JPMorgan gets movies made by the numbers.

HOLLYWOOD'S biggest banker never reads a script. John Miller, head of JPMorgan Securities Inc.'s entertainment group--and responsible for authorizing multibillion-dollar lines of credit for DreamWorks SKG, Metro-Goldwyn-Mayer Inc., Sony Pictures and Warner Bros.--says he often doesn't even know the names of the films he's financing.

In 32 years of lending to the entertainment industry, Miller, 59, has bankrolled some of Hollywood's best-known films, including "Gladiator," "Seabiscuit" and many of the James Bond movies. He credits his success in part to how little he knows about such matters as plot, dialogue and special effects.

He bases his decisions on numbers.

"The movie business on a single picture is volatile," he said. "Odds are that if you take a slate of 12 to 15 films, it's almost statistically predictable. It's quite amazing how predictable it is. You can get it within percentage points of accuracy."

Miller's group measures a film's potential for success using a database of thousands of movies and a computer program that allows bankers to compare each new film against the financial performance of 200 or more similar movies that have gone before it.

JPMorgan's scale of a successful movie weighs such components as the genre, cast, director, budget and target audience against the historical performance of similar films.

New York-based JPMorgan Chase, the second-largest U.S. bank by assets, is the lead bank in arranging 95 percent of financing for major movie studios and independent film producers.

Costs for making and marketing films are increasing as revenue is shrinking, with fewer people coming to theaters. In 2003, filmmaking and marketing costs had risen more than fivefold to $102.9 million since 1983, according to the Motion Picture Association of America. Expenses rose 15 percent in 2003 from 2002, and revenue from ticket sales in North America fell in 2003 to $9.49 billion from 2002's record $9.52 billion.

As a result, studios rely more heavily on people such as Miller.

His computers, as well as studio executives, say the big money in Hollywood now lies in making "event" movies that reach across age groups and international boundaries. Such films don't just sell tickets; they also bring in the most money from sales of home videos and television rights in the U.S. and abroad.

Some of the past year's biggest hits underscore the point.

Sony spent about $200 million to make "Spider-Man 2," according to Los Angeles-based Box Office Mojo, which tracks film costs. Since its June 30 release, the film has taken in more than $782 million in ticket sales worldwide.

The Lord of the Rings trilogy from Warner Bros.' New Line Cinemas cost about $281 million to make, and has taken in more than $2.92 billion in worldwide ticket sales.

Although ticket sales alone rarely are enough to make a film profitable, they indicate whether it eventually will make money from added revenue through sales of home videos and television rights. "The ancillary rights to those films are so valuable, they'll do three or five of those," Miller said. "Films that don't fit into the big-budget event-film-franchise type category usually are done by independents. The probability of success is such that you put a lot more money into them."

Miller's office is in Studio City, where he and second-in-command Clark Hallren work with a staff of 20. He also works with other bankers in Los Angeles and New York.

JPMorgan's deals range from a $200 million line of credit arranged last year for Lakeshore Entertainment, an independent production company whose films include the thriller "Wicker Park," to a $4.2 billion credit line Miller put together this year for Sony Corp.

Sony used some of the money in September to finance its purchase of Metro-Goldwyn-Mayer. Comcast Corp., Credit Suisse Group's DLJ Merchant Banking unit, Providence Equity Partners Inc. and Texas Pacific Group joined in the acquisition. The bank is currently financing about $7.5 billion in entertainment loans.

The studios themselves follow a similar process when deciding to approve a movie. At News Corp.'s 20th Century Fox, the group that makes the call consists of Co-Chairmen Jim Gianopulos and Tom Rothman, Production President Hutch Parker, Fox 2000 Pictures unit President Elizabeth Gabler and News Corp. President Peter Chernin.

"It's mathematics plus instinct," said Gianopulos in his wood-lined office on the Fox lot, just down the hall from the one Darryl Zanuck occupied while running the studio from the 1930s through the 1970s--and producing films such as the Oscar-winning "Grapes of Wrath."

By the numbers

Only about three in 10 movies actually make money, says Harold Vogel, an independent financial analyst and author of "Entertainment Industry Economics." About four films break even, and three lose money.

The odds of failure, plus the rising cost of production and marketing, prompt filmmakers to rely on funding arrangements to spread their risk and reduce the prospect that one box office bomb will hurt corporate profit. That may mean inviting other studios to join the project, casting less expensive actors or filming in locations where government-sponsored incentives can offset as much as 15 percent of production costs.

"There is no way you can predict if a film is definitely going to be a hit," said Walt Disney Studios Chief Financial Officer Alan Bergman. "Sometimes you think you really have it, and it just doesn't happen, for a variety of reasons."

Bergman speaks from experience. In 2003, with such hit films as "Finding Nemo," produced by Pixar Animation Studios and distributed by Walt Disney Co., and "Pirates of the Caribbean," Disney led all owners of Hollywood studios, with $2.22 billion in ticket sales in North America.

But as of Nov. 9, Disney was in third place in 2004 North American ticket sales, with $1.01 billion in receipts, after "The Alamo" and "King Arthur" failed to attract large audiences. Time Warner Inc. was the leader, with $1.21 billion.

Banks take on less risk than studios. Terms of the loan agreement ensure that JPMorgan is paid from film revenue before the studio recoups its production costs. After a film opens, the exhibitors are the first to get their share of the revenue.

As a rule, their take amounts to about 50 percent of the ticket price. The distributor then takes its fee, usually 15 percent to 17 percent of the total. The remainder, known as film rentals, goes to the studio to pay for the loan and production costs, which include actors' salaries and the physical funding of production.

Because of the focus on event films, movies developed and produced by the big studios account for only about 25 percent of filmmaking annually. The rest comes from independent production companies, such as Revolution Studios and Ron Howard and Brian Grazer's Imagine Entertainment.

But the studio that distributes the film is paid from ticket sales before the production company recoups costs. "Production isn't where you get your biggest return," said John Lee, chief executive of Entertainment Business Group, a Camarillo-based consulting company. "It's in distribution."

Miller relies on his staff to evaluate and arrange lines of credit for slates of 12 or more movies. For the independent producers, the credit line is backed by a distribution agreement with one of the studios. For Roth, Miller put together a $400 million credit line used to finance Revolution Studios' first slate of 15 films, including the action/adventure film "Black Hawk Down."

In Roth's favor, Sony Pictures had agreed to distribute the movies in the U.S., and he had already raised $250 million in private equity. The slate performed as predicted, and JPMorgan has financed another 20 movies for Revolution.

Following on formula

Based on the numbers, the bank decides bow much it can safely lend. And, Miller notes, the model is always reliable. "If you have a baseball movie that's very American-looking, it won't work in Germany," he said. "African-American themes won't work in Japan. Any Martin Scorsese film is just going to be a huge success in Europe. It doesn't matter what he shoots--the phone book--they're going to want to go see it."

Film financing has changed since Miller began lending to studios as an executive at Union Bank 32 years ago. In 1986, he moved to Chemical Bank, and through a series of mergers, Miller's group became part of JPMorgan. During his early days, he says, he wrote loans for single movies.

In the 1980s, banks tried to develop more income-producing ventures by writing loans for a slate of movies with one line of credit.

Miller tries to distance himself from the glitz of Hollywood. He routinely wears a suit--something rare in the jeans-and-T-shirt world of the film industry--and avoids the Academy Awards because he dislikes the long wait to get inside as stars walk down the red carpet.

Miller does enjoy Hollywood. "I really like this industry because of its interesting people, and it's constantly changing, it's glamorous and it's sexy," he said. "I don't get mesmerized by it. I feel no aspiration to be in their world because it's a very, very tough one."

Indeed, studios are watching their expenses especially carefully these days.

At Fox, Joe Hartwick and Mike Hendrickson spend all of their time looking for ways to manage costs in filming scenes.

On a September morning in an office tucked among soundstages, Hartwick, Fox's president of features production, and Hendrickson, a vice president, were looking at spreadsheets that showed the costs, scene by scene, for filming "Fantastic Four," a superhero saga two weeks into production.

Hartwick and Hendrickson focused on a scene with a spat between two characters. Director Tim Story was budgeted to film four shots for the scene. Hendrickson picked up a spreadsheet and pointed to a column that shows Story took 15 shots.

The spreadsheet showed that if all of the extra shots were used in the film, along with the special effects they required, the scene's cost would double to about $328,000.

Given a mandate to keep costs under $100 million, spending the money might mean cutting the film elsewhere to make up the difference. "We have this old-school mentality here," said Hartwick, a former studio accountant said. "If we want to make a film for $35 million, we don't mean $35.5 million. We monitor the expenses very carefully."

MICHAEL WHITE

Bloomberg News