enter into deals that have an advantage risk-reward profile for us. Then, it becomes a zero-risk business for us and we can afford to remain in it.”