New Line, old story: A small studio falls

By Claudia Eller

Feb. 29, 2008 12 AM PT

Times Staff Writer

Roll the credits on New Line Cinema, the 40-year-old studio behind such iconic movie franchises as “The Lord of the Rings,” “Austin Powers” and “A Nightmare on Elm Street.”

The company will lay off hundreds of employees between its Los Angeles and New York facilities and be merged into its corporate sibling, Warner Bros.

The consolidation marks the end of the line for the once scrappy producer that prided itself on taking creative risks that other studios wouldn’t. But in recent years New Line strayed from its street-smart roots with a slew of costly flops that ended its role as a big-time player in the volatile movie business.

In a sign of retrenchment that is increasingly prevalent in Hollywood, the company will now focus on making fewer movies limited to the kind of smaller, low-cost “genre” horror and comedy pictures upon which it built its name.

New Line becomes the latest free-standing Hollywood studio to abandon its ambitions as a full-fledged company in a market in which bloated overhead and soaring production and marketing costs have squeezed profits amid flat movie attendance and sagging DVD sales.

It comes just as the studio is to release today what could be one of its most promising comedies in a long time, the basketball spoof “Semi-Pro” starring Will Ferrell.

Over the last three years, DreamWorks SKG, the once highflying live-action studio founded by Steven Spielberg, David Geffen and Jeffrey Katzenberg, was sold to Viacom Inc. and scaled back as part of the media company’s Paramount Pictures. At the same time, Harvey and Bob Weinstein’s Miramax Films became a much smaller unit of owner Walt Disney Co. after the brothers were forced out. Metro-Goldwyn-Mayer was gobbled up by a consortium of investors including Sony Pictures, Comcast Corp. and two major private equity firms.

“People start out with high hopes for these indie studios,” media analyst Harold Vogel said. “But ultimately they encounter rising costs and difficulties in managing the businesses. At some point, the cash flow and balance sheets fall short of their ambitions.”

The consolidation of New Line is the first corporate maneuver by Time Warner Inc.’s recently named Chief Executive Jeffrey Bewkes to rein in costs at the New York media giant, whose stock price has stagnated since its merger with America Online eight years ago. Bewkes is under pressure from shareholders to boost profitability at Time Warner, which owns cable channels such as CNN and HBO; cable systems that are the largest in Southern California; and publishing operations that include Time, Sports Illustrated and People magazines.

In a conference call with media analysts this month, Bewkes announced plans to immediately eliminate 100 jobs at Time Warner’s corporate headquarters, split AOL into two parts, possibly reduce its 84% ownership of Time Warner Cable and target New Line for “near-term cost cuts.”

That was an understatement. As a part of Warner Bros., New Line’s staff of 600 will be vastly scaled back and the company will no longer greenlight, market or distribute its own movies. Although New Line executives will continue to oversee the development and production of its own films, final say on all matters rests with Warner Bros. President Alan Horn. New Line will make only half the 12 to 14 pictures a year it did previously, which will now be distributed worldwide by Warner Bros.

Bewkes will meet today with New Line’s New York employees and address its Los Angeles staff via satellite at the Pacific Design Center.

“Between the cost savings and the revenue enhancements, we believe we can at least double the earnings of New Line,” Bewkes said in an interview. He added that those gains would more than offset “substantial restructuring charges” that Time Warner would incur as a result of New Line’s consolidation and would benefit earnings as soon as next year.

“This is a no-brainer move,” said Richard Greenfield, an analyst with Pali Research. “There’s no reason to have two separate infrastructures.”

New Line’s diminished star is a huge blow for New Line founder, Bob Shaye, 68, and his longtime top lieutenant, co-Chairman and co-Chief Executive Michael Lynne, 66, both of whom learned Thursday that they would leave the company.

No successor was named. In recent weeks, the pair, whose contracts expire at the end of the year, made a last-ditch attempt to stay, presenting Time Warner management with a plan that would have ensured their continued employment.

In an e-mail to employees, Shaye said their departure was a “painful decision, because we love New Line and the people who work here have been like our second families.”

Shaye, who founded New Line in his Greenwich Village apartment in 1967 by peddling “Reefer Madness” to college campuses, continued to reign over the company even after he sold it to media magnate Ted Turner in 1994. Two years later the company was swept up in Time Warner’s purchase of Turner’s cable empire. Over the next 12 years, Shaye continued to run New Line as a fiefdom.

But his and Lynne’s relationship with their corporate parent grew strained as New Line began making costlier mainstream movies in the mid-1990s, including Warren Beatty’s “Town and Country,” “Little Nicky” with Adam Sandler and “The Island of Dr. Moreau,” starring Marlon Brando. Such misfires prompted Time Warner to exercise more scrutiny.

In 1997, Time Warner considered selling New Line but was resisted by Shaye’s ally Turner, who as vice chairman and a major shareholder held a lot of sway.

A couple of years later, Shaye made an audacious bet that changed the course of New Line’s fortunes -- at least temporarily. He committed hundreds of millions of dollars to making three “Lord of the Rings” movies after New Zealand director Peter Jackson’s idea to bring the literary classic to the screen was rejected by other major studios.

The first “Rings” movie grossed $871 million worldwide, followed by a two sequels that amassed more than $2 billion in ticket sales. That was a tough act to follow.

Although all studios have ups and downs, New Line’s poor track record in recent years added to the pressures on Shaye and Lynne.

Since the last “Rings” film in 2003, the studio has had some hits -- “The Wedding Crashers,” “Elf” and last year’s “Hairspray.” But the hits were outnumbered by flops such as “The Last Mimzy,” a family sci-fi fantasy directed by Shaye himself; “Rendition,” a thriller with Reese Witherspoon; and “The Number 23,” a dark thriller starring Jim Carrey.

Its biggest miscalculation came in December with a failed attempt to launch a new movie franchise based on Philip Pullman’s literary trilogy “His Dark Materials.” New Line spent at least $180 million to produce and tens of millions more to market the first film, “The Golden Compass,” which only managed $70 million in domestic ticket sales.

Although the movie grossed more than $250 million overseas, New Line had sold off the foreign rights to offset its high budget. But that longtime practice of the company to hedge its bets runs counter to Warner’s strategy to retain worldwide distribution rights.

“International revenues are becoming more important and it doesn’t make sense to give up foreign rights, where a lot of the upside is,” Bewkes said.

The Burbank studio will now also be able to exploit New Line’s valuable library of about 500 titles, including “Teenage Mutant Ninja Turtles,” “The Texas Chainsaw Massacre,” David Fincher’s thriller “Seven,” and the Jim Carrey comedies “The Mask” and “Dumb and Dumber.”

But the jewel in the crown is a planned adaptation of “The Hobbit,” J.R.R. Tolkien’s predecessor novel to the “Lord of the Rings” trilogy. The project was in abeyance until New Line and Jackson settled a lawsuit in December over the accounting of the first film’s income. That paves the way for Jackson to co-executive produce “The Hobbit,” which MGM will co-finance and release internationally.

But New Line’s legal troubles are far from over. Tolkien’s trust is suing the studio for allegedly cheating it out of at least $150 million in profit from the franchise.

On a more promising note, New Line has several potential hits in the wings, including a movie version of HBO’s popular series “Sex and the City,” a screen adaptation of Cornelia Funke’s fantasy novel “Inkheart” and “Journey 3-D,” based on Jules Verne’s classic “Journey to the Center of the Earth,” starring Brendan Fraser.

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The art of the franchise

New Line has created some of Hollywood’s most notable movies series over its four-decade history. Among the better remembered:

“The Lord of the Rings,” trilogy: $2.9 billion*

“Rush Hour,” trilogy: $846.8 million*

“Austin Powers,” trilogy: $676.4 million*

“A Nightmare on Elm Street,” eight films: $307.4 million**

“Teenage Mutant Ninja Turtles,” three films: $256 million**

*Worldwide ticket sales

**Domestic ticket sales

Sources: BoxOfficeMojo.com; Media by Numbers