The Ring Masters
New Line vaulted into the big leagues with its smash trilogy, Lord of the Rings. Now comes the hard part: staying there.
(FORTUNE Magazine) – Bob Shaye and Michael Lynne, co-chairmen and CEOs of New Line Cinema, are huddled together at a conference table in their New York City offices, trying to work out exactly how to spend $130 million. That's the estimated budget for the first movie in a trilogy called His Dark Materials, based on the books of British author Philip Pullman. The story recounts the journey of a young girl, Lyra, who goes on an adventure to the Far North to save a kidnapped friend, and New Line is betting the project will match the dazzling success of The Lord of the Rings.
It's a lot of money for one movie, and Shaye and Lynne aren't the kind to spend it lightly--a point they make repeatedly to executives back in L.A. via teleconference monitor. On the agenda this mid-November afternoon is whether to advance Chris Weitz, the director and screenwriter for His Dark Materials, a seven-figure check for a second draft of the script. Shaye and Lynne are eager to get the project on track for a 2006 release.
There is pressure on New Line to move this project forward--to prove that Rings was no fluke. That trilogy was a historic gamble, and a historic success: It cost $350 million and was shot back-to-back-to-back in New Zealand by a then-unknown director of horror flicks. It brought in more than $3 billion in worldwide box office, another $1 billion in DVD sales, and yet another $1 billion in merchandising. The final movie in the trilogy, The Return of the King, won 11 Oscars, including Best Picture and Best Director for Peter Jackson.
There's also pressure because Shaye and Lynne do not have the kind of safety cushion that the major studios do when making so-called "tent pole" pictures--big-budget, broad-appeal gambles that, if successful, can support the whole enterprise. After all, if your one tent pole collapses ...
These guys have been here before. Shaye and Lynne are one of Hollywood's most durable and genuinely amicable partnerships. Though often cast as opposites--Shaye as the creative mind, Lynne the number cruncher--they share overlapping responsibilities for running the studio. They're also close friends who tend to finish each other's sentences.
At this particular meeting, Shaye seems skittish about his studio's next would-be blockbuster. The 65-year-old has an unkempt mass of gray hair and a measured way of speaking. "I have two major financial concerns," he says, pausing briefly as the room hangs for a moment, awaiting his judgments. He frowns, and fingers a tie that he rarely wears. "One concern is the daemons," he says. "And the other is ... the witches."
Daemons and witches may not be concerns for your average company, but for New Line they represent a critical crossroads. Its biggest success has passed into the record books. Another success like Rings could put it in the big leagues, but a $130 million flop could hobble the studio. Is the investment worth the risk?
For 37 years, New Line has been better than most of its competitors at answering that question. (Tom Bernard of Sony Pictures Classics calls Shaye the "godfather of independent film.") The studio's success has been due mostly to a conservative approach to production budgets, combined with occasional bet-the-farm fliers. "The movie business is like a hurricane," says Dick Parsons, chairman and CEO of New Line parent Time Warner (which also owns FORTUNE). "Shaye and Lynne survived because they were very clever about how they managed and took on risk in a very risky business."
For New Line, the storm surge came in the mid-1990s when Shaye and Lynne got swept up in the kind of free spending that has ruined so many in Hollywood. A streak of expensive flops during that period almost cost them control of the studio. So when Rings hit in 2001, it not only saved New Line from being folded into its larger sister studio, Warner Bros., but in addition virtually demanded that they take on other similarly risky projects.
The business model that Shaye and Lynne have put in place since Rings suggests that the studio wants to be two companies at once: Since 2001, New Line has concentrated on sub--$40 million pictures in order to clear room for a small number of films like His Dark Materials that will cost $90 million or more. The idea is to eliminate "no man's land" movies--Shaye and Lynne's term for that gray area between a safe play and a major gamble. But the new strategy is also a way to institutionalize big-budget risk taking into the company: In addition to His Dark Materials, New Line has several other large bets lined up. It recently optioned the bestseller Jonathan Strange and Mr. Norrell for a rumored seven figures, and another fantasy novel, Inkheart, is already in development. New Line will continue to search for low-budget hits, but it is now, thanks to Rings, involved in a much bigger, riskier game. "Once you've had a Lord of the Rings, you can't really go back to making $30 million pictures," says Harold Vogel, a former Merrill Lynch analyst and the author of Entertainment Industry Economics. "New Line has too much cash and has had too much success for that. At this point they really have to stick their neck out."
In person, Shaye drifts between the gruff boss and the avuncular ex-bohemian. He wears jeans, brings his Jack Russell terrier, Venus de Milo Due, to work at the company's West Hollywood offices, and still drives a red 1972 Oldsmobile. His office is similarly eclectic: There is a billboard mockup of himself and Lynne dressed as Gandalf and Aragorn from Rings on the floor; on a wall is an Ed Ruscha painting the company commissioned that reads PRUDENT AGGRESSION. The phrase may sound like a rejected Stallone script, but it's been a New Line motto for years. Indeed, the company seems to run on such aphorisms, including "The story is the star" and, of course, "Don't smoke the Hollywood crack pipe." Shaye uses the sayings constantly--especially "Prudent aggression."
Shaye started New Line in his fifth-floor New York City walkup, with no money. His artistic side could have defined New Line --he originally wanted to work on the creative side of the business and once even shared a directing award with the young Martin Scorsese--but instead Shaye drew on more prosaic lessons learned working in his father's supermarket in Detroit. "I learned that a distributor doesn't necessarily need to love everything they sell, whether it's canned goods or movies," he says. "It was very pragmatic."
That bottom-line mentality helped the company from the beginning, with small 1970s cult hits like a reissue of the 1938 stoner film Reefer Madness, and the John Waters weirdfest Pink Flamingos. By the 1980s, Shaye was ready for the bigger upside of production. Making the transition from distribution to production is where most upstart movie companies fail. But New Line played it right. Shaye decided New Line's first production should be a horror film--a genre that would ensure a core group of customers no matter how crummy the final product. Horror effects are cheap, and the stories--main characters getting offed in rapid fashion--don't require stars. Shaye produced the project himself and took a shot with an unknown director, Wes Craven. Recognizing new talent is a crucial factor in making movies, and in this case Shaye's gut was dead on: The movie Craven made was 1984's A Nightmare on Elm Street.
If Shaye was responsible for establishing New Line's founding principles, it was Michael Lynne who helped the company mature into a real business. A former Columbia Law School classmate of Shaye's who first joined New Line as a lawyer in 1980, Lynne began to reshape the company to make it more attractive to Wall Street, which at the time was eager to provide capital to hot film companies. By 1985 the company had reached a distribution deal with RCA Columbia Home Video. New Line went out of its way to promise it would make only movies with budgets under $10 million. That kind of discipline was just what Wall Street was looking for, as the company soon discovered. It went public in 1986. (Lynne became a co-chairman with Shaye in 1990.)
The low-cost strategy survived the influx of capital after the IPO. But when New Line was acquired by Turner Broadcasting in 1993, the company entered what you might call its "smoking the Hollywood crack pipe" period. Shaye recalls going to see Turner for the first time. "I said, 'We would really like to make at least two films with budgets of $35 million,'" Shaye recalls. "And Ted said, 'Are you joking? Come on! You can make films for 50, 60 million dollars! You can make the most expensive movies of all time! Just get out there and swing, Bob!' "
It was a classic trap. "The industry is littered with examples of companies that, after their first big step toward success, took an enormous gamble and literally went off the reservation," says John Sloss, the founder of Cinetic Media, an entertainment consulting company that specializes in independent-film financing. Orion Pictures, PolyGram, Carolco, Vestron, and many more all faltered because of misguided production spending--all were either shuttered or had their production capability absorbed by larger competitors. Even Miramax, New Line's closest rival, now seems an object lesson in "budget creep." Its brand of prestige epics and costly star vehicles have underwhelmed at the box office recently--take Gangs of New York ($100 million budget; $77 million box office), Duplex ($65 million; $10 million), and Texas Rangers ($37 million; $623,000).
New Line had some big successes at first, while the studio stuck to modestly budgeted filmmaking. "The company has always tried to catch lightning in a bottle," says Mike DeLuca, who was head of production in the 1990s. "The hits have always been films without the top five stars or directors. Sleepers are usually accidents at the big studios, but they were the business model at New Line." In 1994 the company helped launch Jim Carrey's career with The Mask and Dumb & Dumber, both huge hits. Elsewhere, the studio was still making unconventional choices--as in the 1995 thriller Seven, in which Gwyneth Paltrow's head ended up in a box.
But as New Line began to revel in its successes, it also started to lose sight of the principles that created that success. It spent $4 million for the script of The Long Kiss Goodnight--the most ever paid for a screenplay at the time. Shaye bought a plane. Lynne bought a vineyard. Awkward stories about the alcohol-fueled sexual antics of New Line executives were splashed in publications around town. In 1998, Entertainment Weekly described the corporate culture at New Line as a "cross between Animal House and Caligula." "There was no more prudence," Shaye says of the period. "It was just raw aggression."
And all of that would have been fine, almost, except the list of flops began to exceed the hits. Worse, the flops tended to be very expensive--the studio lost $100 million in 1996 alone. The bad streak continued through 2000, a year besmirched by the Adam Sandler comedy Little Nicky (cost $79 million; made $39 million), which was such an embarrassment that Shaye and Lynne had to apologize for it at a Time Warner meeting of division heads. In a classic Hollywood example of the story not being the star, the studio hired Warren Beatty, Diane Keaton, and Goldie Hawn for Town & Countryin 1998--and began shooting the film without a finished script. The movie took almost three years and $90 million to make and cleared a piddling $6 million.
Lynne says, often, that the company "lost its way," in the middle to late 1990s, and he seems eager to examine the reasons and motives. "It was all probably predictable," Lynne offers, peering over his gold spectacles. "Suddenly we had financial wherewithal to have a different business plan than we had spent the entire history of the company pursuing."
While the miserable grosses for other bloated-budget pictures were being tallied --and at the very same moment that Time Warner brass froze Shaye and Lynne's ability to make another picture costing more than $50 million--Rings, with a (quickly expanding) combined original budget of $210 million, was in production halfway across the globe.
The story of how New Line came to bet on Peter Jackson has become legend. Jackson had been pitching the project for more than two years and thought he had found a home for a two-part series at Miramax. But when Harvey Weinstein got cold feet and wanted to condense the story into one film, Jackson balked. Weinstein gave Jackson 30 days to find a new studio. With $50,000 of his own money, Jackson made a half-hour pitch tape to shop around to studios. Only two studios bothered to respond--the film division of PolyGram and New Line--and PolyGram soon dropped out. (It was later folded into Universal Pictures.) So it was to Jackson's surprise that Shaye asked, "Aren't there three books? Why not make it three films?"
"I know it was a risky move," Shaye says now. "But it all seemed to make sense to me at the time." Shaye knew Jackson from a draft he had written for Nightmare 5 and was impressed by the passion the director, then 36, demonstrated for the Rings material. But the studio also recognized that Rings fit its formula on a gigantic scale. The Tolkien books had sold 100 million copies over 60 years and had a worldwide audience. Neither Jackson nor any of the actors were big-name, expensive talent.
New Line execs often point out that Rings was, in fact, less of a financial risk than is popularly perceived. The reason lies in the way the studio lays off part of the risk on its distribution partners. New Line, unlike the major studios, does not have its own international distribution arm. In exchange for the theatrical distribution rights in their territories, foreign distributors pay a percentage of a film's production costs, depending on how well they think they can sell the project. This limits the upside for the studio on major hits but also limits the downside. (If a film is a smash, New Line shares a percentage of the theatrical, DVD, and future television revenues with the foreign distributors. If it flops, the distributors are out their percentage of the production costs.)
The global appeal of Rings made it an easy sell internationally. New Line estimates that 65% of the production costs were covered by international distributors--meaning that for the $350 million project, New Line was responsible for only $123 million. (New Zealand, where the movies were filmed, even offered to cover 10% of the production costs.) Though the studio was still on the hook for all of the $210 million marketing push, it's a little more plausible when Lynne says now, calmly, "The amount of money that New Line actually had at risk on Rings was never as much as anybody thought. It was actually relatively small. In actual dollars."
For all their caution, Shaye and Lynne are riverboat gamblers when it comes to betting on people. New Line's co-CEOs have made a virtue of hiring people before their résumés would indicate they're ready. As they'd done with Jackson and Craven, for example, in 2001 they tapped Toby Emmerich, a music executive with little Hollywood experience, to run New Line's studio operations.
Shaye and Lynne were clear about their new hire's mission: Keep costs down. So Emmerich began by churning out sequels: Austin Powers in Goldmember and a remake of The Texas Chainsaw Massacre that cost $9.5 million and hauled in $80 million. He also picked a few sleepers, such as The Notebook and the Christmas hit Elf. Indeed, only one New Line movie in the past two years (with the exception of sequels) has had a budget of more than $40 million. The average studio budget in 2003 was $64 million, according to the Motion Picture Association of America.
That lone "no man's land" movie, however, shows how hard it is to keep promises in Hollywood. Despite New Line's low-budget philosophy, it is still the nature of the town, and the business--and the stars, the agents, your peers, the press--to tempt studios away from their most disciplined efforts. After the Sunset cost $60 million; the studio will be lucky if it sees half that in box office. It was exactly that kind of project that got New Line into trouble in the '90s. "There is a lot of temptation in this business," says Merrill Lynch analyst Jessica Reif Cohen. "You can name 1,000 companies that spent too much or got caught up in the Hollywood whatever. For the most part, New Line hasn't."
Which brings us back to the daemons and witches and His Dark Materials. It's often hard to tell whether those must-have million-dollar blue-screen special effects are truly crucial to the story or the equivalent of Harvey Keitel's campy satanic lair in Little Nicky. Usually Shaye and Lynne would err on the side of caution, but then again, this is their big-swing picture, the next Lord of the Rings.
And the project fits the Rings model well. The built-in audience is huge: Pullman's books have sold more than seven million copies and are fervently loved by fans both young and old, especially in Britain. A six-hour play at London's National Theatre last year played to sold-out audiences and was called back for a second run.
But right now nothing seems to be going easily. In December, Weitz stepped down as the director, saying, "The technical challenges of making such an epic are more than I can undertake at this point." He will stay on as screenwriter, but his departure is a blow to the studio, which had been touting him as a daring choice similar to its picking Jackson for Rings. It's unclear how much Weitz's departure as director will throw off the release date for the film. Emmerich says they are still aiming for "late 2006 or early 2007."
That built-in fan base presents a challenge too. Last month, when Pullman told the British press that New Line had asked Weitz to take out references to the Church in the story, a fan-blog uproar ensued. The oppressive leaders of the Church are major antagonists in Lyra's story, but the studio wanted that changed partly for fear of offending American religious sensibilities. One fan on the website bridgetothestars.net called the changes a "blatant cop-out to the Bible Belt of America."
On top of those problems are the impressive technical, logistic, and artistic difficulties of pulling off a fantasy picture of epic scope. In Pullman's world, every human is accompanied by a shape-shifting animal-daemon, and the plot of the first film features swarms of flying witches and a battle royal between two armored polar bears.
No, there's no shortage of challenges for New Line. "It's difficult to even make projections about things," Shaye cautions from his L.A. office, looking out the window across the street toward the Ivy, the famous industry haunt where he's soon headed for lunch. "It's reliant on hope, to some extent." He pauses for a moment, perhaps considering the $130 million pricetag attached to that sentiment. "Let's call it informed hope."
Going for the Extremes
A sampler of New Line's hits and misses. Hits tend to be low-budget sleepers, blockbusters, or sequels. The mid-budget films are often trouble.