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Warner Looks to Get Lean in Year of Big Hits

October 18, 2005|Claudia Eller and Meg James | Times Staff Writers

At Warner Bros. these days, having a blockbuster year in movies, television and home video just isn't good enough.

During the last several months, the Time Warner Inc.-owned Hollywood studio has been scrutinizing costs and staffing with an eye toward increasing profit.

According to people familiar with the studio's finances, this "corporate introspection," as one executive dubbed it, will probably result in significant budget cuts and an undetermined number of layoffs. Warner Bros. employs 8,000 worldwide, of which 4,500 work on the studio's Burbank lot.

By year-end, these people said, Warner management plans to complete a top-to-bottom review of all of its businesses that will scrutinize not only which executives could lose their jobs, but also travel and entertainment expenses, development and marketing costs and even the number of security guards on patrol.

Warner Bros. Entertainment Chairman Barry Meyer and President Alan Horn, who have led the studio for the last six years, declined to comment on the potential cuts. Meyer released a statement Monday acknowledging that changing consumer demands, the maturation of the company's businesses and rising costs were presenting "challenges" to the studio.

"As part of our normal budgeting process, we continually review our businesses to find ways to operate more efficiently and effectively in light of the constantly changing marketplace," Meyer said in the statement. "In order to continue to build on our record success we have to harness the opportunities provided by new technologies and distribution platforms, while managing our costs."

The proposed belt tightening comes even as Warner Bros. is having another standout year.

Its TV shows "Without a Trace," "Two and a Half Men" and "ER" are bona fide hits. And thanks to "Charlie and the Chocolate Factory" and "Batman Begins," among other movies, Warner has already surpassed the $1-billion revenue mark at the box office (with another potential blockbuster, "Harry Potter and the Goblet of Fire," due out in November).

At the same time, however, Time Warner finds itself under attack by dissident shareholder Carl Icahn. Icahn has joined with three major hedge funds in an increasingly hostile campaign to force Chief Executive Richard Parsons to take bold steps to raise the stock price.

In an angry letter to shareholders last week, Icahn -- whose group has a 2.8% stake in Time Warner -- railed against the company's "bloated cost structure" and vowed to hire an industry consultant to compare Time Warner's costs with its competitors and to uncover any "excess fat."

Time Warner spokesman Ed Adler said Monday, "We are looking at our cost structure companywide more aggressively."

Like all entertainment companies, Time Warner is struggling to find ways to increase its bottom line as once-booming DVD sales have cooled and the TV syndication market isn't as lucrative as it used to be.

"Television syndication, publishing, cable operations -- these aren't growth businesses," said Merrill Lynch media analyst Jessica Reif Cohen, listing some of Time Warner's key units.

"Especially when you have someone breathing down your neck, demanding improvements in your stock price," said Reif, alluding to Icahn. A cost-cutting campaign is "a totally logical move. This is something that more companies should be doing."

In fact, others are.

This summer, NBC Universal CEO Bob Wright sent out a companywide memo urging across-the-board cost cutting at the General Electric Co.-owned entertainment operation.

On the whole, media companies have lost favor on Wall Street over the last few years.

But Time Warner has had unique challenges. After the 2001 merger with America Online Inc., its shares plummeted. For more than two years the stock has remained flat, closing Monday at $18.10, up 10 cents.

In August, Time Warner reported that its second-quarter profit was obliterated when the company set aside $3 billion for legal actions, including settling shareholder lawsuits over the AOL merger.

At Warner Bros., efficiency has been the watchword for months. Four months ago, Meyer and Horn held a three-day meeting with 95 top Warner Bros. executives at the St. Regis Resort in Dana Point. There, the studio chiefs instructed their division heads to comb their 2006 budgets looking for ways to shave costs. What they came up with is under discussion.

Executive sources said Warner planned to keep alive its ratings-hungry WB network. But even areas that are booming will not escape harsh scrutiny and will probably see job cuts, sources said. That includes the movie production division, which is riding high on a number of hits, including one of the year's biggest sleepers, the documentary "March of the Penguins."

Currently, the studio releases 20 to 22 films a year and has 30 prime-time TV series on the air. Although management is not retreating from its strategy to make expensive "event" films or to be the biggest supplier of television shows, there are also no plans to increase those orders. "We're at capacity," one executive said.

According to sources, the studio is also considering ways to trim what it spends on film marketing, including potentially combining its expensive media buys for theatrical movies and DVD releases. On television advertising alone, Warner spent $322.7 million last year to promote its movies in the U.S., according to TNS Media Intelligence.

Meanwhile, the studio is taking what one executive described as a "holistic" approach, especially as it adapts to new technologies such as video on demand, wireless devices and the migration to high-definition DVD and television.

"Everything is on the table for discussion," one executive said.

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