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Warner Brothers Pictures
Time Warner is betting its future on hot-selling films like “The Dark Knight.”
As Jeff Bewkes whittles away at the Time Warner empire, it’s become clear that the company will have unraveled the two great megamergers that created its current shape.
Published: August 9, 2008
ON an early Saturday morning about three weeks ago, Barry M. Meyer pulled a sheet of paper from the fax machine in his home office, inhaled deeply and held it up to the light of a nearby window.
Time Warner’s new C.E.O., Jeff Bewkes, is pruning the media monolith, with a focus on content over distribution.
The number on the fax was eye-popping: $66 million, plus change.
Mr. Meyer is the chairman of Warner Brothers, the Hollywood studio behind “The Dark Knight,” and the film has had its debut at a transformative moment for his studio’s parent, Time Warner.
In an effort to focus more sharply on “content creation” (or what nonsuits still like to call movies and television shows), Jeffrey L. Bewkes,
It’s a makeover that will unravel about two decades’ worth of mergers that created the company in its current form, putting its trophy studio,
Time Warner, initially the amalgam of the old Warner studio and the Time Inc. magazine empire, grew to include Turner Broadcasting,
So, it turns out, have some of its executives.
“It’s always been frustrating that as well as we do, it becomes a blip on the screen,” says Mr. Meyer of Warner’s contribution to Time Warner’s overall bottom line.
Up or down, Warner’s performance will stand out much more starkly in the years ahead because the days of Time Warner being all things to all media are gone.
For now, Mr. Bewkes is staking the company’s future on three big content providers: Warner Brothers, Turner Broadcasting (which includes TNT, TBS and CNN) and HBO.
Elsewhere in the company, it’s all about downsizing.
Mr. Bewkes is also looking to sell AOL or, more likely, find a partner like Yahoo or Microsoft to take it off his hands, leaving Time Warner with a small stake in the online company.
It is less clear how the Time Inc. unit, which publishes magazines like Time, People, In Style, Fortune and Sports Illustrated, meshes with Mr. Bewkes’s strategy.
What is clear is that Mr. Bewkes is tethering his fortunes to companies that are juggernauts in their respective industries and are sprawling, global brands.
Get ready then, says Mr. Bewkes, for global fireworks.
“Around the world, the consumption of entertainment products is growing rapidly,” he says.
THE troika that Mr. Bewkes prizes faces distinct challenges.
For its part, Warner has to produce movies and television shows at a time when it is harder —
Mr. Bewkes describes Time Warner’s new raison d’être as “dominating niches with a clear brand strategy.”
“HBO today means ‘Entourage,’ ‘Big Love,’ ‘Flight of the Conchords’ and the coming ‘True Blood,’ ” he says.
But if Time Warner’s long-languishing share price has been driven by the ups and downs — mainly downs — of AOL, is it any better to have the fickle nature of the world’s moviegoing populace drive the share price?
“The investor world that looks at studios as part of media companies will say that the studio business is supposed to be erratic,”
Among the three units that Mr. Bewkes is betting the shop on, Warner is by far the biggest revenue generator.
The profit picture is slightly different, because cable networks have much higher margins.
When Time Warner reported second-quarter earnings on Wednesday, Warner and the cable networks were the fastest-growing units.
For Mr. Bewkes and his team, the core of the strategy is a wager that the media pendulum will swing away from distribution and back toward content.
“The last number of years, all you have heard about is new and better ways to distribute content,” says Mr. Meyer,
He points at a television screen in his office.
True, to a point.
Despite the proliferation of devices that threaten to make content a commodity —
“While we are in a period of transition, there has never been a better time to be in the content business,” Philippe P. Dauman,
THE Warner lot in Burbank is a 110-acre mill of popular entertainment.
A lengthy, soon-to-be-published coffee table book about the studio’s history,
Warner’s story “is crucial to the history of American movies, even to American social and cultural history —
Indeed, Warner has long been considered one of the most stable and durable of the major studios —
“These are honest and decent people who keep their word with both the business and creative communities,” Mr. Bewkes says.
While Warner is most closely associated with movies, the production of television shows for major broadcast networks and cable channels in some years makes up half the studio’s profits.
The bulk of Warner’s revenue, though, comes from movies.
Although no one denies the shifting media landscape and the enormous degree to which new technologies and the Internet are disrupting it,
Yet digital growth is all the rage on Wall Street.
That’s partly because many analysts regard Warner’s traditional businesses as mature, and therefore hard to expand.
“We are facing a marketplace where consumer spending is relatively flat,” said Kevin Tsujihara, president of Warner Brothers Home Entertainment.
He says Warner’s answer is to convert the DVD rental business, still a roughly $7.5-billion-a-year business for the entire industry, to video-on-demand, or V.O.D., services, which now amount to only about $1.2 billion annually.
But the margins are juicy and likely to become even more so.
Warner executives say demand for American entertainment is growing globally as well.
Digital piracy is also forcing studios to make shows available sooner in international markets.
“Audiences are watching shows that are in the zeitgeist online as early as a day after the U.S. telecast on sites where people have posted them illegally,” said Jeffrey R. Schlesinger, head of international television.
International distribution is paying more these days: a few years ago, a typical show’s international revenue was about $500,000 an episode; today it is closer to $1 million.
For 17 of the last 22 years, Warner has been the top seller of television shows to the four major broadcast networks, despite not owning a network itself.
“Our job is to be the second-favorite supplier of shows to each of the networks,” Mr. Rosenblum says.
It is this dynamic, in part, that could drive Time Warner to buy NBC Universal. G.E. has consistently said it plans to retain its TV and movie unit, but many in the industry say they would not be surprised if, after the Olympics — now on NBC — G.E. explores alternatives.
A recent analysis published by Michael Nathanson, an analyst at Sanford C. Bernstein, found that the share of independent programs (meaning not produced internally) on networks dropped to just 21 percent this year from 42 percent in 2006.
“Nonaligned third-party TV studios like Warner Brothers and Sony appear to have an increasingly harder time finding homes for their programs,” Mr. Nathanson wrote in his report.
That insight isn’t lost on Warner executives.
“In television, we have to be better than the other guys because the networks would prefer to buy from their own production companies,” Mr. Meyer says.
Although ratings for networks have declined, they are still the best place to break a new show.
FOR such a big, ambitious movie, “The Dark Knight” had a small-town theatrical birth.
It was a week before the movie was released more broadly, and Mr. Meyer and other executives were nervous about preventing a leak to file-sharing sites on the Internet that could undermine its theatrical debut and the studio’s profits.
People patrolled the aisles of the Capitol Theater in Montpelier, wearing night-vision goggles to detect hand-held camcorders.
When a copy of the film didn’t make it to the Web until 38 hours after its debut — Warner tracked a grainy camcorder copy to a theater in the Philippines — it was seen as a triumph.
“With a movie like this, where the audience is technologically savvy, the threat and potential cost of piracy is huge,” says Mr. Tsujihara,
THOSE efforts underscore how important protecting intellectual property is to Mr. Bewkes’s overall strategy.
“You just have to look at the box office numbers,” said Jeff Robinov, president of the Warner Brothers Pictures Group.
A few years ago, Mr. Bewkes, along with other media executives, attended a session at the Museum of Television and Radio in Los Angeles,
When the assemblage went to lunch, Mr. Bewkes stayed behind to chat with the hackers.
“They said they didn’t feel bad about piracy becaus
In the future, the “right way” is likely to mean making movies available on every platform — theater, DVD, V.O.D. and on the Internet —
But until technology forces Hollywood’s hand —
“Warner Brothers is staunchly and adamantly supportive of preserving the theatrical window,” said Alan Horn, president and chief operating officer of Warner Brothers Entertainment,
The future, most agree, is seamless distribution of films to television using Internet technology.
That transition will be, and is, wrenching because studio executives must walk a fine line between preserving the traditional business, which still amounts to a vast majority of revenue and profits, and experimenting with new ways of distribution.
Some are already doing it.
“Management’s biggest challenge is transitioning into this brave new world without trampling the massive revenue streams that have supported our businesses for so long,” Mr. Meyer says.
MR. BEWKES ultimately will be judged by how much of a boost he gives to Time Warner’s torpid stock price.
“So ‘Dark Knight’ comes out and it has a calculable earnings lift and the stock doesn’t move because the Street factors in something else,” Mr. Bewkes says.
In this case, he says, that something else is worries about the impact that Verizon’s television service, FiOS, might have on Time Warner Cable.
“It’s hard for investors to balance the pros and cons of dissimilar businesses,” Mr. Bewkes says, adding that once Time Warner’s cable unit is spun off, investors will have an easier time valuing the parent company.
And that, of course, brings Mr. Bewkes back to his central point: in a digital age, content becomes more valuable, not less, because it’s becoming cheaper to deliver.