Hollywood’s Paramount rule
Summary
Skydance’s David Ellison breaks it as he spends his own money to acquire the studio.The first rule of Hollywood: Never spend your own money. Ask David Ellison, who learned the hard way with his mostly self-financed 2006 film “Flyboys" starring James Franco and, yes, David Ellison. It cost $60 million to make and did under $18 million at the box office. He told me he’d never do that again.
Now 41, an avid pilot and son of $172 billion net worth Oracle founder Larry Ellison, Mr. Ellison is set to take over the storied Paramount studio (maker of films from “The Ten Commandments" to “The Godfather").
After the 2008 financial crisis, studio financing dried up. Mr. Ellison, then in his late 20s, figured he’d raise several hundred million from outside investors for a film fund. He could have written a check himself, but he understood Hollywood’s first rule. I was in the room in those early days. A mutual friend, Andrew McKenna, who flies P-51 Mustangs and is now a Wall Street hotshot, helped negotiate a film-financing deal with Paramount Pictures—no easy task—and asked me to get involved.
David Ellison was smart and focused. His company, Skydance Media, was based in a hangar at Santa Monica Airport. I’d often see Harrison Ford stroll by. I contemplated becoming chairman and was even the first investor in the fund. I also was the first to get thrown out.
Mr. Ellison’s idea for Skydance was to fund only action and sci-fi films—movies with explosions! He swore to me: No rom-coms. No touchy-feely emotional Oscar bait. He’d only fund surefire box-office winning categories, including animation.
Hollywood is all about capital efficiency. Yes, studios also know that first rule and try to limit investing their own money. They often use outside capital to help fund productions, which is why you see logos such as Legendary Entertainment at the start of films. Studios collect distribution fees and famously split “adjusted" profits.
Skydance worked with Tom Cruise on “Mission Impossible" remakes. Mr. McKenna made sure to include the neglected rights for a “Top Gun" sequel in the Paramount deal. They even gave the star a rare Top Gun Pilot watch from the first graduating class. (Mr. McKenna found it in a Nantucket, Mass., pawn shop.)
They flew around the world meeting potential investors, a few of whom I had set up. One investor told me Mr. Ellison reminded him of “Bill and Ted’s Excellent Adventure" and said that “giving money to a young guy, who had all the money in the world, to invest in risky films is a tough sell." In 2010, with a deadline looming and deal terms for the fund getting worse and worse, the Ellison family put up the money and threw everyone out, including me. Bye-bye to the first rule of Hollywood.
I heard there were lots of ups and downs, and Skydance was tight on capital several times. That’s Hollywood. In 2020 Skydance raised money from RedBird Capital Partners. Smart, take outside money. In 2022, “Top Gun: Maverick" grossed nearly $1.5 billion at the box office and Skydance raised another $400 million led by the private equity firm KKR at a $4 billion valuation. Smart again, but the valuation may have been a stretch. Skydance was valued at four times its current estimate for 2024 revenue. In contrast, Paramount’s revenue is $30 billion, and it’s worth $8 billion today.
I suspect Skydance and Mr. Ellison had to “go big" to fill their privately negotiated valuation. I see this often with Silicon Valley startups, not always with successful results. Financing others’ films and doing streaming TV show production for Amazon Prime (“Jack Ryan") and Apple TV+ (“Foundation") weren’t going to cut it.
I think this is why Skydance launched its bid to take over Paramount. Assuming regulators approve the deal, there’s a lot of work to be done. Paramount revenue is basically the same as five years ago. Paramount has $15.8 billion of debt. In May, S&P Global downgraded the company’s global debt rating from investment-grade to junk status. That means close to $1 billion in annual interest expense.
No question that the new owners need to strip-mine the company of overhead and sell such assets as cable channel BET and maybe even the CBS network. Mr. Ellison promised the new Paramount will become “a media and tech hybrid," whatever that means. He told CNBC, “We believe in the future of Paramount+," the company’s streaming service. Sure. But Hollywood’s transition to streaming is both a blessing, because subscribers pay you monthly, and a curse, because it limits box-office upside.
Paramount+ has 71.2 million subscribers, many apparently discounted (the average payment is $6.36 a month) making it No. 5 after Netflix, Amazon Prime, Disney+ and Max. Three or four players will survive. Apple TV+ is No. 8. On August 20, Paramount+ prices will go up, which may limit growth.
David Ellison may finally be a movie mogul greenlighting films, the ultimate power position in the power-driven Hollywood of old. But things sure have changed. Depending on how you count it, the Ellisons could put up more than $6 billion to own 70% of Paramount equity. Once again, so much for that first rule of Hollywood.
Write to kessler@wsj.com.
