The Movie World's German Angels

By Steve Zwick/Cologne

Quick! who signs million-dollar paychecks for Catherine Zeta-Jones, Michael Douglas, Dennis Quaid, Leonardo DiCaprio and Martin Scorsese? Would you believe a German company with a name that could come from a Mel Brooks farce? Cologne-based Splendid Media is co-producing the movie Traffic, which Zeta-Jones, Douglas and Quaid are filming. Splendid is also putting up $65 million of the $90 million needed for the Scorsese-DiCaprio movie The Gangs of New York. And if all goes according to plan, it will funnel more than $100 million into a series of co-productions with Zeta-Jones' production firm, Milkwood Films, over the next two years.

If Splendid weren't doing it, other German companies probably would be. In the past year, German movie-production companies and film funds have acted as moneymen for a virtual Who's Who of Hollywood that includes John Travolta, Bruce Willis and Tom Cruise. Nearly 20% of the $15 billion that Hollywood is using to make films and videos this year has come from Germany, where in 1999 the words media project had the same dizzying effect on investors as dotcom did in the U.S.

Until very recently, German film companies had money to burn, and most of that found its way to California. Last year 12 relatively unknown German film-distribution and production companies tossed their shares out onto the local stock market and reeled in more than $3 billion in IPO capital. They used that war chest to gobble up strategic chunks of the worldwide filmmaking and distribution industry, and many of those chunks are shriveling rapidly. Companies with names like Intertainment and Helkon Media ran rings around established German players like Kirch Media and Bertelsmann, which, perhaps wisely, stayed out of the fray. An additional $1 billion flowed into German film-production funds, which raise money from private investors for specific efforts like Mission: Impossible 2, which got $100 million from German sources.

Though upstarts in Hollywood terms, most of them have been around the German scene for 20 years or more, eking out an existence buying German-language rights to non-German films, then selling the product to cinemas and TV stations. Like film producers, such distributors succeed or fail on the basis of their ability to pick winners and avoid losers. But while a producer can control cost and content from day one, distributors bid on individual films or bundles of films that are already in the can. It made sense, therefore, that someone who can make money with his hands tied as a distributor could make more money with his hands free to tinker as a producer--if only he were given the opportunity.

Last year a cash crunch in Hollywood and a glut of investment money in Germany provided that opportunity. Splendid Media was one of the first outfits to move on Hollywood, agreeing last July to buy 51% of strapped Hollywood film-financing-and-distribution company Initial Entertainment Group. That deal hooked up the folks at Splendid with Scorsese. Then came Helkon with 20% of artsy Newmarket Capital, and Intertainment with a 60-film deal with Franchise Pictures, whose first delivery was the mega-dud Battlefield Earth. EM.TV, which was founded by a television company with close ties to Kirch, paid $680 million for what's left of the late Jim Henson's Muppet empire, and the red ink of that deal helped drag its share price down 80%, at which point Kirch bought 25% of the company and forced it to sell off much of its recent acquisitions--including the North American Muppet rights, which went to New York-based Sesame Workshop.

Many of these "co-productions" are really just old-fashioned "output deals," which lock up distribution rights to a successful producer's next five, 10 or 20 films but yield little in the way of direct control. A real producer swims far enough up the production stream so that he has some say in a film's budget, talent and content. Werner Koenig, who runs Munich-based Helkon Media, is one of the few of this new wave with production experience, and he is trying to join the production mob rather than just ride its coattails. He has finished shooting a Leslie Nielsen comedy called 2001--A Space Travesty, which will be released in the spring. "We filmed most of it in Germany, with a German team," Koenig says. What's next? His company is part of a consortium that wrested production of a remake of Norman Jewison's 1975 Rollerball away from MGM (the new version stars Jean Reno, LL Cool J and Rebecca Romijn-Stamos). Helkon is currently co-producing The Mexican (starring Julia Roberts and Brad Pitt) and The Wedding Planner (Jennifer Lopez and Matthew McConaughey), and co-produced The Contender (Joan Allen, Gary Oldman, Jeff Bridges), among others. Their share price is down 30% over the past year, a relative boom in the carnage among their peers.

The country's buying spree wasn't limited to Hollywood. For the past year, German companies have been scrambling not only to acquire rights to individual films and packages of films but also to buy the European companies that produce and distribute movies. Kinowelt is easily the biggest of the young Turks, with a market capitalization that was $1.2 billion when it floated its shares. It used the money to buy a string of distribution and production companies from Hungary to Canada, including 26% of Canada's Alliance Atlantis Communications, which produced Crash and Oscar nominee The Sweet Hereafter. Kinowelt's market capitalization has since fallen to $563 million.

While the upstarts were out forming European alliances and sealing long-term package deals with American producers, veterans like Bertelsmann were playing it tight, refusing to top Kinowelt's $300 million bid for German television rights to a package of Warner Bros. films. Trouble is the giants Kirch Media and Bertelsmann control almost all of Germany's commercial television stations, which means Kinowelt paid more for the films than its probable customers were willing to.

This comes just as a worldwide trend toward locally produced television is kicking into high gear. But the newcomers are not fazed. "Movies like The Matrix were in that deal," Koenig says. "Kirch and Bertelsmann have a tremendous library of films, but they will still need to put up blockbusters from time to time when the public stations run something big." Either way, a wedge exists between the big old German boys and Hollywood's hot new indie producers.

So far, the gamble has been a losing one. Munich-based distribution company Intertainment took an undisclosed hit on the $70 million sci-fi flop Battlefield Earth, which it co-produced with U.S.-based Franchise Pictures. Although preselling the television rights across Europe helped offset some of the loss, that belly-flop may come back to haunt the company if stations think twice about buying in the future. Intertainment is betting on a $500 million, 10-film deal with Hollywood producers Anne and Arnold Kopelson, who were responsible for Outbreak and The Fugitive, to keep its credibility alive.

Hollywood has seen a lot of foreign investors come and go, often poorer on their departure. Japanese companies lost a bundle in the early 1990s, as did a series of French and Italian ventures. But this wave of German companies isn't buying just studios, as Sony did. These companies are buying production teams and burrowing into the production process. "Each company is pursuing a different strategy involving a complex mix of production and distribution elements," says Stephan Seip, media analyst at Merrill Lynch. Some of those strategies have a fantasy feel--for $65 million, you too can be a movie mogul and rub shoulders with the stars. But others are based on long-term plans and objectives backed by years of experience at home. How well are the newcomers likely to do? The inevitable shakeout has begun with EM.TV, and more casualties are bound to follow--events the suits in Hollywood will be watching as closely as the Oscar nominations.