02.09.09

How Spielberg Got Away

Why did DreamWorks leave Universal at the altar and run off with Disney? Kim Masters deconstructs the deal that stunned Hollywood.

The spectacular collapse of Universal’s deal with DreamWorks last Friday was like a big, black period at the end of a long, scary sentence. People knew the industry was facing deep problems but the idea that Steven Spielberg could not make a deal at the studio that he has always considered his home hit a deep nerve.

“The bubble has finally burst in Hollywood,” said a prominent producer on Friday. “It is a wild fucking time.”

At the beginning of the week, Disney announced that quarterly net income had dropped a stomach-churning 32 percent; operating income at the movie studio was down 64 percent. News Corp. then announced that it had lost $6.4 billion in its second quarter and was taking an $8.4 billion write-down. Time Warner had announced its own bad news last month.

"You don’t want to embarrass Ron Meyer publicly. He hates that more than anything."

For the movie business, the great terror was that DVD sales might be down forever. Yes, the box-office numbers for January were good. But money from theaters accounts for only about 20 percent of a studio’s return from a film. Without DVD sales, most movies are losers. Throw in the strength of the dollar and the head of one company says a lot of movies that were expected to be profitable thanks to a strong performance overseas must now be re-evaluated.

And there’s more bad news. Studios like Universal, Disney, and Fox are part of companies that own broadcast networks, cable channels, and local television stations—all of which are being pummeled by cutbacks in advertising. With all of these winds howling, it’s hard to resist the temptation to invoke that overused phrase “perfect storm.”

At the end of this dismal week, Universal discovered—apparently from press inquiries—that DreamWorks was talking to Disney. It had long been expected that DreamWorks, which broke up with Paramount last summer, would return to Universal, as Spielberg wished. (Despite the deal with Paramount, he has never physically left the lot.)

Now we learn that the DreamWorks negotiation to distribute its movies through Universal had been stalled for weeks. While Universal believed it was still in exclusive talks, DreamWorks was in fact reaching out to Disney. That discovery has led to feelings of rage and of betrayal at Universal—and some ugly name-calling.

A source familiar with the thinking at DreamWorks says that Spielberg and his chief executive, Stacey Snider—the former chairman of Universal—felt the company’s survival depended on turning to Disney. DreamWorks had been promised $500 million from Mumbai-based Reliance ADA Group, but to get that money, DreamWorks had to raise several hundred million dollars on its own. Of course, if anyone in the industry can raise money, it should be Spielberg. But in this economy, even his name was no longer magic. DreamWorks had the outlines of a deal with Universal and then it had to go back and ask for more, and more, and still more.

Ultimately, DreamWorks asked Universal for a couple of key points: a $250 million loan and the chance to put six of its films into the studio’s lucrative deal with HBO—a deal worth millions of dollars per movie. (DreamWorks had thought it could make its own, separate deal with HBO after it left Paramount, but no dice.)

A source knowledgeable about Universal’s position says the studio never understood that getting access to those HBO slots was a deal breaker and was never told that DreamWorks was feeling desperate. That source also says the studio—or its parent company, General Electric—ultimately agreed to loan the $250 million. But the studio could not figure out why it should give that HBO money to DreamWorks. Universal has expensive films of its own in the works and it wanted every dime to help pay for those. It was willing to give DreamWorks two slots but not six.

And so the parties were at an impasse (even if Universal didn’t see it that way). But Spielberg had one thing that was interesting to Universal. Since 1984, Spielberg has collected 2 percent of the money from all Universal theme parks outside Southern California—Orlando, Japan, Hong Kong, etc. An executive familiar with the terms says this is a “humongous deal” for Spielberg, who is very involved with the parks and visits them and provides his notes on the attractions. The deal also includes a provision allowing Spielberg to demand that Universal buy him out altogether—meaning that Universal would have to cough up hundreds of millions of dollars.

This deal point hangs over Universal as a potentially very costly item in terms of cash (especially at a time when cash is impossible to come by). And it is an issue should GE want to sell the theme parks or the whole of NBC Universal (as some suspect might happen if the opportunity presented itself). So Universal suggested that if Spielberg wanted to make a deal for DreamWorks, he should promise that he wouldn’t exercise that buyout option for several years. Spielberg disliked that proposal so much that Universal dropped it, fast.

But according to the source familiar with the DreamWorks position, Universal sought to impose another condition: If it loaned DreamWorks all that money, it wanted to be first in line to be paid back—ahead of the banks (which still would have to come up with a few hundred million). “The terms that were asked were breaking all the standard rules of how loan money is prioritized,” this source says. “It didn’t matter what Steven wanted. But [Universal] kept saying it should work.”

The talks were stuck for the past few weeks, during which time Universal apparently heard nothing from DreamWorks. When Universal chief Ron Meyer found out that DreamWorks was in fact talking to Disney, he got on the phone with DreamWorks chief executive Stacey Snider and said she and Spielberg had behaved “like pigs” ( as has been reported elsewhere). Other words, like “despicable and deplorable,” have also been used.

An industry veteran close to all the players says he thinks DreamWorks made a mistake. “If I were the lawyer negotiating the deal for DreamWorks, I’d have had Steven Spielberg walk over to Ronnie Meyer’s office and say, `We’re in a bind. If you can’t give us [what we need] we have to talk elsewhere. We’re bleeding here.’ By not talking, you burn your bridges, which is exactly what happened. You don’t want to embarrass Ron Meyer publicly. He hates that more than anything.” (A source close to Meyer says he’s not embarrassed—just mad.)

So who decided to start talks with Disney without telling Universal? A strong candidate in the minds of the Universal team is Alan Levine of JP Morgan Chase, the point man on the negotiations for India-based giant Reliance and by extension, DreamWorks.

Levine in an earlier life presided as president and chief operating officer of Sony Pictures Entertainment during the disastrous tenure of Peter Guber and Jon Peters. That debacle resulted in Sony’s taking a $3.2 billion write-down. Levine was the last man standing and then he, too, finally was dismissed. Eventually he wound up with JP Morgan Chase. A knowledgeable source says Universal has its suspicions that Levine (who could not be reached for comment) hoped to play Disney off against Universal, but wound up with an explosion when news of the Disney talks leaked.

“I guarantee you—Alan wants to be a hero to Reliance,” says this source. In that context, perhaps protecting DreamWorks’s relationships was not a primary consideration.

A source with knowledge of the thinking at DreamWorks says the company doesn’t see Levine as the problem. Levine “wasn’t equipped to run a studio” when he was at Sony Pictures,” this person says, but “in the capacity that he has operated on this deal, he has done a good job and the proof will be the ease with which Disney will make this deal.”

Perhaps it will be easy because Disney has the whip hand. An industry veteran who knows all the players well puts it this way: “I promise, whatever issues were open between Disney and DreamWorks will be resolved 100 percent in Disney’s favor. There are no other buyers and DreamWorks needs money desperately.”

Kim Masters covers the business of entertainment for NPR News. She is also the author of The Keys to the Kingdom: The Rise of Michael Eisner and the Fall of Everybody Else.