Relativity on the Brink: Why Ryan Kavanaugh’s Big Hollywood Bet Has Failed

Relativity Media is poised to file for bankruptcy, a victim of its inability to deliver hit movies and its founder’s penchant for high risk

Last Updated: July 31, 2015 @ 3:17 PM

He had money. He had charm. He had a helicopter, a Malibu mansion, movie star pals and friends at every studio.

For years, Hollywood insiders predicted the imminent demise of Ryan Kavanaugh. And yet every time financial ruin loomed, the young mogul emerged unscathed, with a new loan of $250 million, another equity partner willing to invest in his vision.

Until now.  Short of a last-minute miracle, Relativity Media is poised to file for bankruptcy, a victim of its own overblown ambitions, an inability to deliver hit movies and its founder’s penchant for high risk. Update: An individual with knowledge of the company’s plans said Chapter 11 filing would come on Thursday, and that mass layoffs would take place on Wednesday.

Just three months ago, Kavanaugh was traveling the country, making a pitch to institutional investors for an IPO. This week he may be out of a job.

To many observers, Kavanaugh pushed hard to expand Relativity into new areas of growth — movie distribution, sports talent management, television, digital, the Latino market, databases, education, fashion — without ever mastering the fundamentals of making hit movies.

Indeed, in 11 years of operation, Kavanaugh continually announced new divisions and initiatives, driven by a hunger to build a global media company and an obsession with driving his company to $1 billion in revenue.

In all those years, the closest he came to a global hit was “Immortals” in 2011, a stylish $75 million swords-and-sandals epic that grossed $227 million worldwide. The closest he came to a succès d’estime was “The Fighter” in 2010, directed by David O. Russell and starring Mark Wahlberg, which won two Oscars.

From the start, Kavanaugh — who named his company after Einstein’s theory — claimed to have devised a fail-safe financial formula that guaranteed every one of his films a profit, by locking up foreign distribution guarantees for his slate.

But as he expanded into the risky area of distribution, away from co-financing deals at the major studios, his company produced one mediocre movie after another.

“Everything has always been about raising money,” said one former executive. “He could leverage the assets — if you were a sports client, you could hang out with celebrities. And he’s not wrong that if you build up assets they can service one another. Sports people could make movies — that all makes sense. But the execution was always messed up.”

Observers also noted that Relativity opened divisions far from its core operations in film production and distribution even as it failed to stabilize its core business. “Relativity has a university — ‘Relativity School,'” noted one executive who knows the company well. “What business do they have doing that? Fashion? It was one of the nails in the coffin.”

Kavanaugh launched one initiative after another:

  • The company paid $150 million for Universal’s genre film label Rogue Pictures, which then spun off a clothing line and social network venture.
  • On the eve of the 2014 Toronto Film Festival, Relativity announced it was launching R2, a specialty division to be run by Robbie Brenner, who was riding high off of “Dallas Buyers Club.” Thus far Brenner’s division has not produced anything.
  • Last August, the company lured away Ice Cube’s longtime producing partner Matt Alvarez to serve as president of a newly formed multicultural division.

This year’s slate was emblematic of Relativity’s troubles. The distributor has released just four films so far this year, which have grossed a total of $73.1 million, for a 1.2 percent market share among Hollywood studios.

relativity-table

The studio’s one bona fide hit in 2015 was a Jason Blum-produced horror film “The Lazarus Effect,” which took in $35.8 million worldwide on a $3.3 million production budget.

But the horror sequel “Woman in Black 2: The Angel of Death” and the Kevin Costner-Octavia Spencer drama “Black or White” fared less well, while “Desert Dancer,” the biopic of an Iranian dancer, pulled in just $155,000 in limited release.

Despite Kavanaugh’s high-risk approach to business, his company’s film slate seemed to be hamstrung by a risk-averse strategy that generally minimized the losses when films didn’t click but also brought only modest profits when they did connect.

By avoiding big-budget tentpoles and high-profile franchises, the company failed to generate any major breakouts, unlike previous mini-majors like Summit, with “Twilight,” and Lionsgate, with “The Expendables” and “Hunger Games” series.

relativity-table2

Last year, Relativity’s top grosser was the $13 million kids adventure film “Earth to Echo,” which took in $39 million domestically and $45 million worldwide.

But even supposedly safe bets like the Nicolas Sparks adaptation “The Best of Me” underwhelmed; the $26 million romance starring James Marsden and Michelle Monaghan became the lowest-grossing Sparks film with just $36 million.

relativity-table3

It was a far cry from 2013’s “Safe Haven,” another Sparks adaptation that grossed $97 million for Relativity on a $28 million budget. Or the studio’s biggest recent hit, the $55 million animated Thanksgiving comedy “Free Birds,” which brought in $110 million.

Even when films did take off, they frequently topped out too early. In 2013, the $13 million teen comedy “21 & Over” grossed $48 million. That’s a nice profit, but unlike most studios’ hits, it wasn’t big enough to offset the losses on other releases that significantly underperformed. Nor did it do blockbuster business that the company could further capitalize on via home entertainment, TV or game divisions.

Meanwhile, the company continually recruited and then lost experienced executives who were often crucial to tempering Kavanaugh’s enthusiasm and outsize appetites. Finance executive Steve Bertram and marketing veteran Russell Schwartz were two among many who passed through Relativity’s doors in recent years.

“The company needed more grown ups,” said the former executive. “All the people who came with experience ended up leaving. “

Ultimately, Relativity is a product of Kavanaugh’s willingness to bet big. But it will likely be a victim of that very same impulse.