Niche players.

Hollywood has found profits in arthouse fare. But can it stand the controversy?

Quick, name some of the most profitable films of 1995.

Did The Usual Suspects or The Brothers McMullen come to mind? What about Belle de Jour? They should have. Granted, their combined rentals probably wouldn't pay Sylvester Stallone's salary for his next movie, but on a dollar-returned-per-dollar-spent basis, they were among the most successful films released last year. Indeed, 1995 was an incredibly good year for so-called niche movies.

And the summer was especially good. Those months are usually dominated by films aimed at teenagers and younger kids who are out of school. But companies who distribute specialized films took a chance that adults might want something different. They put their arthouse fare into a market saturated with action films and kiddie comedies and came up with winners.

This counterprogramming is emblematic of an ongoing trend in Hollywood. For years, the big studios have chased after the youth market that produces mega-hits such as Batman and Star Wars. Foreign markets, which reward the universal language of sex and violence, have also become quite important, going from one-quarter of Hollywood's total revenue 20 years ago to more than half today.

But the rise of these two markets meant that the films Hollywood made, as a group, became less cerebral. Independent filmmakers and distributors stepped into the breach. These distributors specialized in so-called arthouse pictures, and the dumber Hollywood got, the more successful offbeat fare became. Some of the biggest hits of recent years - Pulp Fiction, The Crying Game, Four Weddings and a Funeral - were arthouse movies. And given the low, low budgets of these films, they were more profitable than a lot of films that had much higher grosses.

The big studios aren't run by fools, and they are nothing if not imitative. They saw the success niche films were having and have jumped on the bandwagon. In the past two years, all of the major studios except Paramount have started or purchased distributors devoted to arthouse fare. Fox has Searchlight and Sony has Sony Classics, for instance.

The trend started in earnest when Walt Disney Studios bought Miramax in 1993. Miramax was, at the time, the highest-profile of the independent film distributors, and it is almost single-handedly responsible for Hollywood's interest in niche films. You may not have heard of Miramax or the men who founded and run it, Harvey and Bob Weinstein, but you've certainly heard of the films it has distributed. To name just a few: The Crying Game, Priest, and The Cook, the Thief, His Wife and Her Lover.

If there was ever any doubt, the success of niche movies - and the studios' embrace of arthouse fare - should prove that the market can produce challenging art. That's good news for those who like intelligent, sometimes edgy films. But it isn't exactly clear that the big bureaucratic studios are the sorts of places that can nurture tiny films.

For years, Hollywood shunned art films. They didn't make much money. They didn't get a great deal of attention. Who needed them when you could make a big action film that could clean up at the box office?

But Hollywood movies, particularly action films, have become extremely expensive. Stars such as Sylvester Stallone and Jim Carrey get $20 million a film, plus a bit of the gross revenue. Computer animation and other special effects have become necessary to give films the look that audiences demand. It costs $40 million to make and market the average studio film these days. And the profit margins are declining on even those films that do make money. Take Waterworld and Last Action Hero: Both of those films grossed over $200 million worldwide, but neither probably broke even.

Enter Miramax. This company really didn't reinvent the arthouse film. Indeed, Miramax's founders rarely produced their own movies, usually buying them from independent filmmakers. But Miramax showed an uncanny feel for how the market had changed.

As Hollywood movies were becoming dumb and dumber, Americans were becoming more and more educated. More Americans today have college educations than in decades past, and thanks to cable and videotapes, a lot of people get to see most everything Hollywood puts out. That leaves many people hungry for something different. And those people have changed the arthouse market.

In the past, foreign-language movies dominated the arthouse. The English-language films that were shown tended to be edgier stuff that might turn people off: John Waters's movies and Andy Warhol's films come to mind.

Today, however, foreign-language films aren't very important. English-language films dominate. And while there is still a market for edgy films, there's a pretty sizable market for gentle pictures, too. The success of Gramercy's Four Weddings and a Funeral shows that.

In turn, the number of screens specializing in niche films has doubled in just the past five years. One can thank the multiplexing of America for this trend. Long derided as cookie-cutter theaters, multiplexes have in fact provided great opportunities for niche films. In areas where screens are numerous, it isn't enough to play the same studio blockbuster as everyone else. So why not take a chance on something different? Distributors who wanted to counterprogram couldn't have done so without exhibitors willing to take their product.

Niche films' low budgets mean they still have a good chance of at least breaking even. Twentieth Century Fox will only have to gross a couple of million dollars to earn back its money on its recent release The Brothers McMullen. That probably wouldn't even pay the catering on the typical film the studio releases. And when an arthouse film breaks out into the mainstream, it can be enormously successful. Four Weddings and a Funeral cost only $4 million, but it grossed more than $250 million Worldwide.

There's more to studios' interest in art films than a search for lower-cost, lower-risk alternatives to their standard fare, however. The studios have long used the independent film world as a farm system for writers, directors, and virtually every other position in movies.

Now, they Seem to want to gain some control over that farm system, helping to cement relationships with the talent of tomorrow. For instance, a couple of years ago, Sony Pictures picked up director Robert Rodriguez's independently made (and ultra-low budget) El Mariachi for distribution. The film did well, and Sony signed Rodriguez to direct Desperado, which became one of 1995's most profitable films.

Art films can also help cement relations with established talent with a yen to try something different. Witness all the big-name actors who took low salaries to act in Pulp Fiction.

Of course, there may be problems. The big studios are geared toward putting out big, mass-audience films. It isn't clear that their bureaucracies can be as nimble as the small companies that have traditionally dominated the niche-film market.

There's the basic question of whether these new divisions can stick to their mission of making low-cost films. In the two years since it was acquired by Disney, Miramax has raised eyebrows with its relatively free-spending ways. Competitors grumble that the Weinsteins have used Disney's dollars to bid up the price of talent. So far, though, Miramax's budgets remain well under Hollywood standards, and they seem to be successful. Witness the money Pulp Fiction made.

And once a specialized film is made, there's the problem of selling it. Marketing an art film involves more than just buying a lot of television ads - it requires wit and creativity.

Take The Brothers McMullen. Edward Bums made the movie for $20,000, raised mostly from family members. Then a friend of his who works for Fox Television passed on a videotape to the head of Fox's arthouse distributor, Searchlight. Searchlight in turn gave Bums $50,000 to finish post-production of the film. In exchange, Searchlight got the option to distribute the film. Bums finished editing the film, and he took it to the Sundance Film Festival. The audience response was so enthusiastic that Searchlight picked up its option, paying Burns $500,000 for the movie.

Searchlight then used a series of low-cost stunts to create awareness for the film. The night before it opened in New York, for example, they invited every McMullen in the Manhattan phone book to a special screening. In another stunt, they admitted each person who brought his brother free.

The most obvious way to generate awareness for a niche movie may be controversy, however. And that poses problems of its own, at least for big studios.

Miramax is the past master of this trick. From the violence in Pulp Fiction to the transvestite in The Crying Game, Miramax has not shied away from taking on films with controversial elements. Indeed, it has used those elements to gain all sorts of free publicity for the films. But much as they may love the publicity controversy generates, it remains to be seen whether big corporations have the guts to continue releasing very controversial movies. Two years ago, for example, Disney made Miramax give up the Martin Lawrence concert film You So Crazy after the ratings board slapped it with an NC-17 rating. Disney is contractually bound not to release unrated films, and it has a corporate policy against releasing NC-17 films. Earlier this year, the Weinstein brothers released the film Kids on their own for much the same reason.

Disney has reason to worry. When Miramax released the R-rated Priest, it inspired boycotts of Disney products by Catholics upset at the film's presentation of sexually active clergymen. Small companies don't have to worry about such threats, since people offended by their films probably aren't their customers to begin with. But a big corporation has to consider a film's impact on the rest of its business - which in Disney's case includes not only family films but theme parks, both much larger sources of revenue than Miramax.

If big studios don't prove able to stick with specialized films, however, that doesn't mean they won't get made. As long as the audience is there, firms will have an incentive to produce for them. And if the big companies neglect this audience, that just creates an opportunity for the next Miramax.

Contributing Editor Charles Oliver writes for Investor's Business Daily.