Hollywood's biggest blunders.

The numbers behind the industry.
Sept. 19 2005 1:49 PM

Hollywood's Biggest Blunders

Inexplicable decisions of the new moguls.

While it is a decidedly minority view, the proposition that inner Hollywood is a pretty rational place run by intelligent people is one that I am dedicated to. They fully grasp the new reality (even if the outside world doesn't get it) that what used to be a business focused on movie theaters is now one centered around television sets and DVD players in the home. Even so, I have to admit that some decisions made by the new moguls seem to defy this logic—or any explanation other than personal pique or ego gratification.

Consider, for example, the near-suicidal decision of Blockbuster Entertainment in 1998 to turn down Warner Bros.' offer to entrench a DVD rental window. Warren Lieberfarb, who headed Warner Bros.' home video division, which, along with Sony, then provided the vast majority of DVD titles, offered Blockbuster CEO John Antioco a deal to insulate the rental business from retail competition by delaying putting DVDs on sale for a few weeks after their release. Warner Bros. (and presumably the other studios) would provide rental copies of new titles on DVD to the 10,000 Blockbuster stores and, in return, receive 40 percent of the rental revenues that Blockbuster earned from them.

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At the time, Blockbuster was a powerhouse, accounting for nearly 50 percent of the studios' video revenue. Indeed, Sumner Redstone, the CEO of Viacom (which owned Blockbuster), had told Lieberfarb, "The studios can't live without a video rental business—we are your profit." Yet, even though Lieberfarb was only asking that the 40 percent revenue-sharing arrangement that Redstone himself had pioneered for video be extended to DVD, Antioco turned him down. Warner Bros.' response was to offer DVDs as a traffic-builder to Wal-Mart, Best Buy, and other mass retailers. As it turned out, the studios could not only live without a video rental business, they could thrive. By 2004, the studios were raking in $20.7 billion a year from DVDs while Blockbuster Entertainment, its rental business decimated, was hemorrhaging losses. Why did Antioco turn down Lieberfarb's offer? According to an insider privy to the Warner Bros.-Blockbuster negotiations, Antioco's decision proceeded not from any financial analysis of the offer's merits but from his "massive ego," which made it difficult for him to accept Lieberfarb as an equal in the negotiations.

Or, consider Paramount and Universal's inexplicable decision this summer to effectively kill their jointly owned United International Pictures, even though it was the dominant international film distributor. UIP dates back to 1970, when Lew Wasserman found that his Universal Studios lacked the clout overseas to profitably book movies into foreign theaters. With the help of lawyer Sidney Korshak, another consummate Hollywood insider, he combined Universal's foreign distribution operation with that of Paramount and MGM, the other two weak sisters of international distribution. The muscle that three studios could bring to bear provided enormous leverage overseas, where U.S. antitrust law did not prevent the consortium from block-booking whole slates of their movies into chains. UIP indeed became so dominant in getting bookings in the key European markets that the European Union has attempted (unsuccessfully) over the last decade to force it to disband.

In 2000, after MGM dropped out of the consortium (and was subsequently acquired by Sony), the two remaining partners, Paramount and Universal, changed the overhead cost-sharing split from one based on "intensity of use" to a simpler 50/50 split of the operating costs. When Universal attempted to further renegotiate the overhead-splitting formula this spring, Paramount's new regime, led by MTV founder Tom Freston and former TV producer Brad Grey, dug in their heels. According to one executive, they became so exasperated with Universal's nitpicking refinements to the formula that they told Universal, "Let's just split it up," and the consortium Wasserman had so carefully engineered disappeared in a fit of new-mogul pique.

Although Paramount executives justify the move on the grounds that it will now have its own overseas arm instead of having, as one Paramount executive put it, "half a studio," the immediate consequence is that Paramount will go from being the dominant international theatrical distributor, with all the rewards that entails in getting play dates, to an also-ran at the bottom of the pack. Nor will Paramount save any money since its new international operation will cost an additional $35 million a year. Why would Paramount and Universal accept this outcome? "It is stupid, stupid, stupid on every possible level," answered an insider who had been involved with UIP. "The great thing about the UIP deal is that when it's your movie's turn in distribution, UIP is essentially 100 percent your leverage. Paramount didn't get half the leverage, it got 100 percent—and when it was Universal's turn, it got 100 percent." So, without much ado or analysis, a win-win game became a lose-lose game for two studios.

These decisions, as baffling as they may seem, pale in comparison to what may be the most inexplicable decision in the annals of modern Hollywood: Edgar Bronfman Jr.'s decision, in 1999, to trade most of Universal's television assets, including the USA cable channel, to Barry Diller's company, renamed USA Networks, in return for $1.2 billion in cash and a minority interest of 56.7 million shares in Diller's company. While the transfer of Universal's television interest no doubt reflected Bronfman Jr.'s high esteem for Diller's business acumen, it also deprived Universal of the properties that are the bread-and-butter profits for a movie studio. So, when Bronfman Jr. sold Universal to the French conglomerate Vivendi in 2000, it had to buy back these television assets from Diller for $10.3 billion, and then, to completely reverse Bronfman Jr.'s deal, Diller also got back the 56.7 million shares and an additional $2 billion. So, while this deal fully demonstrated Diller's brilliance in deal-making, it resulted in a loss for Universal and Vivendi of over $10 billion (part of the larger $40.6 billion write-off taken by Vivendi-Universal).

To be sure, such inexplicable blunders are relatively rare in Hollywood—especially if one does not count mere financial contretemps such as Time Warner's $99.7 billion write-off from its AOL fiasco, or Murdoch's News Corp.'s $7.2 billion write-off from its Gemstar fiasco, or Sony's $2.7 billion write-off from its initial employment of Jon Peters and Peter Guber when it took over the Columbia-TriStar studio. But if Slate readers have further candidates, I will happily add them to the list.

Edward Jay Epstein is the author of The Big Picture: The New Logic of Money and Power in Hollywood. (To read the first chapter, click here.)

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