Studio Alights on a Universal Idea: Make More Films

CANNES — Seeking to reinvigorate its movie-making operations, Universal Studios is planning an ambitious expansion of its film releases over the next three years, more than doubling its current output.

Universal Pictures Chairman Casey Silver said that after an extensive review of its film strategy, the company plans to distribute 40 to 50 films a year. He said the studio is devising ways to finance the increase without requiring any additional capital investment from parent company Seagram Inc., in part by seeking more foreign partnerships both on individual films and over the slate.

Silver and Chris McGurk, chief operating officer of the Universal film division, have had a series of meetings with foreign distributors here at the International Film Festival to discuss the company’s aggressive plans.

Under the redesigned strategy, Universal would release 20 to 25 studio movies each year--up from the mid-teens--with a like number released by October Films, the New York-based specialty film company Universal announced it was acquiring earlier this month.

The expansion in film distribution comes at a difficult time in the movie business, when most studios agree that the marketplace is overcrowded with movies and that the returns on investment are marginal at best. Walt Disney Co. is among those that have announced plans to reduce the number of films it makes and releases.

But in an interview, Silver and McGurk, a former Disney executive, said they believe Universal needs to have “a critical mass” of films to reduce risk and to help build other parts of the company’s entertainment empire.

Universal has distributed fewer films than market leaders Disney and Warner Bros. in recent years.

The company has had to reevaluate its film strategy in part because one of its main suppliers of major movies, Steven Spielberg, now is a principal in DreamWorks SKG, which will produce and distribute its own products domestically and pay Universal a fee to release it overseas and in home video.

Rethinking its film strategy comes amid a broad review of Universal’s operations by Universal Chairman Frank Biondi Jr. and by Seagram Chief Executive Edgar Bronfman Jr., who has repeatedly stressed the importance of developing the company’s international business. Seagram acquired Universal in 1995.

Top executives at the company have identified music and theme parks as areas with the greatest potential for growth and have told analysts that the company will increase investment in those areas.

The company’s strategy in television remains unclear because of an unresolved dispute with Viacom Inc. over USA Network, which is jointly owned by the two companies. Universal sued Viacom, contending that it violated the USA ownership agreement by starting new cable channels outside the partnership.

A federal court decision, expected soon, could lead to one company buying the network from the other.

Movies are regarded as crucial to the future strength of Universal, but Bronfman wants to cap the level of investment in movies because of the poor return on capital.

Silver and McGurk said they have devised a series of methods of paying for a dramatic expansion in film distribution without burdening the parent company.

McGurk said one element of the financing strategy would be to enlist “two to four” foreign partners who would invest a total of about $100 million a year in certain Universal movies,presumably for the right to distribute them in select foreign territories. This amounts to 10% to 15% of what the company would like to invest annually in filmmaking.

The Universal executives have told foreign distributors they also are willing to consider co-productions on particular projects. Paramount and other studios have been more aggressive than Universal in such ventures.

Studio executives admit that while they may be more comfortable spreading the risk on their more expensive movies, they potentially sacrifice profit they otherwise wouldn’t have to share.

McGurk and Silver also have been working to obtain more than $1 billion in “off balance sheet” financing through Citibank, which arranged for similar financing for News Corp. last year. The bank essentially would sell a security based on the projected cash flow of a slate of movies over several years without recourse to the company’s other assets.

Because foreign markets are growing at twice the rate of the U.S. market, Universal wants to hold on to foreign distribution rights, Silver said.

But it’s unclear how the company can do so while seeking to substantially increase the level of financing from foreign partners. Some international distributors here expressed skepticism about Universal’s strategy, saying much depends on what films are offered.

Silver said the films distributed by October--whose past releases include “Secrets and Lies” and “Breaking the Waves”--would be financed in large part by pre-sales of foreign distribution rights. In those arrangements, foreign distributors agree to pay certain amounts for the film rights and those commitments are taken to the bank to get a loan to finance production.

The foreign financing and distribution strategy raises interesting questions about the fate of United International Pictures, the overseas distribution company jointly owned by Universal, Paramount and MGM.

One major international distributor said Universal’s strategy suggests that UIP is likely to be disbanded someday.

But McGurk insisted that selective distribution of films through foreign partners wouldn’t harm UIP. He said that by increasing its volume of movies, more product could flow through UIP. McGurk also said Universal is working with UIP, which traditionally handles Hollywood blockbusters, to make it more responsive to specialty film distribution.

Domestically, October will choose its slate of films and operate as an autonomous company, much as Miramax Films runs independently of Disney, McGurk said.

Based on a study of return on recent films, Silver and McGurk said, the company wants to make more “event” films--from four to eight a year. Such films generally have the largest budgets but also have the greatest potential to break through to a huge audience.