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Tinseltown consolidates
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March 23, 2001: 6:33 a.m. ET
Smaller studios and distributors are being snapped up and shut down
By Staff Writer Kim Khan
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NEW YORK (CNNfn) - Destination Films gave the green light to this year's romantic hit "The Wedding Planner." It also cast A-list stars Jennifer Lopez and Matthew McConaughey and grossed more than $57 million at the domestic box office.
Unfortunately for Destination, it did not receive any of the glory or the money from the hit. The company did not have the funds to produce the film and the rights were sold to Sony Pictures, which brought the film to theaters with production company Intermedia.
 The result was another hit for one of the major studios, which are steadily eliminating competition by snapping up films from struggling companies or buying smaller, successful companies outright.
And as the consolidation continues it becomes tougher and tougher for smaller films without the advertising budget of a major media company to get any Oscar consideration.
Destination Films is now defunct. There were rumors of buyers, but nothing solid developed and the company shut down on Feb. 19 after it was unable to pay its workers.
Buzz, but no payoff
Destination managed to create a lot of buzz for its films, such as 2000's "Eye of the Beholder" with Ashley Judd and Ewan McGregor and 1999's "Whipped" starring Amanda Peet, but their releases fell flat when it came to ticket sales.
According to Variety, Destination suffered because it had no plan for equity investment. The company was formed in October 1997 with a $100 million bond backed by a group of insurers. But when the company sought another $100 million loan, banks were skeptical because of lack of an equity plan.
 "Destination was trying to be like New Line Cinema used to be, producing and distributing lower-middle budget films," said Greg Dean Schmitz, creator of Upcomingmovies.com, which watches the production side of the industry. "But they didn't have real good luck with their films, either critically or at the box office."
New Line Cinema started with smaller titles, but has had huge success with films like "Austin Powers." New Line is owned by AOL Time Warner, the parent of CNNfn.com, and now also runs another company, Fine Line Features, for movies with a smaller release.
Schmitz said the major media companies, such as AOL Time Warner (AOL: Research, Estimates), Disney (DIS: Research, Estimates) and Vivendi Universal (V: Research, Estimates), are aggressively scooping up successful independent studios, making it difficult even for companies with top-tier titles under their belts to keep their autonomy.
"A lot of the studios that used to be independent three to five, maybe even 10 years ago have been absorbed into the major studios," Schmitz said. "You're seeing that more and more."
A classic example of such a takeover is Miramax, which was snapped up by Disney in 1993.
Miramax became known for independent "art" films, but its success with directors such as Quentin Tarantino caught Disney's eye and the studio is now a major player in the Oscar race.
Disney's backing helps the company launch one of the strongest Oscar-push advertising campaigns in the industry, which helped garner Best Picture awards for "The English Patient" in 1996 and "Shakespeare in Love" in 1998. It is also in the running this year with "Chocolat."
And then there was one?
Schmitz pointed to Artisan Entertainment, which shepherded "The Blair Witch Project" and Lions Gate Entertainment (LGF: Research, Estimates), which brought out "American Psycho," as two smaller studios that are doing well on their own.
 But that small number of successful independents may soon be cut in half.
On March 14, Artisan withdrew its plans for a $102 million initial public offering and announced it had hired investment bankers Merrill Lynch and Allen & Co. to consider recent unsolicited takeover offers.
Although no suitors have been named, a number of companies would be interested in Artisan's film library of more than 6,700 titles, including "It's a Wonderful Life," "Terminator," "On Golden Pond" and the Rambo series.
Artisan also is profitable. According to filings with the Securities and Exchange Commission, the company had revenue of $383.3 million in 1999, with net income of $15.7 million.
The company's 1999 earnings before interest, taxes, depreciation and amortization (EBITDA), closely watched in the film industry, rose to $38.1 million from $17.5 million the year before.
"Because of Artisan's unique position in the entertainment industry and valuable library assets, we have received a number of indications of interest regarding various strategic alternatives with the company," said Amir J. Malin, Artisan CEO, in a statement. "Although we are very excited about continuing to build on Artisan's many strengths, we believe it is appropriate to consider each inquiry from acquisition or merger partners."
One analyst who follows the industry said acquisitively inclined USA Networks (USAI: Research, Estimates) is rumored to be interested in adding Artisan to its USA Films studio. USA Networks Chairman and CEO Barry Diller formed USA Films by buying Polygram Filmed Entertainment and October Films in 1999 from Seagram.
USA is wavering on how much it wants to concentrate on film instead of cable television or ticket sales, but its success with Best Picture-nominated "Traffic" may rekindle Diller's interest, the analyst said.
Analysts also said Lions Gate could swoop in if the price for Artisan is in the hundreds of millions rather than the billions. Lions Gate reported revenue of $94.4 million for fiscal 2000, with a net loss of $2.4 million, or about 10 cents per share.
Shares of Lions Gate are now hovering around $2.
Independent film cowboys
While companies such as Miramax have turned into household names on the backs of independent films, the companies at the forefront of low-budget "art house" cinema are the very small boutique distributors.
"Boutique distributors are very often based in New York City, they specialize in American independent and foreign films and young independent directors," Schmitz said.
"The number of these distributors is usually between 20 and 30, and some of those go away and some come along," he added.
One distributor getting a good deal of attention is Cowboy Booking International, whose film "George Washington" has been a major critical success.
Written and directed by David Gordon Greene, "George Washington" tells the story of a group of young kids who are faced with a tragedy.
Roger Ebert, film critic with the Chicago Sun-Times, gave the picture four stars, calling it "a lovely film" with the best cinematography of the year.
 But even with such acclaim, John Vanco, one of the partners who runs Cowboy, said the company faces tough economic challenges.
"We have to be very aggressive and creative in how we get our movies out theatrically," Vanco said. "The main problem we confront is how expensive print advertising is and how do we get around buying big print ads."
Vanco said Cowboy uses e-mail lists, the Web and other method to make sure the core "arty" audience gets the word when the film is coming out. He added most of their films won't have potential to cross over to a mainstream audience.
This translates into limited revenue from the box office, so distributors such as Cowboy, The Shooting Gallery and Winstar Cinema need to acquire films cheaply, and then press for TV and video revenue. Cowboy recently negotiated a deal for "George Washington" with the Sundance Channel and is working on a similar deal for the video release.
Film festivals such as Sundance are important, but the boutique distributors must wait until the fervor has died down on the top films and pick up what interests them later.
Cowboy agreed to a partnership with another distributor, which provided equity for ten film releases.
"That's been a real boon for us this year," Vanco said. "Like 'George Washington,' we couldn't have afforded it."
But even the films with glowing reviews from top critics can have a tough time getting the crowds to come.
"Once you get the acclaim, you're probably in the middle of a run," Vanco said.
No Oscar bounty for small shops
When it comes to Oscars, small films have little chance of competing against wide-release movies with big advertising budgets in the major categories.
"To be honest, I think that other than the foreign language and documentary categories, it's nearly impossible for someone smaller than a mini-major, like USA Films, who can mount a campaign to get considered," said Vanco, who worked as a national publicist at Miramax Films.
Instead, smaller films get a chance for recognition at the Independent Spirit Awards.
Cowboy would like to keep its own independent spirit, but Vanco admitted it would be very tough to ignore an approach from a major studio.
"People here would want us to come out with our identity intact," he said. "We wouldn't want to handle a studio's orphan films, but we wouldn't turn down a meeting with a studio head."
"We really like our autonomy and we're in a very fortunate position of picking the movies we are passionate about, but it would be nice to make some money and pay our staff better," he added. 
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