The Big Picture

by Ben Fritz

  So she agreed to a compromise: Lynton would be named CEO and chairman of Sony Pictures, but she would be given the new title of chairman of the motion picture group and would report directly to Stringer. She and Lynton were partners, in other words, if not quite equal.

  It was a “weird, arranged India marriage,” Lynton said. The man whose only experience in the movie business had been a brief and sour one and the woman who had never done anything else; the analytical, worldly, and mercurial Harvard MBA and the gut-driven, emotional, and transparent Los Angeles lifer; the man that the corporate suits trusted and the woman Hollywood adored.

  “If these two can’t work together, I’ll eat my hat,” declared Stringer.

  Making It Work

  The first sign that Stringer was right came in the office assignments for Lynton and Pascal. Rather than exercise the prerogative that came with his title, the new CEO allowed Pascal to have the palatial room that once belonged to the MGM mogul Louis B. Mayer—the literal and metaphorical power center of the Thalberg Building, where the top executives of Sony Pictures worked.

  The born-wealthy, double-Harvard-degree-holding CEO didn’t need external signs of power as much as his UCLA-graduate partner did, and so was happy to take an office of maybe half the size next door. She got a balcony with a stunning view all the way to the Hollywood Hills. He got a few windows. And even that, he would later say, was more than he needed.

  For Pascal, taking the office made famous by Mayer and most recently occupied by Calley was a sign she had arrived. “Everyone knows how I feel about my Louie b Mayer office And what it means,” she wrote. To office visitors, she sometimes put things more bluntly: “Don’t forget I’m the one who runs this place.”

  Many couldn’t imagine how the man who pulled up to work in a Volkswagen and the woman whose Range Rover was met in the parking lot by assistants could get along. But they did, because Lynton deferred to her on most movie-making issues while handling strategy, administration, relations with Tokyo, and a small but growing television business—all of which she was happy to ignore.

  “Amy lives and breathes movies, she works 24/7, and she was really into every detail the way Walt Disney was in the early days of his studio,” said Mike De Luca, a producer who worked with Sony frequently and was an executive there from 2013 to 2015. “Michael had opinions, but he was occupied with other stuff and he delegated a lot.”

  The duo even came to consider each other friends, attending the same synagogue, remembering birthdays, and congratulating each other on successes. “I love you very much And I know you feel the same way about me,” Pascal told Lynton. “We are so different I want that to be what’s good about us.” Conflicts between the two were rare. And in a business where temper tantrums were still considered acceptable behavior by many studio executives, Lynton and Pascal set a different tone.

  “For a long time, it was the nicest place to make a movie and the most talent-friendly,” said De Luca.

  Pascal was a hugger who always lingered too long in conversations and couldn’t be more interested in the personal lives of the people she worked with. Lynton was more standoffish, rarely having one-on-one lunches with his executives or inquiring about their families. But he rarely lost his temper and didn’t have a mean bone in his body, so though he didn’t earn the kind of love and loyalty Pascal did, most of his employees respected him.

  Their first year together, 2004, was hugely successful. The fan-pleasing blockbuster Spider-Man 2, solid hits like Adam Sandler and Drew Barrymore’s 50 First Dates, and the horror film The Grudge brought Sony’s motion picture business $550 million in profits—nearly double its internal target and the highest it would reach for at least another decade. The problems of the past seemed to be over and done with.

  “Tokyo finally believes this is a business, which, if run in a disciplined way, can be a sound business,” boasted Stringer.

  The year 2005, however, was a rude awakening. Nearly all of the studio’s big bets bombed, including a remake of Bewitched, the action movie Stealth, and the sequel XXX: State of the Union. Motion picture profits plummeted to $31 million. Lynton and Pascal responded in a way that would become a pattern when times got tough at the box office. They replaced their marketing president and promised to take a hard look at costs and their greenlight process. But when things got better, as they did in 2006, with hits like The Da Vinci Code, starring Tom Hanks in an adaptation of the best-selling thriller, and Will Ferrell’s comedy Talladega Nights, all was forgotten and forgiven.

  As profits for the motion picture group swung up to $305 million that year, Stringer gave Pascal a five-year contract extension and a new title: “co-chairman” of the studio. (Lynton remained “chairman”; in Hollywood, “co-” does not always indicate equal rank.) In practice, her job of running the movie business stayed the same. But it was the highest title she could be given without usurping Lynton.

  Both were well compensated for their work. Pascal made between $6.7 million and $14.2 million annually from 2002 to 2014 (“did I really get this?” she wrote to her lawyer about her peak pay, in 2011). Lynton, who was more circumspect about discussing money in his e-mails, made $13 million in 2013, when Pascal made $12 million.

  For most of Pascal’s reign, the job wasn’t easy, but it was simple: it was just a question of putting together the best slate possible and then hoping that the “movie gods” smiled on her studio.

  She wasn’t wrong. For a decade starting in the late 1990s, Hollywood experienced one of its flushest moments, thanks to three letters: DVD. Anyone who shopped before 2012 remembers when huge sections of stores like Wal-Mart, Target, and Best Buy were filled with DVDs. The hottest new releases were often priced as low as $13, well below their wholesale cost of $18, in order to lure people into the store. At that price, why not buy a movie and save yourself the trouble of making two trips to Blockbuster Video to rent and return it?

  DVD collecting became such an addiction that roughly 15 percent of the DVDs sold in the mid-2000s were never removed from their shrink-wrap, a studio home-entertainment president once admitted to me, with a mix of glee and shame. With studios earning a profit of about $15 on each disc, it became easier than ever to make money in the movie business. All but the biggest flops were profitable.

  Hollywood operated like a “welfare state,” in the words of one veteran executive, and everyone enjoyed the windfall, from executives to producers to agents to talent. In late 2003, cost control at Sony consisted of a policy to give no more than 25 percent of the revenues of a movie to its stars, director, and producers. A decade later, the concept of “gross points,” in which a studio hands out big chunks of revenue to talent before it has even made a profit, would become an embarrassing relic of the past.

  In those golden days, it made sense to produce movies for everyone—and a lot of them. The number of movies released annually by the six major studios peaked at 204 in 2006, the same year that home-entertainment revenue hovered near a high of almost $25 billion.

  Sony thrived in this environment because Pascal thrived at making all kinds of movies for all types of people. She wasn’t much at maximizing the value of a branded franchise, but she knew how to develop a script to perfection, make just the right change in the editing room to take a film from good to great, and how to charm the most talented filmmakers and actors. Stars like Sandler and Smith and Ferrell and Nicole Kidman loved to work at Sony because Pascal loved to have them. She was like a den mother for the industry’s A-listers, albeit one who paid her scouts lavishly.

  A typical Sony slate at the time could include twenty-five movies in one year, of which two or three were big-budget “event” films like The Da Vinci Code and the James Bond sequel Casino Royale. The rest were mid-budget movies that crossed genres and audiences, be they dumb comedies like Adam Sandler’s Click, high-minded dramas like The Pursuit of Happyness (which earned Will Smith his second Academy Award nomination), or romantic heart-warmers like The Holiday, starring Cam
eron Diaz, Kate Winslet, Jude Law, and Jack Black.

  All around Hollywood, studios were making risky movies. They were not based on well-known intellectual property, and each cost between $30 million and $120 million to make. Alfonso Cuarón’s post-apocalyptic Children of Men, George Clooney’s taut thriller Michael Clayton, the psychological crime tale Zodiac, Tom Hanks’s true-life comedy Charlie Wilson’s War, the petro-political drama Syriana, and the director Michael Mann’s Collateral and Public Enemies are just a small sampling of the films released by major studios in the 2000s that would stand virtually no chance of making their release slates today.

  Though she employed a large team of production executives, Sony’s film output was ultimately defined by the “Amy factor”—the tastes and sensibilities of Pascal. “If she doesn’t get it, we don’t make it,” said one executive who worked for her. Her tastes weren’t narrow—Sony successfully made everything from Adam Sandler comedies to sports stories to Spider-Man. But her “comfort zone,” as one agent put it, was mid-budget original films for adults rather than global “event” films engineered to spawn sequels.

  Sony’s motion picture profits did swing up and down in the 2000s, which according to conventional Hollywood thinking was inevitable, since it was tough to tell ahead of time which original films would prove popular and which wouldn’t. But with Lynton managing the business and Pascal the moviemaking, financial results were satisfying more often than not. The studio beat its motion-picture-group-profit targets five out of the seven fiscal years from 2002 through 2008, earning an annual average of $329 million.

  Over the next seven years, however, the movie division missed its profit targets every year but one, and its average annual profit was nearly unchanged, despite inflation. Sony Corporation expected more from its movie studio as the global economy grew, but Sony Pictures didn’t deliver.

  It wasn’t the recession, during which cinema attendance actually grew, as people cut back on more expensive leisure activities, and it wasn’t that Pascal lost her touch. The movie business was turning upside down, and Sony Pictures was painfully slow to react.

  2

  Reality Bites

  How Everything Went Wrong for the Movie Business

  In 2009, terror struck at the hearts of Hollywood moguls like Amy Pascal. The sudden and unexpected drop in DVD sales was like having a leg yanked out from under a table at which they had feasted on gourmet food for a decade.

  Internet piracy was a major cause. Also, a pair of innovative businesses, Netflix and Redbox, were giving consumers a far more efficient way to watch movies than buying them at Target or renting them at Blockbuster. For a dollar per night at Redbox or less than ten dollars per month from Netflix, consumers could watch as many, or as few, movies as they wanted and return them in the mail or at the grocery store. Actual consumption of films went up, but studios’ home-entertainment profits tumbled because people were spending far less to watch them.

  Video-on-demand rentals and digital downloads helped a bit as the years went on, but the movie business never fully recovered. Annual home-entertainment revenue, and the studio profits that follow from it, fell by nearly half between 2004 and 2016, from nearly $22 billion to $12 billion.

  At the same time, Americans became much less important to the American movie business. As the economies of developing nations throughout Latin America and Asia grew, theater construction surged and the rising middle class spent their newfound wealth on what was to them the novel and luxurious experience of a night out to see the latest Hollywood flick. International box office exploded, from $8.6 billion in 2001 to $27.2 billion in 2016. The biggest driver of growth in recent years has been China; its box office grew from $2 billion in 2011 to $6.6 billion in 2016 and is expected to surpass U.S. box office before the end of the decade.

  Domestic box office, meanwhile, grew by only 40 percent between 2001 and 2015, to $11.4 billion—reflecting a slight decline in attendance, once you factor in ticket price increases.

  Both trends were like a siren’s wail to studio executives, urging them to make fewer, bigger, louder movies. DVD sales declines were smallest for movies with budgets of more than $75 million, and as studios tried to cut costs in response to plummeting home-entertainment revenues, risky original scripts and adaptations of highbrow books were the first to go. Annual movie releases by major studios were 139 in 2016, down 32 percent from their peak in 2006, and the decline is explained entirely by the evaporation of interesting, intelligent mid-budget films.

  Studios realized their assumption that they had to make every type of movie for everyone was no longer true. So they focused on the types of movies that delivered the biggest and most consistent profits to their publicly traded parent corporations.

  Increasingly, that meant movies that appealed to audiences in Russia, Brazil, and China. These consumers weren’t likely to understand the cultural subtleties of an American drama or to consider people talking or even running for their lives to be adequate bang for their buck on an expensive night out. They expected spectacle, particularly if they were paying premiums for an IMAX or 3D screen, and they wanted stories that made sense to a villager in China, a resident of Rio de Janeiro, or a teenager in Kansas City.

  Transformers, in other words. And The Avengers. And Jurassic World and Fast and Furious and Star Wars. With the exception of 1997’s Titanic, which made a spectacle out of the sinking of a cruise ship and Leonardo DiCaprio’s eyes, the forty-eight highest-grossing Hollywood films overseas are all visual-effects-heavy action-adventure films or family animation.

  The transformation of Hollywood into a foreign-first business has also made sequels, spinoffs, and cinematic universes the smartest bet in the movie business. Newly minted middle-class customers in developing nations like China love prestige Western brands like Apple, Louis Vuitton, and Gucci. The same logic applies in cinemas. American cineastes may reach for the Advil when offered the choice between the latest superhero, dinosaur, or talking robot spinoff, but to many foreign moviegoers, that response is somewhere between condescending and confounding—the equivalent of complaining that there aren’t enough modern art installations at Disneyland.

  One more trend fundamentally changed the movie business this decade: the golden age of television. As TV has gotten better, the pressure on major movie studios is not to keep up with Breaking Bad, Orange Is the New Black, and Fargo (a property that was perfect for the movie business of the 1990s and for the TV business of today), but rather to stand out by offering something different. Most people, particularly middle-aged adults, simply don’t go to the movies for sophisticated character dramas anymore. Why would they, when there are so many on their DVR and Netflix and Amazon queues at home?

  Why go to the movie theater at all, audiences have asked over the past few years, when movie tickets, snacks, and a babysitter can easily cost a hundred bucks and there is so much good TV to watch and so many apps on their tablets to interact with?

  Moviegoing is no longer a habit the way it used to be, particularly for people ages eighteen through forty-nine. They saw two fewer films per year on average in 2016 than they did in 2012. When they do go to the cinema, modern consumers increasingly prefer to know what they’re in for, which means a brand-name franchise. Even big-budget, star-driven action movies with stellar reviews, like Tom Cruise’s excellent Edge of Tomorrow, have struggled. And in the same year, Star Wars: The Force Awakens destroyed box-office records by essentially re-creating a movie from forty years ago.

  Sony’s Struggles

  Some in Hollywood adapted well to this new reality. Disney, as we’ll explore in depth later, reoriented its studio with brands like Marvel and Star Wars and movies based on fairy tales. Warner Bros., which pioneered the global tentpole in the early 2000s with Harry Potter and owned DC superheroes such as Batman and Superman, as well as Lego and the Hobbit, was consistently at or near the front of the pack.

  Sony was not. Between 2003 and 2009 it was ranked in the top three o
f the six major studios in domestic box office every year but two. Between 2010 and 2016, it was in the bottom half of the pack every year but two.

  More troubling, as international box office became more important, the weakness of Sony’s overseas operations hurt it more and more. It was ranked fifth or sixth among the major Hollywood studios in foreign grosses every year between 2010 and 2016 except one. While other studios hired people with overseas expertise for top positions, Pascal and her team remained far too U.S.-oriented for far too long.

  The biggest reason for Sony’s box-office struggles, however, was that it hadn’t acquired or built many cinematic series that qualified as global franchises. Sony’s focus on mid-budget star vehicles had kept the studio lights on when that type of film was consistently profitable. But as the industry shifted, Sony’s cupboards were almost bare.

  Still stung by the big write-down it took on its initial purchase of Columbia, the Japanese parent company was reluctant to make the kinds of investments that drove the success of competitors like Disney, which bought Pixar, Marvel, and Lucasfilm, or Warner Bros., which signed a costly partnership with J. K. Rowling, the creator of the Harry Potter stories. Discussions about big investments for Sony’s movie business rarely translated into action.

  The studio’s slate still largely reflected the singular version of the mogul who oversaw it. But as the economics of the film business and the tastes of global audiences evolved, Amy Pascal’s vision grew increasingly misaligned with what the job required.

  “The truth [is] that we do not have as many frnachises aas other companies,” she wrote to her friend Doug Belgrad, president of Sony’s motion picture group, in a candid admission of failure. “The cornerstones of our slates were Adam Sandler, Will S[mith] and Will F[errell]. For a long period of time these relationships provided a steady stream of reliable, profitable films. This was an advantage we had vs. other studios, but it was about talent rather than properties . . . Over time, like any franchise, the freshness wore off. And unlike a property or brand, you can’t reboot a movie star . . . We stayed too long at the party and got behind, as our competitors built their businesses for the future.”