To Dunn, Michael Ovitz's way of thinking was stuck in the past.
Michael believed his ability to secure film investments hinged on his control over the production crew. With big-name directors and stars as his leverage, he could convince investors to fund a movie. He could even swap out directors or leads based on an investor's preferences or toss a flashy role to their "honey" to sweeten the deal. By managing the crew this way, he'd win over investors, fulfilling his service promises to the film company with a full package—stars, crew, and funding all wrapped up.
It's a solid idea, no doubt. Movies are a star-making machine, but they're not always a goldmine. Plenty of rich folks invest in films not for profit, but for favors, prestige, image, or to impress a girlfriend. That kind of thing was everywhere in the early days of the movie market.
Take old Hollywood, for example. There was this popular "BD" dynamic—B for "sugar baby," D for "sugar daddy." Plain and simple, a "dry daughter" and her "dry dad." But as society shifted and the film industry matured, that setup faded from Hollywood's core, lingering only on the fringes of the entertainment world. Girls in that game had a nickname: "wannabes"—people dreaming of stardom but not quite there yet.
Across the ocean, in a certain developing powerhouse, as the movie market boomed, a similar "dry dad" culture popped up, along with its own version of "wannabes"—known locally as "peripheral girls."
Dunn, though, had a vision that outstripped the times. His perspective was broader and sharper than Michael's. He knew what a proper, healthy, rational, and mature film market needed for financing. And it sure wasn't relying on big stars or peripheral girls to reel in the cash!
Dunn chuckled. "Michael, I think… your approach is too narrow."
"Hm?"
Michael wasn't thrilled to hear that.
He'd admit Dunn was unmatched in film production, but when it came to strategic vision for a company, he'd never bowed to anyone. Back at Disney, if he'd been willing to just follow orders, he wouldn't have clashed so hard with Michael Eisner.
Dunn took his time. "Michael, times have changed. Star power's pull at the box office is fading. The old trick of using big names to snag investments—it's losing its magic."
Michael's tone soured. "Stars don't work? Fine, then tell me—what else is going to draw investors in?"
"Profit, obviously!" Dunn shot back without missing a beat.
Michael replied coolly, "Sure, if they could see a big enough return, everyone and their dog would be throwing money at movies. Problem is, most investors are outsiders. They don't get films. Without stars as a guarantee, how do you convince them? With smooth talk?"
Dunn burst out laughing. "Smooth talk? Not a chance. Even Reagan's charm couldn't pull that off!"
Michael raised an eyebrow, squinting at Dunn. "From the way you're talking… you've got a plan, don't you?"
"You bet!"
Dunn puffed out his chest, radiating unshakable confidence.
Michael, half-skeptical, said, "If you can actually crack this, you'd be pointing Hollywood in a clear new direction. The whole industry would owe you—and Disney's mess would sort itself out."
Dunn grinned. "I'm still young, so I've only got a rough idea. The nitty-gritty details? I'll need your help to flesh them out and connect with investors."
Michael waved a hand. "Of course. It's not just for you—it's for AG too."
Dunn reached out, signaling his secretary to bring over a carefully prepared file. He handed it to Michael. "First set of numbers: in 1975, the average U.S. film budget was $5 million. By 1987, it hit $20 million. In 1999, it's over $40 million, with marketing costs at $15 million. You can bet that'll keep climbing. Investors won't just see a few star names and dive into that kind of risk anymore."
Michael flipped through the data, his expression grim. "With budgets ballooning like this, even if overseas markets hold steady, pre-selling rights won't cover the funding gap."
"Exactly!" Dunn snapped his fingers, a smile breaking out. "Second set of numbers—good news this time: film companies' internal rate of return."
"Internal rate of return?"
Michael's eyes sparked with curiosity.
Dunn grinned. "Yep, the return on movies. Take Columbia Pictures—sure, they've been losing money for years, but their film returns never dipped below 14%. In 1997, with hits like Men in Black, Air Force One, As Good as It Gets, and My Best Friend's Wedding, their internal return hit [insert percentage]!"
Since Sony bought them out, Columbia's been in the red. But that doesn't mean their movies are flops! The losses come from clashing U.S. and Japanese management styles, skyrocketing operating costs, and a global distribution team of over 10,000 eating up salaries. After the acquisition, a lot of Columbia's old partners jumped ship to other studios, leaving them with a massive distribution arm but not enough films to push. Still, their movie profits—while not up to Warner, Fox, or Universal's level—have stayed solid.
Michael wasn't quite following. "What's that prove?"
Dunn waved him off. "Hold on, hear me out. Over the past few years, Twentieth Century Fox and Warner have ruled the box office. I've got a detailed five-year breakdown of Fox's internal returns here—take a look. The low point was 1995 at 17%. The peak? 1997, with Titanic, hitting 36%!"
Michael frowned, still lost on Dunn's angle.
Dunn's voice rose, his excitement bubbling over. "Michael, don't you see? Strip away operating costs, staff salaries, project cancellations, breaches of contract—all that overhead—and the film industry's return rate would be the envy of every investor on the planet!"
"But… cutting out operating costs? That's impossible," Michael said, his voice low.
Dunn smiled. "Eliminating a company's overhead? Yeah, that's a pipe dream. But the investments you bring in—they're for the movies, not the company, right?"
Michael's eyes lit up, a realization dawning.
Dunn pressed on, striking while the iron was hot. "No studio can guarantee every film's a winner, but every major player's internal return rate is solid. What does that tell you?"
Michael jumped in quick. "It means the big earners offset the losers. That scale of production is why film companies have such strong internal returns."
"Bingo!"
Dunn clapped his hands, practically buzzing. He'd been worried Michael might be some stubborn old fossil, too set in his ways to buy into Dunn's half-baked theories. But now? Michael's insight proved he was still a cut above.
Dunn had laid it out in just a few words, and Michael got it.
Michael's own excitement kicked in. Dunn's pitch was like a divine revelation, opening a new window in his career. He'd always thought stars were the key to landing film investments. That's why, after building AG into a "one-stop shop" agency, he'd been chasing Hollywood's A-listers. But with his frosty ties to Disney and little chance of collaboration, top stars wouldn't touch AG—leaving his investment plans dead in the water.
Then came Dunn's spiel.
It hit him like a ton of bricks: stars weren't the golden ticket to investors' hearts. It was the film industry's stellar, jaw-dropping internal rate of return!
Investing in just one movie—even with the biggest director and hottest stars—still carried a flop risk. But scale it up like the studios do? Fund 20 films, let the winners cover the losers, and even Columbia, the weakest of the Big Six, could pull a minimum 14% return in a year! In a good year, it might top 20%. Hit a Titanic or Spider-Man? You're looking at over 30%!
Dunn's data handed Michael the ultimate weapon to hook investors.
And Dunn wasn't done. His next line nearly sent Michael cheering—
"You know I've got some buddies on Wall Street. According to Merrill Lynch, hedge funds there aim for a 12% to 18% internal return. But when a crash like this year's hits, they—"
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