Wall St. Journals, cell phones, briefcases, suits, a bright-articulate group of CFOs, attorneys, bankers, entertainment execs, accounting execs. This conference fits your interests if you work in the media business and your focus is on mainsteam financial issues and strategic planning. The goal of the seminar: to provide an up-to-date overview of current and future entertainment investments.

Paul Kagan Associates, Inc. based in Carmel, California, has been researching, analyzing and valuing media for more than 27 years. The group produces newletters, reference books and conferences.

Kagan Seminars, Inc., which produced this seminar, produces approximately 10 Kagan seminars every year - one in Los Angeles, several in New York, Miami (focusing on Latin America), and Europe. (See information at end of report on how to purchase seminar cassettes).

Paul Kagan, Chairman of Paul Kagan Associates, Inc., is a former broadcasting/cable TV analyst for E.F. Hutton & Co., and an executive with the Radio Advertising Bureau and CBS Radio. He was host and panel moderator with colleagues Larry Gerbrandt (Senior Analyst) and Derek Blaine (analyst) for the two days. Gerbrandt's work at Kagan focuses on MP/TV Programming, Interactive Media/Cable Networks/Home Video. Blaine focuses on Newspaper Holdings/Home Video Stores/Cable Programming.

Note: All comments by the hosts and panelists are paraphrased and not verbatim unless indicated by quotations.

How much do movies cost? Will there be a continuing volume of pictures from the studios? Will the production of big budget movies yield high rewards? Can markets support high costs of these films?

Kagan's lead-in comments, (paraphrased) - It seems bigger and bigger pictures make sense when the box office numbers come in. So far this year, 9 films have cleared $100 million (Kagan's definition for a blockbuster film is one which generates over $100 million in revenue), and we are not even into Christmas. INDEPENDENCE DAY, the third biggest movie so far this year, cleared its negative costs domestically by three.

Larry Gerbrandt's paraphrased comments - Movies cost 50% more than they used to, and more films have been released so the studio costs have gone up proportionately. We have developed a data base which tracks films by budget range for the last 11 years, the database has tracked over 2,800 films. Statistics show that higher budgets yield great profits, and that lower budgets rarely yield great profits unless there is a breakthrough film. The Bear, Stearns media conference in Phoenix last month focused on macrotrends in the business - reduced slates, more shared risks, more concentration on the distribution side of the business (studios can lose $ making movies but can make $ distributing movies). Big budgets will not go away. Stars expect to be paid.

Panelists:

Bill Mechanic - President and COO Fox Filmed Entertainment. Oversees production, distribution, marketing, and home video (10 years previous experience at Walt Disney Studios as President Intl Distribution and Worldwide Video, and as an exec at Paramount)

Paraphrased comments: Mechanic pointed out that all the major studios focus on how to survive storms by constantly balancing and adjusting the back and front ends. When Fox produces its 12-13 movies/year, it must maintain an infrastructure around the world. It takes a lot of $ to release a film, it took a machine to make ROMEO AND JULIET work, for example. He added, "making more small movies is not a workable model' for Fox. ONE FINE DAY will be Fox's big Christmas picture.

Reducing slates is not an industry issue. Attendance is not up in this market. Not lots of takers to share risks. Concentration on distribution fees only can wipe you out. Formula is not to make the average movie. Content is important, movies today must have an edge. We don't want to make safe films, we want to make riskier films. INDEPENDENCE DAY did not cost anywhere close to $100 m, it was the least expensive big budget film released last year, and did not have major stars. It was not expensive going in, but,.the sequel will be expensive.

INDEPENDENCE DAY opened with $90 million in the first weekend, this could not have happened years ago. A lot of execs can't say no, but I know I'm guilty if I say yes. A lot of companies and studios are poorly managed. 16 movies with $100m+ budgets are slated for next summer, there can be a trainwreck. Profit margins are continually lower, but bigger budgets make more profits. So we have to hit big home runs.

Robert Greenhut - Producer 30 years, producer of 20 Woody Allen films. His production of EVERYONE SAYS I LOVE YOU will be released December 6. He also produced the PREACHER'S WIFE directed by Milos Forman and executive produced by Francis Coppola. Greenhut's philosophy is that a movie should be made if the material is good. He doesn't believe in following formulas. Films that cost the most accentuate what you can see in the theater as opposed to what you can see on video or TV. Special effects and digital sound all are motivating reasons to pay $8 to see a movie. Prints and ads are so expensive compared to what they used to be. Star salaries are such a big part of the budget. Yes, some companies do get burned, and there are big budget failures. 'I love big budget movies, they pay producers more." I have a middle ground budget film I want to get made and I don't follow formulas, material should be made if good, middle ground A talent taking more creative type of deal. It's not just stars who make money, lots of directors and others do too. Why pay retail to one person, pay that to rest of cast and crew, it always trickles down. The problem with indies is that the pre-sale value of the movie has nothing to do with its potential to be a good movie.

Stephen Brown - President of Arnold Kopelson Productions. Producers of the FUGITIVE, FALLING DOWN, and other major movies with big box office grosses. Kopelson Productions has 18 films in development, 3 in production now. Stars don't take reduced fees on studio projects, they will take reduced fees on independent projects they are passionate about. Content and great story ideas are key - material which pushes edge makes a difference. When we make movies we set out to make good movies based on exceptional material - i.e. SEVEN. We are now producing MAD CITY, a film with a "brilliant script," contained story, not a blockbuster story - with stars it can be accessible to a mass audience. It's all about great content and stars and the balancing of the two. Lots of pressure to pay more money below the line, i.e. hiring new dps so you don't have to pay for hotshot dps. There is also a squeeze on mid-range actors.

Karen Kehela - President of Imagine (exec prod NUTTY PROFESSOR, FEAR). The company is successful in the "star" business. Certain movies are surprisingly idea driven as opposed to star driven. Not all stars consistently earn their salaries, i.e. Eddie Murphy in NUTTY PROFESSOR. You need to be imaginative to keep costs down. With comedies, it's easier to restrict scenes, combine sets, and save on meal penalties. etc.

How will the new DVD players impact the home video industry? Have any trends on pricing, packaging and title depth begun to emerge?

8 million DVD (Digital Video Discs) units will be produced by the year 2,000. Kagan, Inc., is reviewing the numbers now, to get idea of what market looks like, the last few have been in flux. It is anticipated that 33 million units will be in distribution by 2035 . Total sell thru of about $12 billion. Movie industry desperately needs new revenue. Are we there? What will industry look like next year? Is DVD a replacement technology or an incremental business? Will it be an all sell-through business? Videos cost so much less than laser discs. Key to video rental business is lot of shelf space, can't do with lasers, would need bigger stores. Laser disc down in size to jewel case and in cost (now $40). There is no incentive for an early adopter to buy a combo player. Won't be enough to buy, novelty not good enough, has to be perfected.

Panelists:

Roger Berger, Chairman & CEO, Rentrak (founder of National Video Inc., a franchiser of national video stores which became Rentrak in 1988).

The future market for DVD will be healthy. All platforms have demonstrated that the consumer gravitates to technology that works with software which is available widely and cheaply. We offer a clear, quick solution. $1 million installed bases by next year. Public that has access to high quality technology, CD-Roms, why buy new piece of hardware to get something else they already have - no value . Why pay for something you can rent for $2.50? Laser discs are big in Thailand and Hong Kong. How is DVD driven? What hook does it have that makes it different, that would make me want to buy it? DVD may get delayed release windows.

Martin Greenwald, Principal Exec Officer, Image Entertainment Involved with laser technology since 1981. Says it will take 15 years to reach 2 million U.S. households. Software is a significant part of our future. 1997 will be a rollout year for DVD. There is lots of hype and confusion in the marketplace this year. We are now organizing a real launch for March. Image will be launching for Thomson Electronics. People who can buy this product do not care about the price. 500,000 to 1 million buyers to roll out slowly, the numbers will accelerate after the studios line up with product. But there won't be a party if the studios don't line up. $20-$30 sell through product, thinks it will mostly be rental market. Pioneer is coming out with a combination player which has DVD. 65-70 cents is cost of material of a polycarbon disc. cost of adhesive, bonding, price below $1.00. Realistic price. $2,400 to make master for 2-sided laser disc. $7 duplicating cost per disc. Believes DVD Rom drives should be on computers. Movies on computer screens way of future.

Emiel Petrone, SVP Ent Acquisitions and Worldwide Video, CD, DVD Phillips Media We are in the hardware business. DVD is promising, its growth inevitable. DVD Ram is several years away. Early next year the players will be available and they will be priced around $700. Then the price will drop to $500 to $299. There should be a quick cascade in prices depending on the volume of units sold by Christmas 1997. Put bonded 4 layer disc or single disc with 2 layers. 6 or 7 encoders in LA area. Cost will be made public within weeks. There are 4-7 post facilities which press DVD discs.

John Powers, Dir DVD Marketing, WB Home Video Consumers are more interested in purchasing videos and building their own personal libraries. Consumers are migrating to digital technology. The trend is convenient delivery systems to the home. 1 million homes by end of year with DVD players and the purchase of 20-30 movies per house. Our intention is to help the hardware community because we want to sell our back catalogue. Lower costs than video discs.

Kagan introduces this as the "deal panel." What kinds of deals work? What are the trends at both ends of the spectrum, the megabudget films versus low budget movies. With the cutbacks in studio production and the new screens that are available, are there new opportunities for independents?

Panelists:

Brad Krevoy, Founder, Motion Picture Corp of America (Part of Metromedia Intl) Krevoy is an attorney and his company MPCA is now a production and distribution arm of Orion Pictures. MPCA has produced more than 50 films, including the blockbuster DUMB AND DUMBER. They have a first look deal at Paramount.

How do you divide up rights? We count 65%-80% of negative costs from foreign. Our budgets range from $4 to $12 milion. At a minimum we have an upfront domestic theatrical release in America. Genre films that don't cost a lot of $ are what we are going after. The video market around the world is very depressed. Art house/commerical films best now - ALBINO ALLIGATOR ($7 million classy art film, huge demand for films like this overseas.) , co-prod with UGC gave us 80% budget. GANG RELATED. Jim Belushi, David Paymer for release Sept 97. Urban movies (like GANG RELATED) have a built-in domestic market. We take 20-30% plus p and a costs domestic. We have to spend an enornous amount in the U.S. to release a film. If a film is too risky for us to finance, we have first-look deal at Paramount. The studios are starting to make deals with companies like ours because we have below-the-line deals which are different, they are tier deals based on the budgets. Last little spin - Orion takes int'l rights, delivers a low budget movie, and the studio gets domestic. We produce movies with $6-$10 m budgets and their opening costs domestic are between $10 and $20 m. EIGHT HEADS IN A DUFFLE BAG with Joe Pesci has a $20 m budget, MPCA laid off most its budget to int'l partner. Average overhead at MPCA is less than 1/4 of MGM's (which is north of $100 million). Our primary emphasis is on domestic theatrical.

Michael "Mickey" Mayerson, Co-Chairman, Ent. Dept, Loeb & Loeb I went to MIFED this year and lots of films failed to find a market. The mid-tier films found markets, but not the lower budget or higher budget ones. The buyers don't want riskier product. The middle market is becoming more and more viable. That's the trend in the marketplace. Italy for example counts for 6% of the budget of a U.S. film. A $5 million movie, $250,000 is not a lot of money for the Italians. Projects which work are director driven or have good names attached. Giving up foreign rights for 15 years. You can predict a certain buying pattern of movies in certain territories. The UK has developed a banking product which may have supported the financing of Phoenix Entertainment - a TVC credit enhancement for the gap. Banks are now in the insurance policy business with gap financing.

Sigurjon "Joni" Sighvatsson, President, Lakeshore Entertainment (co-founder Propoganda)

Kagan asks if Sighvatsson's model on investing equity in an independent can work.

Lakeshore's financing consists of a combination of jv's, self-financing, and real estate investments from Chicago. Sighvatsson's philosophy from the beginning was to produce small films. Now, the company will be involved in the financing of films with budgets from $3 million-$30 million. (A mid-level studio budget is $34 million). Studios just can't make films as cheaply as indies can. We can make them 25% cheaper. Polygram teamed with WB on SLEEPERS, and with Disney on 1000 ACRES. Maximum expected from a foreign on pre-sale basis is $35 million. Independent distributors worldwide are hungry for product. Earlier they over paid for Carolco films, etc, and suffered a lot of losses. These distributors did not make money. The old model was 50% domestic/50% foreign. Low budget art films THE PIANO and PULP FICTION changed landscape of marketplace. Now it's not about the production costs of a movie, but about the quality of the movie as well. The budgets of these films was $7 million and the risks were substantially less. Lakeshore is at Paramount because we don't have a domestic distribution deal. Paramount distributes Lakeshhore pictures with budgets above $10 million, and Lakeshore shares in the p & a costs. This insures distribution of our product. The p & a is least risk money because it's the last in and first out. Lot of equity funding available. In order to take advantage of opportunities in low budget business you have to pull $ trigger quickly. Partners take risk 20-30% per picture. When we sell film overseas with major U.S. distribution, it enhances value of the film. We take most of risk on funding of film so favorable terms with Paramount. We can greenlight at a much greater speed.. Time to get papers and financing in place but with equity we can greenlight. We are in the content business and we want to own our own negatives, we just bought old New World library from Tran-Atlantic - B titles. We could therefore set up our own foreign sales agency. We have our own sales operation. Forced now into position of making movies. We don't want to be in the domestic distribution business. Will be in acquisitions business to get titles from indies to distribute. Now picking up at script stage. Quality control from beginning.

Stephen Scharf, Partner, Ent Dept, O'Melvany & Myers and lecturer Stanford Law School (his alma mater). His clients include Sony Pictures Entertainment and The Walt Disney Company and Phoenix Entertainment.

Paraphrased comments: Regarding financing structures, everything is evolutionary. The law firm is involved with big budget pictures. More and more negotiating splits rights deals for domestic and foreign distribution. The video market has dried up for lower budget pix. Fox/New Millennium deal - credit enhancement with insurance company insures repayment of the debt. The use of insurance is new. Accounting treatment on pictures may result in lower cost of funds, cheaper money for Fox. Triple AAA rating from TapMac which guarantees repayment of debt. Insurance policy for Phoenix - they distribute through Sony except for Canal+ distribution deal, Showtime deal. Phoenix doesn't want to sell upside of picture so this was factored into the risk-reward strategy. Scharf said he used Kagan sources to show profile of returns from majors, etc.

Note: Every Tuesday morning you can read Kagan's Movie Tracking report on the Internet at PKBaseline.com.