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THE LIBERATION OF MGM by Peter M. Bracke
In a move that paves the way for MGM to control the destiny
of their home video library for the first time, MGM ends the forced
distribution of their product by Warner Home Video. But was the
price the beleaguered lion paid to free itself worth it?
On March 16, 1999, MGM announced they would be paying Warners
$225 million to escape a nearly 13-year video distribution deal
that had not only been depressing the exploitation by MGM of their
own extensive home video library, but also the value of the studio
as a whole. Industry opinion was swift and varied; were the considerable
fees MGM paid to liberate themselves from the shackles of years
of bad deal a sound business strategy, or may it not have been
as advantageous as it seemed?
To gain perspective, one must be aware that over the past several
years, MGM has been given the proverbial short end of the stick.
It helps to go back a few years to understand better, to 1990
to be precise, when MGM was in a bigger state of chaos that it
perhaps ever was. A company of rather dubious distinction and
not the most honorable of intentions by the name of Pathe Communications
bought MGM (at the time there weren't too many takers) for over
$1 billion. Then, to help finance the deal, they sold Warner the
distribution rights to MGM's home video product for 12.5 years,
at a token price of only $125 million. Perhaps needless to say,
this quickly became an industry joke, with Warner then-chairman
Robert Daly proclaiming "it turned into an unbelievable deal for
us." I'll say.
In the years since, MGM has had to pay Warner an estimated $350-$450
million in distribution fees and percentage of profits, which
some analysts proclaim may be 2 or 3 times more than it would
have cost MGM to just distribute their product themselves. Warner
made back their meager $125 million investment in no time. And
to further add insult to injury, head Pathe Communications huckster
Giancarlo Parretti would shortly dump MGM, selling it off to billionaire
Kirk Kerkorian.
Since then, because of the deal Warner has had considerable indirect
influence over MGM's ability to make any sort of meaningful production
partnerships. A major source of revenue for motion pictures after
their initial theatrical runs is home video, and Warner's hold
on the MGM library impacted the potential for MGM to offer any
home video distribution packages to interested investors as well
as any foreign market licensees. This depression of MGM's value
as a studio as a whole was one of the major factors in MGM's desire
to terminate the Warner deal prematurely. For MGM, it wasn't just
a matter of economics, but of pride, and as MGM CFO Dan Taylor
explained after the the deal was announced, "controlling our own
destiny."
Thus, MGM has agreed to pay Warner $225 million (in two lump
sums over the next six months) to end their contract, with the
transition period scheduled to end January 31, 2000. This not
only frees up the MGM cash flow, but allows MGM to expand their
distribution market and fully exploit their catalog on all formats.
This is particularly central to MGM's tightly-focused DVD strategy,
as the release of MGM's recent acquisitions of the Polygram and
Orion catalogs has been stunted due to the fact MGM was attempting
to prevent these libraries from being a part of the Warner distribution
deal, even setting up Orion as a subsidiary of MGM for distribution
to avoid having to go through Warner. MGM further angered their
big brother by agreeing to release their films in the DIVX format;
this pay-per-view DVD variant is vehemently opposed by Warner,
as was the switch by MGM from Warner-subsidized "snapper" packaging
to the more consumer-friendly "keepcase" variety.
So for all the tensions the termination of the MGM / Warner seems
to have lessened, as further details on the deal came to light,
some have questioned the division of product between the two entities.
It is Warner, not MGM, that now completely retroactively controls
(to January 1, 1999) all pre-1986 MGM titles, in addition to all
the pre-1948 Warner titles that up until the deal MGM had home
video licensing rights to (though Warner was actually distributing
these MGM-licensed Warner titles!). MGM retains control of the
post-1986 catalog, the complete Orion and Polygram acquisitions,
as well as all United Artists titles.
Many have asked the question of just how MGM would "give up"
control of all their pre-1986 catalog, which contains such lucrative
and well-regarded properties as 2001: A Space Odyssey and Poltergeist,
amongst others. The fact of the matter is that the story is a
bit more complicated, in that MGM in actuality has not owned these
titles for some time already.
Back in 1986, Ted Turner tried to buy Time Warner (!), but failed
due to lack of funds, and ended up with only Warner's pre-1948
and MGM's pre-1968 titles. In a subsequent and quite convoluted
chain of events , Warner ended up buying Ted Turner's company,
TNT. Good ol' Ted also sold home video distribution rights to
these titles to MGM. So, when the Pathe deal rolled around in
1990, Warner ended up distributing pre-1948 Warner titles licensed
to MGM by Ted Turner, which were now owned by Warner!
Thankfully, the early termination of the MGM/Warner deal simplifies
the ownership and control of the MGM library. MGM fully owns and
can distribute its post-1986 titles, and all United Artists, Orion,
Cannon and Polygram catalog holdings. Warner gets all the Turner
pre-1948 Warner and pre-1986 MGM titles. So, for example, Citizen
Kane, The Haunting and 2001: A Space Odyssey, to name but three,
are fully Warner-controlled titles. But, the James Bond and Rocky
series, which are United Artists, stays with MGM, as do post-1986
titles, such as The Birdcage and, uh, Showgirls (Editor's Note:
And just what is the matter with Showgirls, Mr. Smart Guy?).
Interestingly, many of MGM's DVD release decisions over the past
two years in hindsight make more sense than many accused them
of. The vast majority of releases have either been post-1986 MGM
titles or United Artists films. The Polygram and Orion titles
have been indicated by MGM to be arriving near Christmas 1999.
Also, sources report that MGM's monthly DVD output will be increased
to a likely 8 catalog titles a month starting late summer 1999.
Of course, there will be some interesting divisions of product.
For example, Warner now controls both Poltergeist and Poltergeist
II, yet MGM retains control of Poltergeist III, as it is a post-1986
title. In addition, MGM are also free to make all packaging decisions
and strike up any new retailer relationships they like. They can
even continue with DIVX without hassle from Warner. (Editor's
Note: But lets not go there...)
So although the future has brightened for MGM, there still is
the stark reality that MGM has to set up an entire, self-sufficient
distribution arm to by the time the transition period ends. MGM's
financial resources as of this writing remain weak, and the costs
ramping up a strong distribution arm currently exceed its existing
capital. Industry analysts and pundits continue to speculate that
the real reason behind the deal was to prepare MGM for the eventual
sale of the company, either as a whole or in pieces (such a move
would not be possible if Warner controlled home video distribution).
In any event, as some have smirked, when a billionaire like Kirk
Kevorkian owns 90% of your company, how do they say it? Don't
cry for me, Argentina...
Anyway, such theories will continue to abound, but in the end,
MGM got out of a crappy deal, and for DVD enthusiasts, it means
MGM is free to distribute their vast and attractive catalog on
DVD much more freely. So, although some may still balk at the
price MGM paid for the liberation of their home video catalog,
and thus, increasing the value of their studio as a whole, it
can be argued that one's freedom is worth all the money in the
world. Whether MGM will be sold remains a question mark. But as
MGM's cash cow James Bond himself once said, "We have all the
time in the world..."
The author would like to thank authors Scott Hettrick and
Carl DiOrio for the quotes in this piece.
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