Chapter 687: God of Wealth in Hollywood

Institutions like the California Institute of the Arts and New York University's film school had introduced dedicated courses studying Duke and his films. Although his work seemed overly commercial to the school faction, this was fundamentally a commercial nation, and no one could ignore such massive financial success.

Besides, most students graduating from these programs would enter Hollywood and its related industries, where practicality mattered.

A single success or two could be written off as a fluke, but an unbroken string of successes made someone a subject well worth studying.

It wasn't just film schools. Unauthorized biographies of Duke were already popping up in bookstores, packed with the same wild anecdotes found in the unlicensed biographies of other Hollywood stars.

This was especially true of his early escapades. Duke had never bothered to hide them, making them common knowledge among industry insiders and entertainment reporters. Now, vividly retold and paired with his current fame and box-office draw, these stories attracted quite an audience.

The most famous was an absurd rumor circulating in the music industry about a fling between him, country star Shania Twain, and pop diva Madonna Ciccone. Some people claimed to have confirmed it with the two singers themselves, and a few film studios were even looking to adapt the affair into a movie.

Once someone became famous enough, all sorts of people and stories would find a way to attach themselves to his name.

Duke took it in stride. As long as they didn't cross the line, he had no problem turning a blind eye—it simply came with the territory of fame.

After making the rounds through several major cities in the western Pacific Ocean region, Duke returned to Los Angeles at the end of June, just as Transformers wrapped up its fourth weekend in theaters.

Although the film brought in only $16.06 million over the weekend, it still claimed the top spot at the North America box office, easily securing its fourth consecutive weekend crown. This brought the cumulative North America gross for Transformers to $366.54 million, putting it well on track to break the $400 million mark.

Overseas, Transformers had expanded its release to more than 150 countries and territories starting in its third week. Compared to The Dark Knight, this lighthearted crowd-pleaser proved even more popular outside North America. As its international footprint widened, overseas ticket sales surged again, accumulating a massive $550 million.

The film's global box office smoothly surpassed the $900 million mark, aiming straight for $1 billion.

In China, after nearly thirty days in theaters, Transformers reached 985.66 million RMB. Sitting just shy of the one-billion threshold, it was poised to become the first film in Chinese history to gross 1 billion RMB.

Good news had also arrived from the China Film Group. After extensive maneuvering, Transformers successfully secured a release extension from a certain pair of big scissors. This added another month to its theatrical run in China; a full sixty days would be more than enough time to squeeze every last drop of potential from the market.

Back in Los Angeles, Duke gave the numbers for Transformers only a brief glance before turning his attention elsewhere—namely, to the film fund he had established two years prior.

At the time, the fund had seemed like just another venture riding the wave of Wall Street money pouring into Hollywood. However, Duke hadn't established it to make standard film investments; he had set it up so he could step in this year as the bag holder for those slate-financing deals.

The explosive success of Transformers wasn't solely due to its quality and stellar marketing—it was also inextricably tied to the broader social climate.

With North America gripped by economic turmoil, companies across the insurance, real estate, and finance sectors were going bankrupt, leaving masses of people out of work. Yet, in stark contrast to the broader economy, the North American film market historically thrived during periods of socioeconomic turbulence. Ducking into a theater or staying home to lose oneself in a virtual world was perhaps the best way to escape a harsh reality.

Throughout the first half of the year, the North American theatrical market had been running hot, with box office revenues up nearly 12 percent over the same period the previous year.

Still, none of this could alter the broader economic downturn across North America. The fund companies that had invested in Hollywood through slate-financing deals were facing particularly severe crises.

Though Hollywood still looked booming on the surface, a major problem lurked underneath: a shortage of incoming capital.

Not long after Duke returned to Los Angeles, Tina Fey handed him a comprehensive report on the subject. According to surveys by multiple institutions, between January 2006 and December 2007, major Wall Street banks, hedge funds, and wealthy limited partners had poured a total of $8.7 billion into Hollywood film production. Driven by this influx of capital, Hollywood's film output over the two years leading up to 2008 exceeded the combined total of the previous five years by 20 percent.

Right now, however, film investment was steadily drying up.

Since August of last year, not a single new film fund—the sort of financing partnership combining equity, mezzanine funds, and bank debt—had been launched on Wall Street.

Over the past few years, Hollywood studios had relied on such funds to secure a significant portion of their production budgets.

In 2006, for example, Ryan Kavanaugh founded Relativity Management Company and raised more than $2 billion in cash and debt capital from hedge funds like Elliott Partners and traditional banks like Deutsche Bank, using the money to establish the Gun Hill Road 1 and 2 film funds.

Now, however, banks had grown increasingly selective about lending. With many struggling just to stay afloat themselves, the difficulty and cost of securing a loan had skyrocketed.

A crisis on Wall Street could rattle the entire world, and Hollywood was no exception. Many film producers were anxiously scraping by on previously raised equity funds or lines of credit, while struggling outfits like the MGM Film Company were frantically scrambling for sponsors.

Where was the next big spender willing to burn cash in Hollywood? It was an answer plenty of studios were desperate to find.

Had oil prices and the Mumbai stock market remained sky-high, tycoons from the Middle East and India might not have hesitated to open their wallets. But with the economic crisis sweeping in and everyone scrambling to save themselves, that avenue was no longer realistic.

On the surface, surging North America box-office numbers made Hollywood look prosperous, but in reality, its revenue streams were shrinking.

So far this year, Hollywood's DVD sales revenue had dropped 19 percent compared to the same period last year, and overseas distributors were only interested in pre-buying the rights to quintessential blockbusters like Transformers and Indiana Jones.

"As things stand, if a film doesn't have big-name stars and a well-known director attached," Tina Fey said in the office, speaking up once Duke looked up from the file, "no overseas buyer will pre-purchase the distribution rights."

The sharp drop in pre-sales revenue was another major headache confronting Hollywood.

"Television revenue is also sliding because of falling ad sales and competition from online video," Tina Fey added.

Hearing this, Duke let out a sigh. Even though he wouldn't take much of a hit himself, the economic crisis was striking Hollywood far harder than he had realized.

Even a director as famous as Spielberg was now worrying about funding.

Early this year, India's Reliance Communications Group had promised to invest $550 million in his DreamWorks to help it break away from Paramount Pictures, on the condition that JPMorgan Chase Bank raise another $700 million in financing for the deal.

Before long, however, the stock market crashed, and the market value of Reliance Communications shrank by more than 60 percent. Faced with this grim reality, Spielberg and JPMorgan Chase had already scaled their financing target down to $325 million, with Reliance Communications only required to provide matching funds. As a result, the share of each film's production budget that DreamWorks had to shoulder itself would jump from 40 percent to 70 percent.

No production company wanted to find itself in that position. It meant that if a single big-budget movie flopped, the fallout would be catastrophic.

And it wasn't just DreamWorks. The credit crunch was forcing major studios across the board to adjust their production ratios, creating a "dumbbell effect" throughout the industry: big-budget tentpoles and low-budget films at either extreme kept rolling out, while mid-budget movies grew scarce.

Hollywood studios would pour even more money into blockbusters like Transformers. On the low-budget end, there would be more films along the lines of Underworld, whereas movies like The Happening—with budgets in the $50 million to $100 million range—would drop off sharply.

To put it more precisely, Hollywood was experiencing an unprecedented "cash crunch."

To borrow an expression from across the Pacific Ocean, anyone holding a massive pile of cash right now would become Hollywood's "god of wealth."

Duke remembered very clearly that the man who had once played that role was named David Ellison. Armed with ample cash flow, he had bought up film investment stakes at bargain prices from multiple slate-financing deals and stepped in like a savior to rescue Paramount Pictures, thereby establishing a real foothold in Hollywood.

Now, however, the one leading the charge was no longer David Ellison.

"Dune Capital and Relativity Management Company are both facing a severe crisis," Tina Fey said from across Duke's desk, briefing him on the latest developments. "If they can't consolidate their internal resources and secure enough working capital, they are highly likely to go the way of Lehman Brothers."

"How are talks with them going?" Duke asked.

"I've met with Ryan Kavanaugh in person three times, and he's refusing to budge from 50 percent."

Tina Fey frowned slightly. Even when capitalizing on someone else's crisis, buying up their film investment stakes at half price was no easy task.

"Keep talking to him and push it down to 40 percent if possible," Duke instructed after a moment's thought. "Everything else can wait, but the Warkey Fund's stakes in Twentieth Century Fox's Avatar and New X-Men, Disney's Alice in Wonderland and Pirates of the Caribbean 4, and DreamWorks Animation's The Croods and How to Train Your Dragon are the top priorities!"

"Understood." Just as Tina Fey was about to leave, she remembered something. "Word is that David Ellison is also interested in taking over some of the slate deals."

"Is that so..." Duke thought it over for a few moments, then said, "Follow our predetermined plan and leak the news."