MGM film studio remade with a low-profile and a focused strategy

The historic MGM film studio, which made “The Wizard of Oz” and “Singin’ in the Rain” on one of Hollywood’s largest lots and for decades boasted that it employed “more stars than there are in heaven,” is today housed on six floors of a nondescript Beverly Hills office building.

Sent into bankruptcy last year after decades of dysfunction, the former home of Louis B. Mayer and Leo the Lion is now led by two low-key executives who have transformed the 87-year-old studio into, essentially, an international TV rights company servicing MGM’s library of 4,100 movies.

Under chief executives Gary Barber and Roger Birnbaum, who celebrate their first anniversary on the job this month, MGM no longer releases or markets its own movies. The company’s nascent film production business, which kicks off next week with “The Girl With the Dragon Tattoo,” consists entirely of pictures on which other studios put in half or more of the money and are doing most of the heavy lifting, including an upcoming James Bond film and a pair of “Hobbit” movies directed by Peter Jackson. Its small internal development slate is mostly remakes of old MGM movies such as “RoboCop” and “Death Wish.”

To some it’s a tale of lost luster in corporate Hollywood. But others see it as the focused strategy that MGM has long needed.

“The strategy of focusing on international television rights is exactly what anyone running MGM should be doing because it’s the greatest source of revenue left in the library,” said Harry Sloan, the studio’s chief executive from 2005 to 2009.

Since the 1980s, bad management, ownership shuffles and crushing debt have left MGM a second-rate studio in the industry it once ruled. By last year, unable to make interest payments on $5 billion in bonds, it came under the control of a group of investment firms with little to no experience in the entertainment industry.

Believing that purchase offers of up to $1.5 billion from bidders including Time Warner Inc. were too low, the debt owners recruited Barber and Birnbaum to take a stab.

Barber and Birnbaum, who declined to be interviewed, are not flashy moguls who turn heads at premieres. Instead, they’re known as savvy deal makers. Barber is an accountant from South Africa with extensive knowledge of the international entertainment business. Birnbaum moved from the record business into film production, with stints at Fox, United Artists and Caravan.

The two industry veterans founded Spyglass Entertainment in 1998 primarily to invest in other studios’ movies. One of their first was “The Sixth Sense,” director M. Night Shyamalan’s hit 1999 thriller that the pair bought from a nervous Walt Disney Studios. Over the next 12 years, Spyglass invested in more than 50 movies, including “Memoirs of a Geisha,” “Seabiscuit” and “Star Trek.”

During Chapter 11 reorganization last year, MGM’s debt was eliminated and replaced with a $500-million credit facility. Barber and Birnbaum slashed the staff to fewer than 300 from more than 400 while bringing over about 25 employees from their prior venture, leading some to say the new MGM could also be called “Spyglass 2.0.”

Before bankruptcy, the cash flow from MGM’s library declined by nearly half over a three-year period to about $250 million annually as the DVD market weakened, according to a person familiar with the numbers but not authorized to disclose them. But a growing percentage of revenue came from foreign TV sales and MGM-owned networks in countries including India and Italy.

On a recent conference call with shareholders, Barber said the company has “received extremely positive feedback from key broadcasters.” In addition, MGM is seeking to grow digital revenue and has signed deals in Latin America and Britain with Netflix.

Getting foreign distributors interested in MGM’s collection of movies including “Dances with Wolves,” “When Harry Met Sally” and “Rocky” sequels is a lot easier, experts note, when you can open the door with the newest James Bond or “Hobbit” film.

“New productions can enhance library sales, allowing you to have conversations with broadcasters and other distributors who are most attracted to the fresh content,” said Patrick Russo, a principal at the Salter Group, a media business advisory firm.

Like Spyglass before it, MGM has set up a number of co-financing pacts, but this time with a key provision in mind: “MGM tries to get international television rights,” Barber told shareholders.

A February agreement that let Sony co-finance and distribute two James Bond movies, starting with next November’s “Skyfall,” gave MGM the ability to buy into several of Sony’s films. The first is “The Girl With the Dragon Tattoo,” in which MGM invested 20% of the approximately $90-million production budget.

MGM also owns 50% of the upcoming pair of “Hobbit” movies.

Although MGM has yet to acquire a single original script or pitch in the last year, the studio is developing its own small slate of movies. “Horrible Bosses” director Seth Gordon is set to helm a remake of MGM’s 1983 hit “War Games,” for instance, while “Rabbit Hole” playwright David Lindsay-Abaire is writing a new version of its 1982 film “Poltergeist.” In addition, the small motion picture department brought over several projects from Spyglass, including a new “Hercules” to be directed by Brett Ratner. They also acquired the Eminem boxing drama “Southpaw” previously in development at DreamWorks.

People who have done business with MGM say its executives are not seeking movies designed to have Oscar appeal, such as Warner’s “J. Edgar,” or to make the most money in American theaters, such as Universal’s “Bridesmaids.”

“Worldwide box-office potential is on every studio’s mind, but foreign appeal is particularly critical now to MGM,” said Nicole Clemens, head of the motion picture literary department at the International Creative Management talent agency.

Although MGM’s revenue declined in the first nine months with virtually no new content released, it swung from negative to positive net income because of drastically reduced costs.

It’s a notable turnaround, but shareholders hoping the company is later sold or taken public have reason for concern. On a recent conference call, one shareholder expressed frustration that in confidential transactions not listed on public markets, the stock has “drifted significantly lower since exit [from bankruptcy].” A knowledgeable person who requested anonymity because the company’s share price is private said MGM’s equity value has fallen about 20% over that period.

Barber said the company will start buying back shares because it believes “the stock is currently undervalued.”

If the efforts fail, MGM won’t have to worry about selling its back lot or even taking its logo off a building facade as owners have done in the past. The only signs on the outside of the company’s new headquarters are “for lease” notices over empty retail space on the ground floor.

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