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'Avatar': The Risk and the Secret Weapon

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Nov 09, 2009 | 4:21am EST

The New York Times today poses the question: Can a movie studio make money on a film based on an original and unfamiliar story, with no Hollywood superstars, a vanishing DVD market and a price tag approaching $500 million?

The paper is of course talking about Fox and James Cameron's Avatar, the long-anticipated feature return for the Titanic director. And, although skeptics abound, Fox, says the NYT, believes it can turn a profit on one of the most expensive movies ever made -- in part because it was Cameron at the helm of 1997's Titanic. Prior to that film's release, many pegged it as a sinking ship and not the eventual blockbuster it became.

But just in case box-office receipts for Avatar fall short, Fox has worked hard to hedge its large bet on Avatar, says the NYT.

The film may carry surprisingly little financial risk for Fox's parent company, News Corp, even if it disappoints, thanks to shifting industry economics, reliance on outside investors and help from a network of allied companies and in-house business units.

The final cost of the film has not been tallied, but published reports have put the production budget at more than $230 million.

The price tag would be higher if Cameron's (and others') financial contribution were included. When global marketing expenses are added, Avatar may cost its various backers $500 million, the NYT surmises.

At what point the various partners would see profit from the film depends on what share of revenue each receives from theatrical and ancillary. If domestic ticket sales reach $250 million, a level broken in the last year by five films, Fox and its allies would appear to be headed into the black, the NYT says.

With Titanic, News Corp was at risk for at least half of a production budget that would approach $300 million in today's dollars, and was borne partly by Paramount.

Today, News Corp is carrying a much smaller share of Avatar's production cost. Private equity partners Dune Entertainment and Ingenious Media picked up 60% of the budget, sources told the NYT.

James Clayton, the chief executive of Ingenious, confirmed his company’s backing for Avatar, but declined to discuss the size of its stake.

Other sources said Cameron would give up part of his own participation if production costs exceed a specified level. For example, if final production costs exceed $300 million, Cameron would effectively defer much of his payout until the studio and others were compensated.

Fox's biggest investment in Avatar may be on the marketing side, where the company is planning to spend about $150 million around the world.

But the studio has looked for partners to bear some of that load. IMAX worked with exhibitors to set up a special 15-minute preview over the summer without significant cost to the studio.

Further, Panasonic, in return for using some of Cameron's expertise for its own 3-D home video systems, contributed technological and marketing help.

Still, initial reaction to a conventional trailer was flat, and response to the 3-D IMAX preview provoked doubts about whether the film is really the cinematic game-changer that had been promised.

Taking no chances, the NYT says Fox is backing up Cameron's movie with what an executive recently called the studio's "secret weapon": Alvin and the Chipmunks: The Squeakuel.

Story: http://power.networksolutions.com/index.html

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