by Rick Lyman
New York Times
LOS ANGELES, Dec. 11 The recent management shuffle at the top of AOL Time Warner in which Richard D. Parsons, a veteran Time Warner executive, emerged as the surprise successor to the retiring chief executive, Gerald M. Levin only revived a question that has nagged New Line Cinema, a mere cog in the company’s vast global empire, for years: What does AOL Time Warner, which already has Warner Brothers studios, , need with a second, separate film studio?
The answer lies in sprawling tale of good versus evil in a mythical world populated by elves, dwarfs, wizards, goblins and a three-foot-tall, hairy-footed hero named Frodo Baggins.
The tale, the first in New Line’s film trilogy based on J.R.R. Tolkien’s half- century old fantasy epic, “The Lord of the Rings,” will open in movie theaters across the country a week from tomorrow, and the initial signs are so enncouraging that New Line may have done more than turn out a potential hit movie it may have secured its own future.
When the smallish studio took on the audacious gamble of spending more than $270 million to make three “Rings” films at once, more than one skeptic in Hollywood thought the task would have been formidable for even the largest studio, notwithstanding the top-notch international cast led by Ian McKellen, Elijah Wood and Cate Blanchett.
In a phone interview, Mr. Parsons gave New Line a strong vote of confidence, even given the studio’s mixed record of flops and successes.
“New Line makes movies, and any company that makes movies is going to have some hits and it’s going to have some misses,” Mr. Parsons said. “You’re making a big mistake if you’re trying to estimate the viability of an entity like New Line on the basis of one film. In fact, as it’s coming together, `Lord of the Rings’ looks like it’s potentially going to be a huge franchise for AOL Time Warner.”
The scent of success is particularly satisfying to Robert K. Shaye, who founded New Line 35 years ago in a Lower Manhattan walk-up, and Michael Lynne, co-chairmen.
After all, the film had been languishing at Miramax as a too costly two-parter, and they snapped it up and turned into a trilogy with a budget far higher than they were used to. By filming three movies at once, they achieved significant economies of scale, but the bet was risky: If the first film flopped, the studio would be sitting on expensive sequels that promised only further financial drain.
“It may have been bold in some senses,” Mr. Lynne said. “But it was never imprudent.”
Early reviews of the 2-hour-58- minute first installment from Peter Jackson, the New Zealand director, have been extremely positive, some to the point of giddiness. It’s subtitled “The Fellowship of the Ring,” and it opens on Dec. 19. Peter Travers of Rolling Stone, the first critic to issue his Top 10 list, has already named it the year’s best film. The National Board of Review, the first group to issue its year-end passel of awards, gave one to Mr. Jackson for special achievement. And the regular market research of audience interest in coming movies has shown explosive enthusiasm for it.
“You can just sit here and look ahead and see that there are three films opening wide in December that are really positioned to be hugely successful,” said Joe Roth, a former chairman of Walt Disney Studios and the founder of Revolution Studios. “One of them is `Ocean’s 11,’ another is Will Smith in `Ali’ and the third is `The Lord of the Rings.’ “
Mr. Parsons said he would like to put an end to rumors that AOL Time Warner would sell New Line or fold it into the much larger and more mainstream Warner Brothers studio.
“When Time Warner first merged with Ted Turner back in 1996, we reviewed whether it made sense to keep or sell New Line at that time and made the judgment to keep it,” Mr. Parsons said. “We wanted and needed the production, not just for New Line’s sake but for our cable networks.”
Last year, when Time Warner merged with AOL, the issue was revisited, he said. Again, the conglomerate decided to leave New Line independent, figuring that in the risky, cyclical world of moviemaking and in a corporation with so many outlets and so much hunger for content, it would be wise to maintain more than one film production unit.
Changes were made, however. Mr. Lynne was raised to co-chairman with Mr. Shaye. And the company was asked to end a recent drift toward more expensive productions and return to the kind of midbudget films on which it was built, like the “Teenage Mutant Ninja Turtles” and “Nightmare on Elm Street” series. “We modified, to some extent, their positioning within the pantheon of movie companies, to take them closer to their core competency,” Mr. Parsons said. “That means no big-budget films and more medium- budget films.”
From time to time, he said, New Line might come across a project like “The Lord of the Rings” that it wants to turn into a bigger-budget production. In that case, Mr. Parsons said, Mr. Shaye and Mr. Lynne must convince him and other corporate officials that it’s a worthwhile risk.
“For example, with the third `Austin Powers’ movie that they’re making now,” he said. “To make that, they are going outside their normal bandwidth of midbudget films, but because it’s part of such a successful franchise, they made a case for the higher level of its production costs and we told them to go for it.”
Wall Street analysts have been cautiously and increasingly optimistic about the prospects for the Tolkien series. “The relative performance of the first film will be very critical for setting the pattern for the rest of the trilogy,” said Jill S. Krutick, an entertainment analyst for Salomon Smith Barney. “Luckily for them, the buzz on this movie has been extraordinary, and it looks like it could really turn into another huge franchise for AOL Time Warner.”
Through it all, Mr. Shaye and Mr. Lynne have insisted that while it was a formidable challenge, the making of “The Lord of the Rings” trilogy was never reckless or big enough to put their company at risk.
The production costs on the first installment, including actors’ salaries and extensive post-production special effects, were about $93 million, they said. This means that the special-effects and post-production costs for the other installments “The Two Towers,” coming next December, and “The Return of the King,” to be released in December 2003 will bring the full production cost of the series to somewhere north of $270 million, but still well below $300 million. On top of that, of course, will come tens of millions of dollars in marketing costs, about $50 million for the first film alone.
The project was “well insured,” as Mr. Lynne put it. New Line will distribute the films in North America, but the other regions of the globe have been licensed to foreign partners, bringing in about $55 million a film. Another $11 million a film came from Burger King, JVC Electronics, Barnes & Noble and other toy and merchandise companies. And a final $10 million a film came in tax incentives from the government of New Zealand, where the films were shot. “All of that is cash money,” Mr. Lynne said. And it means that New Line is vulnerable for less than 20 percent of each film’s production costs.
Meanwhile, he said, the potential upside is much larger. New Line stands to make all of the profits of the films’ North American runs, plus 50 percent of the profits from overseas runs, after the distribution fees are paid to foreign partners.
“Was it an aggressive thought?” Mr. Lynne said. “Yes. Was making three big films at once something that had never been done before? Yes. But the reason for those things was not the irrational plunging that people continually want to nail us with.”
Mark Ordesky, the president of Fine Line Pictures, New Line’s specialty film division, was a longtime Tolkien fan and early proponent of the project. He remembered the first meeting in 1998 between Mr. Jackson and Mr. Shaye. The rights to the project had been in the hands of Miramax Films, but that studio, reluctant to make a film of the scope and expense that Mr. Jackson was proposing, gave him a three-week window to shop it around to other studios.
“At the time, Peter Jackson was proposing that it be made into two films,” Mr. Ordesky said. “In the middle of his pitch, Bob Shaye asked him: `Aren’t there three books in the series? Why are you making two films? Why not three?’ “
The argument for doing it this way was economy of scale, Mr. Ordesky said. Major sets in distant locations (the trilogy was shot over 15 months in remote sections of New Zealand) could be built once. The huge cast could be assembled only once and for one fee, saving the studio from the higher costs of getting an actor to return for a sequel.
Of course, the downside was even more obvious.
Rolf Mittweig, president for worldwide distribution and marketing for New Line, said “The Fellowship of the Ring” would open on about 5,000 screens at more than 3,000 theaters in North America and was expected to have a huge opening weekend, befitting a prospective blockbuster, although not as big as the opening of “Harry Potter and the Sorcerer’s Stone” on Nov. 16, which was on more than 8,200 screens in 3,672 theaters.
There are only so many screens to go around, Mr. Mittweig said, and in the crowded pre-Christmas season it is impossible for New Line to line up as many screens as “Harry Potter” had. Still, he said, the studio hopes to have the movie on an average of two or three screens at the major multiplexes, as well as 10,000 screens around the world by the middle of January.
“From the beginning, we divided up the audience into three groups,” said Russell Schwartz, New Line’s president for domestic marketing. “The first 25 percent are fanatics who couldn’t wait for the films to come out. The important thing there was to convince them that we were taking the project seriously and doing it right. Another 50 percent were people who had heard of the books but hadn’t read them. And the final 25 percent were people who never heard of Tolkien and couldn’t care less.”
In the earliest months, Mr. Jackson and his team sought to reassure Tolkien fanatics. “Then, between March and October, we focused our attention on that middle 50 percent,” Mr. Schwartz said.
“Only in the last couple of weeks have we turned our attention to that last 25 percent,” he said.
Mr. Shaye and Mr. Lynne were sitting in their Beverly Hills offices one recent afternoon, looking over the latest audience tracking numbers and the early reviews, optimistic that things seemed to be coming together well, but superstitious that it might still blow up in their faces.
“We are crossing our fingers, as we always do on all of our films,” Mr. Lynne said.