It didn't take long for Hollywood's newest movie studio, Summit Entertainment, to reach a crossroads.
The 2 1/2 -year-old company, riding high on the teen vampire phenomenon "Twilight," is hoping to leverage that success and avoid a premature demise that has befallen many mini-studios.
While market pressures are forcing rivals to retrench by slashing overhead and reducing the number of films they make, Summit wants to go the other way: expand and increase its output of content.
Start-ups are difficult even in flush times. But Summit's plans come at a perilous juncture for Hollywood's majors, roiled by declining DVD sales that have undercut movie profits and monumental changes in technology that are reshaping how people watch entertainment. Other independents, such as MGM and Weinstein Co., are scrambling to stay in business, while several studio-owned specialty film labels have ceased operating.
"It's hard for everyone out there in the media industry," said Dave Sanderson, head of consulting firm Bain & Co.'s global media practice. "The film business has been hit with cyclical and secular forces that have made the environment so difficult."
Such dim prospects are not deterring Summit, which recently hired investment bank Morgan Stanley to explore merger and growth opportunities, including acquisitions of smaller entertainment firms and libraries, aimed at scaling up its business to the next level.
Summit has quickly learned that relying on individual movie releases can be rough sledding, especially for companies that don't have large libraries to generate steady revenue that helps pay overhead and ongoing production costs. That needs to change, Summit's leaders acknowledge.
"We think diversification done the right way offers us more consistencies in our cash flows that will help even out film performance variations," said Chief Executive Rob Friedman, who runs Summit with Patrick Wachsberger. The Santa Monica-based studio employs 150 people and releases up to 10 movies a year with budgets of $20 million to $70 million.
"We believe the time is right to try to build other revenue streams for the foundation of the overall company," Friedman added. The priority: expand into TV production.
Acquisitions are not the only option. Industry insiders believe a likely scenario is that Summit could merge with or be sold to another media company, such as Lions Gate Entertainment Corp., the studio behind the "Saw" films and "Mad Men" TV series. Last fall, as buzz was mounting about "Twilight" before its release, Lions Gate attempted to buy Summit, but talks fell apart over price.
Indeed, now would be an opportune time to strike some kind of deal: The sequel "The Twilight Saga: New Moon" comes out Nov. 20, and many expect it to surpass the $383.5 million in worldwide ticket sales of the original, giving Summit an after-burner glow.
In a business that has become obsessed with "brands," Summit's "Twilight" franchise, based on Stephenie Meyer's bestselling novels about vampire love, represents Hollywood's newest gold mine.
Aside from its ticket sales, "Twilight" is this year's top-selling DVD and has generated tens of millions more in merchandise, soundtrack and TV sales. Summit has already shot the third movie, "The Twilight Saga: Eclipse," due out June 30, and plans to make one, and possibly two, movies from Meyer's fourth book, "Breaking Dawn."
The popularity of "Twilight" amplifies that Summit's success has been largely centered on one hot property. Other than the thriller "Knowing" and the acclaimed low-cost acquisition about the Iraq war, "The Hurt Locker," Summit has had far more misses than hits.
Friedman and Wachsberger dismiss criticism that Summit is a one-trick pony. The studio is readying other potential franchises, including a movie adapted from the DC Comics series "Red," starring Bruce Willis and Morgan Freeman, and a "re-imagining" of the 1980s cult classic "Highlander," from director Justin Lin and producer Neal Moritz.
The partners say that by 2011 they want to raise Summit's output to 12 films a year.
Although "Twilight" is the gusher, Summit's real financial pump is the company's international sales operation, which sells foreign rights to Hollywood movies to overseas distributors and helps fund production of its movies.
"More than 60% of our budgets are covered by foreign pre-sales," said Wachsberger, whose international sales experience fueled the growth of Summit's predecessor company of the same name that began in the 1990s.
Friedman, 59, and Wachsberger, 58, are in some respects odd business partners, a contrast in background and styles.
Born in Paris, Wachsberger came from showbiz blue blood -- his father, Nat Wachsberger, was a film producer.
Friedman, son of a veterinarian, grew up in the San Fernando Valley, dropped out of college and went to work in the Warner Bros. mailroom at 20.