The empire builder

Relativity Media CEO Ryan Kavanaugh is not alone when he observes that the turmoil brought about by the financial crisis has restored order to Hollywood. What may set the company apart is that, at a time when distribution and production entities have shed staff, closed down or appear to be in their death throes, Relativity is growing at a dramatic pace.

“We’re the beneficiaries of an incredible time of growth and I almost look at it as the time of the internet boom, when the joke was you could IPO your desk for a million dollars,” Kavanaugh says during an interview at his Malibu home, referring to the time when the business was driven by very high home video growth. He stresses that today, while there are exciting opportunities, Hollywood has reverted to a more balanced growth curve and it has become more important than ever to pursue “a very disciplined risk/reward model.”

Kavanaugh made a splashy entrance into the film business in 2004 funnelling hedge-fund money into large-scale studio slate deals; out of that he built Relativity into a standalone production and finance operation, bought Rogue Pictures from Universal and last month incorporated the distribution and marketing units of Overture Films, giving him a fully staffed US distribution outfit. Relativity remains cash-rich, backed to the tune of $1bn by New York-based hedge fund Elliott Associates.

Persistence pays

Kavanaugh launched Relativity at a time when the market was under stress. He saw an opportunity for capital investment in studios following the demise of the German Neuer Markt and UK sale-and-leaseback. The studios and Wall Street were reticent at first, but Kavanaugh persisted and it paid off.

In 2008, billions of dollars in revenues later, Relativity and Universal extended their partnership so Relativity now co-finances 75% of the studio’s slate until 2015. A similar arrangement exists with Sony and also runs through 2015. Films under these deals have included hits such as Mamma Mia!, Wanted and Paul Blart: Mall Cop, as well as inevitable flops such as Land Of The Lost and MacGruber.

Relativity had in the meantime started its single-picture business, a fast-growing concern whereby the company produces films such as 3:10 To Yuma and the recent Brothers remake and licenses distribution rights. On top of this, Relativity acquired the Rogue assets in 2009, and funnels these genre titles through Universal’s distribution infrastructure.

While the studio slate deals have enabled Kavanaugh to become an influential voice at two US majors, the single-picture business operates perfectly well by itself within strict financial parameters. And therein lies a delicious irony. Kavanaugh, often dressed in jeans, jacket and Converse trainers, is regarded as a maverick, but his tendency to go against Hollywood’s grain comes from a philosophy of fiscal responsibility. The industry’s traditionally excessive behaviour has come undone, whereas Relativity, staffed by a small team and run out of offices in Beverly Hills, prides itself on careful analysis, planning and judicious execution.

Kavanaugh, Relativity COO Andrew Marcus, president Michael Joe and president of worldwide production Tucker Tooley control budgets with an iron fist.

“For us, it’s about getting to a place where we can create the best package and make sure we have an acceptable financial break-even,” Kavanaugh says.

“We want to know that in the worst-case scenario we break even or maybe lose a little bit.” On the rare occasions the company loses money, he says, it is fractional”.

Hollywood’s big $20m paydays are gone and accordingly, Relativity views talent as partners, paying reduced upfront fees with the incentive of “a substantial portion of the profits” when a film is successful. The company is happy to allow the director and producer a significant level of control over the production, as long as they stick to budget. “I always tell people we¹re not invested in any particular movie and if we have to shut it down a day into production, we’ll shut it down. We’re a financially driven model, obviously under a creative business, so we need a great script, a great package, great talent -but it has to be within these financial parameters.” Kavanaugh says the single-picture business currently accounts for 50% of the company’s films and estimates that by next year the share could grow to 70%.

International plays a critical role in risk mitigation here. Several years ago the company began to assemble a network of partners and, 110 output deals later, Relativity has arguably filled the void left by New Line International. “We’re probably the largest supplier of film content to the largest foreign independent distributors,”he says.

Deals with the likes of Momentum in the UK, Roadshow in Australia and New Zealand, Euro TV in France and Nordisk in Scandinavia allow the company to build a solid financial platform, leaving the North American release as the upside. “Our model is to cover a minimum of 75% of the budget and sometimes more between international and tax,” Kavanaugh says. “Take a movie like Brothers − we were a million dollars in profit before we started one day of principal photography. Domestic was all profit for us. Take Dear John − we pre-sold that for 75%-80% of our budget and the net budget was $25m, so let’s say we had $5m or $6m left in the movie and then it goes and does $80m box office and is a wild success.”

Self-distribution

Relativity’s single-picture expansion led to the Overture deal which sees the company take on Peter Adee, Kyle Davies and 43 staff members from Overture’s former owner Starz. That follows on from a de facto pay-TV deal struck recently with Netflix.

The pact grants Netflix the right to stream Relativity’s upcoming single-picture releases several months after their theatrical release, bypassing the traditional long-term pay-TV slot controlled by HBO, Showtime and Starz. Netflix’s 14 million-plus subscriber base will be able to turn on their computers or televisions and watch films like The Fighter with Mark Wahlberg and Season Of The Witch starring Nicolas Cage. On top of that, Relativity can still enjoy the fruits of electronic sell-through on platforms such as iTunes or Amazon, something pay-TV operators can restrict in their deals.

³It gives us a significant pay-TV deal that is incredibly competitive and enhances the profitability of our films overnight,” Kavanaugh says. “Because it’s Netflix, who know their consumer, it gives us the ability to understand more about our consumer and what they’re liking and what they’re not.” The cable operators will be watching closely.

Kavanaugh believes in interaction with the consumer and to this end Relativity has developed the Rogue network, a popular digital community which Kavanaugh says receives 45 million hits a month and serves as a burgeoning promotional platform. VoD ties into all of this, of course, and Kavanaugh says that once the user interface offered by cable channels is simplified the format will take off.

When that happens, he thinks two things will occur. “You’ll see the shrinking of windows and day-and-date theatrical and VoD in some cases, and you’ll see a lot of original content made for VoD. We already have it in YouTube, which is a free supplier of VoD content. When VoD as a platform becomes omnipotent - and it’s starting to because it’s available, whether it’s through HBO or Time Warner cable or through Netflix - it makes you realise we will, for the first time, have the ability to impulse-buy film.”