John Malone and Greg Maffei must put the brakes on selling Overture Studios.
They don’t need to sell it. They need to restructure it. It’s too valuable an asset to let go, especially when combined with Liberty Media’s other properties.
The Overture Model
I had hopes for Overture when Dr. Malone initially announced the venture: an independent studio with domestic theatrical distribution infrastructure. Liberty already had homevid distribution via Anchor Bay, Pay-TV distribution in its captured subsidiary of Starz/Encore, and dozens of Liberty-owned businesses with which movies could be cross-promoted.
My hopes dimmed when Liberty hired two MGM executives to run Overture. It wasn’t Chris McGurk and Danny Rosett I had a problem with – they were perfectly capable executives — it was the fact that Overture needed to have a truly independent sensibility to distinguish itself in the market.
As one senior financial executive at another studio told me, “They’re trying to compete with the studios on films with $20-30 million budgets. That model won’t fly. They should be making Little Miss Sunshine.” He went on to say that the model should be to make films for under $10 million – ones with original voices and truly unique stories with robust execution, that requires more creative and targeted marketing, but have breakout potential. By keeping budgets low, losses can be mitigated on the films that don’t work. There would be no need to rush into making 8 to 12 per year.
Surveying Overture’s 15 produced films, we find the studio did diversify its slate, but they conducted business as usual. This wouldn’t have mattered, except the low budget films failed to connect with audiences, and the more expensive ones did not generate enough revenue to turn a profit. While we don’t have data on ancillary market revenues for these films, Liberty’s Annual Report shows operational losses from Liberty Capital’s tracking stock (which contains Overture) of $342 million, $395 million, and $100 million in 2007, 2008 and 2009, respectively.
Below are global box office results (in millions), followed by the TomatoMeter rating from Rottentomatoes.com (% of positive reviews by critics).
Mad Money – $26 – 23%
The Visitor – $18 – 90%
Sleepwalking – $0.2 – 13%
Henry Poole is Here – $1.9 – 38%
Traitor – $28 – 61%
Righteous Kill – $77 – 20%
Last Chance Harvey – $32 – 70%
Sunshine Cleaning – $16 – 70%
Paper Heart – $1.3 – 60%
Pandorum – $19 -30%
Capitalism: A Love Story – $17 – 75%
Law Abiding Citizen – $114 – 25%
Men Who Stare at Goats – $60 – 53%
The Crazies – $42 – 71% [To date]
Brooklyn’s Finest – $26 – 41%
Average box office: $31.89 million
Standard Deviation: $30.96 million
Average Critic Rating: 49%
Standard Deviation: 23%
The global box office analysis illustrates what I wrote in previous articles. Had you attempted to predict box office for this series of films, your prediction would’ve had little value to capital investors. “Well, we can tell you that the average box office revenues for this series of films will be between $0 and $60 million each, and your returns will not be nearly commensurate with risk.”
Not a winning proposition.
Which leads back to my original assertion – that a mediocre selection of films was chosen. If we are to accept critical reaction, an average of 49% positive reviews just isn’t going to draw audiences when the films themselves generally (I’m sorry to say) weren’t very good. And while The Visitor generated word of mouth, none of them really demonstrated an original voice, except perhaps Goats, based on Jon Ronson’s book.
This underscores the logical conclusion: the only thing you can control is good storytelling and good execution. The internal operations of Overture did not work. It needs to be restructured, not sold.
The New Overture Model
I’m sure you are saying, “Okay, wise ass. See if you can do better.”
Even better, I can guarantee my results will not be any worse statistically than what resulted – and I will spend less money doing it. Under the plan proposed in this article, Overture could be altered into a lean operation with a distinctive creative and fiscal focus. Creatives will learn the business side, and the business folks will not second-guess the creatives as long as they hit their budgets and timetables. Talent and management will be partners and have aligned interests. As for genre, there is clear and compelling historical evidence that horror, thrillers, and unique comedies are the most likely to provide a reasonable ROI.
In addition, there will be emphasis on new marketing initiatives – ones that are rolled into the project right from the creative stage. As fond as I am for Liberty’s Berkshire-like strategy of buying companies and essentially leaving them alone, I believe they are missing enormous cross-promotional opportunities. I’ve ordered products from QVC, flowers from ProFlowers.com…and all I get in the package are the products I ordered. Where are the flyers for other Liberty-owned assets? Where are the inserts for the next film from Overture? Are Atlanta residents handed coupons for Braves games? Perhaps Liberty management has tried these methods and they failed, but as far as I know, they have not been attempted.
There are other aspects to this model, but they are proprietary. I’ve just tried to sketch out the overview.
Et Tu, DirecTV?
The Liberty takeover of Hollywood does not end with Overture. Given Liberty’s enormous stake in DirecTV, Dr. Malone and Mr. Maffei have a golden goose already in their laps. Now they could make it a platinum one. I’ve discussed this matter in another article, and the argument remains as compelling now as it did then. DirecTV still has billions of cash on hand, and generates free cash flow of half a billion dollars annually. They have the money for this initiative. DirecTV’s status as a premium walled garden offers Liberty management yet another opportunity for profitable creation of content.
For the approximately $13 million DirecTV spends to get Friday Night Lights for an exclusive run prior to appearing on NBC, they could produce 10 episodes of their own original series. Right now, they get no tangible revenue for FNL because they don’t own it. But they’d own their own series, which could attract new subscribers, allow them to sell into all the ancillary markets, and begin to build a library.
They have the cash on hand and free cash flow to create entire nights of original programming for The 101, with the ability to subsequently offer the programming first to other premium walled gardens such as their own Starz/Encore channels, then on to network, and so on.
My strategy, properly executed:
1. Is low-risk and not capital intensive.
2. Takes advantage of other programmer’s weaknesses.
3. Provides further differentiation from their competitors and will put them in the position of being the heir to HBO.
4. With the value of a new subscriber arguably worth more than $600 in net revenue per year, and a churn rate of less than 2%, this strategy stands to bring them in far more revenue than an HBO subscriber ever would.
5. Could leverage and integrate many of the extraordinary assets Liberty carries.
The Monte Carlo simulations I’ve run on this strategy offer high levels of confidence in returns that range between 30% and 110%. Once again, the operations keys have been discussed in other articles. Genre matters here, also. Other specifics of the strategy are proprietary.
Top of the Heap
I follow hundreds of public companies. I can point to mistakes made by almost every one of them. In the time that I’ve followed Liberty, I’ve not seen Dr. Malone or Mr. Maffei make a single mistake. Not one. They are – pardon my language – fucking geniuses.
But they are on the cusp of making their first error. There’s still time to stop.