BUSINESS
Warner Bros. to absorb New Line

Associated press

The 'Lord of the Rings' producer is being absorbed by Warner Bros. as the company continues to slash costs.

By Claudia Eller, Los Angeles Times Staff Writer
2:14 PM PST, February 28, 2008

It's the end of the line for New Line -- at least in its current form.

The 40-year-old studio behind such franchises as "Lord of the Rings," "Austin Powers" and "Rush Hour" will become a significantly smaller version of itself and merge into a unit of Time Warner's Warner Bros.

The development marks the end of an era for New Line founder Bob Shaye and his longtime top lieutenant, co-chairman and co-CEO Michael Lynne, who will leave the company. In recent weeks, the pair, whose contracts expire at the end of the year, made a last-ditch failed attempt to stay aboard, presenting Time Warner management with a reorganization plan that would have ensured their continued employment.

It is unclear how many people will lose their jobs as a result of the consolidation. New Line Cinema employs more than 600 people in Los Angeles and New York.

While New Line will maintain separate development, production, marketing, distribution and business affairs operations, it will rely on Warner's global infrastructure to save significant costs and improve profit margins in the volatile movie business.

The decision is the boldest effort yet by Time Warner's recently named Chief Executive Jeff Bewkes to slash costs at the media giant, whose stock price has largely stagnated since its merger with America Online eight years ago. Bewkes is under pressure from shareholders to take steps to improve the stock price and profitability of the company, which owns cable channels such as CNN, TBS and HBO -- cable systems that are the largest in Southern California and publishing operations that include Time, Sports Illustrated and In Style magazines.

"This is a no-brainer move," said Richard Greenfield, an analyst with Pali Research. "There's no reason to have two separate infrastructures. The question is why did it take so long for this decision?"

Earlier this month, in his first conference call with media analysts since succeeding Richard Parsons as chief executive in December, Bewkes announced plans to immediately eliminate 100 jobs at corporate headquarters, to split AOL into two parts, and to potentially reduce its 84% ownership of Time Warner Cable. At the time, he said New Line would be targeted for "near-term costs cuts."

In a statement Thursday, Bewkes said: "We are moving quickly to improve our business performance and financial returns. New Line has built a strong franchise of cutting-edge entertainment. We can enhance its value by combining it with Warner Bros. Given the trend toward fewer movie releases, New Line and Warner Bros. will now have more complementary release slates, with New Line focusing on genres that have been its strength. With the growing importance of international revenues, it makes sense for New Line to retain its international film rights and to exploit them through Warner Bros.' global distribution infrastructure. We can also take better advantage of digital distribution platforms by combining our studios. These changes will enhance our revenue opportunities and drive dramatic cost efficiencies and higher margins at New Line."

New Line Cinema becomes Hollywood's latest distributor to downsize its ambitions and business strategy in a tough market, where bloated overhead and soaring production and marketing costs have compromised profitability, once-reliable DVD sales have cooled and movie attendance is flat.

Over the past three years, DreamWorks, the once high-flying live-action studio founded by Steven Spielberg, David Geffen and Jeffrey Katzenberg, was sold to media giant Viacom Inc. and scaled back as part of the media company's Paramount Pictures. At the same time, Harvey and Bob Weinstein's Miramax Films became a much smaller unit of owner Walt Disney Co. after the brothers were forced out. The Metro-Goldwyn-Mayer studio was gobbled up by a consortium of investors including Sony Pictures, Comcast Corp. and two major private equity firms.

"People start out with high hopes for these indie studios," said media analyst Harold Vogel, "But ultimately they encounter rising costs and difficulties in managing the businesses. At some point, the cash flow and balance sheets fall short of their ambitions."