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After Years of Battling Miramax, Disney Might Rewrite the Script

Weinstein Brothers Produced Many Hits, but Departed From Their Early Mission Heat From 'Fahrenheit 9/11'
By BRUCE ORWALL
Staff Reporter of THE WALL STREET JOURNAL
June 24, 2004; Page A1

Miramax Films Co-Chairman Harvey Weinstein likes to smoke when he visits the Burbank, Calif., headquarters of corporate parent Walt Disney Co. But on a recent visit, someone at Disney smelled his cigarette and called the company fire marshal, who ordered Mr. Weinstein to stop.

Mr. Weinstein apologized profusely, according to people familiar with the meeting, extinguished the butt -- and lit another a few minutes later. So it has gone for Harvey Weinstein and his brother Bob in the years since they sold their scrappy independent film company to Disney, and tried, but often failed, to conform to the rules of play inside a giant corporation.

Now, after 11 contentious years together, Disney and the Weinsteins are entering a crucial period that will determine if their relationship has a future. The duo's contract runs until 2009, but Disney has the right to opt out in September 2005. For the Weinsteins, the alternatives appear clear: Change their ways or leave the company.

Backed by the media giant's money, the Weinsteins built Miramax into a studio valued at an estimated $2 billion, on the strength of a library that includes titles such as "Pulp Fiction," "Shakespeare in Love" and "The English Patient." Miramax has earned 200 Oscar nominations and 47 statuettes since Disney acquired it for $70 million, and along the way, the once-struggling company has ballooned into a major studio with a $700 million annual budget to produce and market movies.

But the relationship between Disney and Miramax has deteriorated markedly as the Weinstein brothers grew powerful under agreements that gave them significant autonomy. They battled over controversial films Disney didn't want Miramax to release, such as "Kids," a 1995 movie about teenage sex; and "Fahrenheit 9/11," Michael Moore's documentary targeting President Bush that opens nationwide this week. Harvey Weinstein fumed publicly over business opportunities he says Disney nixed, such as the chance to produce the "Lord of the Rings" movies and invest in Broadway plays.

Moreover, as Miramax's operating performance slipped during the past five years, Disney tried to put an end to the chaotic intramural skirmishes over the Weinsteins' rich compensation.

Disney Chief Executive Michael Eisner declared on a recent earnings conference call that Miramax has been profitable in only two of the last five years. Nonetheless, under an arrangement complex even by Hollywood's accounting standards, the brothers continued to reap bonuses. Over 11 years with Disney, they received as much as $250 million, according to people familiar with the matter. In some years, they were the highest-paid Disney executives after Mr. Eisner.

In a spat remarkable for a public company, Miramax disputes the audited results Disney records on its books for the unit. When Harvey Weinstein proudly cites the unit's profitability, he's referring to numbers much like the ones used to calculate his bonus. Those figures don't account for the Weinsteins' compensation, Miramax's share of Disney's overhead in areas such as video distribution and other accounting differences.

Disputes over Miramax's best and worst years provide a glimpse of the dysfunctional relationship with Disney. According to people familiar with the matter, Disney's audited financial statements for the year ended Sept. 30, 2003, recorded a profit of about $87 million for Miramax, flush from its big hit "Chicago." The Weinsteins argued to Disney that Miramax made $211 million. Similarly, in fiscal 2001, when Miramax was weighed down by its ill-fated investment in the now-defunct Talk magazine, Disney recorded a loss of more than $100 million for Miramax. The Weinsteins argued the loss was about $37 million.

In two other recent years, Disney booked losses for the unit while Miramax claimed profits of $39 million and $48 million, these people say. Disney doesn't officially break out the unit's results.

With the Weinsteins' contract approaching next year's opt-out date, Disney wants to steer Miramax away from the big-budget epics and toward the more modest productions on which it made its early name. People familiar with the company's plans say Disney is increasingly likely to quit the arrangement unless the Weinsteins revamp their relationship with the parent company. There's no specific proposal on the table, but the discussion will likely focus on simplifying, and perhaps reducing, the Weinsteins' compensation.

If they leave the company, Mr. Eisner could face criticism for losing the architects of such a valuable asset. Disney could either replace them or dissolve the operation and operate Miramax's 550-title library itself. Disney would consider selling to the Weinsteins the Miramax name -- it's named for their mother Miriam and father Max -- but won't part with Miramax's film library.

At a Los Angeles screening earlier this month for "Fahrenheit 9/11," attended by Hollywood's liberal royalty, the audience was unsure if Harvey Weinstein was joking when he said the brothers had taken out a newspaper advertisement reading: "Two executives looking for company to run. Resumes on request."

Asked to comment for this account, Bob Weinstein says: "We can all agree that Disney's multimillion-dollar investment in Miramax has developed into a multibillion-dollar asset for its shareholders. This has been a mutually beneficial relationship and we look forward to an amicable resolution that will bring continued value to shareholders."

Walt Disney Studios Chairman Dick Cook says Disney acquired Miramax to buy and distribute small independent pictures. He adds: "Harvey and Bob have provided great leadership at Miramax and going forward we hope Miramax moves toward the original vision of focusing on new and innovative independent film product."

Miramax isn't the only part of Disney's film empire under scrutiny. Disney's animated-movie division, once a foundation of the company, is struggling to make the switch from hand-drawn films to those made by computer. Disney's main movie studio, after a strong 2003, is struggling this year with flops like "The Alamo" and "Around the World in 80 Days."

The Weinsteins are the latest in a series of key Disney players who have had dust-ups with Mr. Eisner. Pixar Animation Studios, the computer-animation company headed by Steve Jobs, said earlier this year it will terminate in 2005 a long-term deal under which Disney co-financed and distributed its movies. Disney board members Roy Disney and Stanley Gold resigned last year after 18 months of escalating tension with Mr. Eisner over the company's direction.

These battles were a big reason why Mr. Eisner, 62 years old, won little support from Hollywood earlier this year when he faced a twin threat that nearly cost him his job: An unsolicited all-stock buyout offer from Comcast Corp.; and a shareholder revolt led by Mr. Gold and Mr. Disney. Mr. Eisner surrendered his title as Disney's chairman after the company's March annual meeting, where 45% of the shares voted withheld support for his re-election to the board. Disney rebuffed the Comcast bid, which has since been withdrawn.

Miramax was founded in 1979 by the Weinstein brothers, who introduced themselves to the entertainment industry as concert promoters in Buffalo, N.Y. They built Miramax on the simple idea that independent movies with tiny budgets and low profiles could find a wider audience through smart marketing and patience.

The company survived hand to mouth, finding enough hits to stay afloat. Then, in the late 1980s, it shepherded a string of successes that defined what came to be known as the independent-film movement, including "My Left Foot" and, in particular, "sex, lies and videotape." Miramax acquired that Steven Soderbergh film, which cost $1.2 million to make, and turned it into a sensation that sold more than $20 million of tickets at the U.S. box office. It also did well overseas and on video -- a near-perfect realization of the company's initial business plan.

Yet Miramax's financial picture didn't stabilize, largely because of its limited access to capital. Harvey, now 52, and Bob Weinstein, 49, were receptive when Disney pursued an acquisition of Miramax in 1993. The deal was attractive for both parties. Disney got a company with a deft cultural touch, huge profit potential and Hollywood prestige not generated by its own studio. Meanwhile, Disney limited its risk by capping Miramax's investment in any one film at about $12.5 million; Miramax could spend more if it sold distribution rights in foreign territories.

In return, the Weinsteins received one of the most autonomous deals in Hollywood. Knowing there would be clashes between a family-entertainment stalwart and an edgy indie player, the brothers negotiated a deal that gave Disney the right to veto only movies rated NC-17 or those that exceeded the spending cap.

In the first few years after the sale, Miramax exceeded expectations by sticking to its original plan, focusing on small pictures acquired from other producers. Demonstrating that the Weinsteins' creative instincts remained intact, one $8 million film Miramax made itself, "Pulp Fiction," exploded into a blockbuster that grossed more than $200 million world-wide.

The Weinsteins' ambitions grew over the next few years, with each brother heading in his own idiosyncratic direction. Bob started the company's Dimension label and made movies targeted at younger audiences, a bull's-eye he has hit repeatedly with inexpensive franchises like "Scream," "Scary Movie" and "Spy Kids."

Harvey Weinstein gravitated toward prestigious films with budgets as high as $40 million that were bigger than Miramax's earlier offerings but still relatively small financial risks. "Good Will Hunting" was made for less than $25 million and "Shakespeare in Love" for less than $30 million; both brought Oscar glory to Miramax and Disney.

Miramax hit a sweet spot in the late '90s, spending about $450 million a year to make and market movies. "We're managing the 1927 Yankees," Harvey Weinstein boasted at the time, comparing his line-up of Tarantinos and Afflecks to the Bronx Bombers of Ruth and Gehrig.

A new employment deal for the Weinsteins, announced in 2000, further expanded their financial resources, bumping their annual allocation up to $700 million. Disney acquiesced for fear the Weinstein's would walk.

But the brothers were spreading themselves thin. Miramax had earlier agreed to launch Talk magazine, in partnership with Hearst Corp., without first mentioning it to Disney, and also dabbled in book publishing and television production. Talk magazine later collapsed, leaving Miramax with more than $30 million in losses.

As for movies, Miramax became a far cry from the company that once bet on obscure foreign films. It started producing more of its own movies with much larger budgets, a strategy that has brought a few successes and some painful bombs.

When it hits a gusher -- such as the $45 million, Academy Award-winning musical "Chicago" -- the results are spectacular. But other pet projects with big-name filmmakers have had a mixed track record. Harvey Weinstein persuaded Disney to let Miramax take all of the risk on the $80 million "Cold Mountain" after partner Metro-Goldwyn-Mayer pulled out, a bet that didn't pay off when the Civil War drama fared poorly overseas.

More painful has been a string of pricey Miramax films that barely saw the light of day: The Ben Stiller dud "Duplex" cost $65 million but sold less than $10 million of tickets; the $36 million Oscar-tipped "The Shipping News" sold just $11 million of tickets; "Texas Rangers," a $37 million production, took in just $623,000 in tickets. Miramax typically reduces its risk by selling foreign distribution rights. In these cases, that wasn't enough to stem the losses.

The public spat over the documentary "Fahrenheit 9/11" did nothing to make Disney more charitable toward its errant unit. After Miramax invested in the controversial movie last year, Disney instructed Miramax not to distribute the film. The matter was dead until a few weeks ago when Mr. Moore drummed up headlines suggesting that Disney had somehow censored the film. Disney complained it was the victim of a publicity stunt but received no support from the Weinsteins, who bought the film from Disney with their own money and arranged to distribute it through other companies.

Miramax has already run through its budget for this year and is considering making layoffs. In the past, Disney eased the Weinsteins through cash crunches, but this year the corporate parent isn't inclined to help.

Heading into what may be the homestretch of their Disney careers, the question is whether the Weinsteins will go along with Disney's tougher line. In a 1997 interview, Harvey Weinstein bragged about the concessions Disney made to him.

"I'm a smoker, but you can't smoke in their corporate office," he said. "Michael Eisner has personally, in every meeting that I've been in, provided me with an ashtray. I just tell you that as a metaphor. Because if they're not going to let us do it, we'll go somewhere else."

Write to Bruce Orwall at  bruce.orwall@wsj.com4

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The thrill of capitalism 24.Jun.2004 16:33

Pravda or Consequences

People are going without the basic necessities of life and this shit makes you wonder where are our values?