Maverick Mogul

As he builds his own digital version of the vertically integrated movie studio, Broadcast.com founder Mark Cuban is questioning everything about the business—and naturally ticking a lot of people off.

Old-school movie moguls lunch extravagantly at Morton's, feeding on gossip and opening-weekend grosses. Pitching them an idea can be as complex and time-consuming as making an actual movie. But Mark Cuban is not that kind of mogul.

"When we green-lit Enron, there was no meeting," he says, referring to the documentary about the Houston company's flameout that was released last April. "It was all email. 'Here's the guy, here's his background, here's the budget.' " Elapsed time: 12 minutes. When there's not a lot of red tape, Cuban says, "that is attractive to filmmakers." The movie's entire budget was around $700,000—a sum that wouldn't cover the catering on many movie sets—and Enron: The Smartest Guys in the Room ended up grossing more than $4 million during its theatrical run.

That's not a lot of cake by Hollywood standards, but Cuban doesn't care about Hollywood standards—his whole MO is to subvert them. In fact, Cuban, with his longtime business partner Todd Wagner, is questioning everything about the century-old movie business, from the way films are made to the way they're distributed, marketed, and experienced. They've built a vertically integrated mini-empire—2929 Entertainment is the umbrella company—that allows them to "control our own destiny," as Cuban puts it, in the same way that movie studios did in the first half of the 20th century.

Their accumulated assets now include production entities HDNet Films and 2929 Productions; Magnolia Pictures, which acquires and distributes indie films such as the Oscar-nominated Capturing the Friedmans; the Landmark Theatres chain of 60 art-house cinemas; and two television channels that broadcast in high-definition and crank out original programming.

Clad in black jeans and a light-blue striped dress shirt, sipping from a can of Red Bull, Cuban doesn't cut a particularly iconoclastic figure. He's actually mild-mannered and rational in person—a far cry from his irascible persona at Dallas Mavericks games (he bought the NBA team in 2000 and has racked up hefty fines, including a record $500,000 for saying a certain ref wasn't fit to "manage a Dairy Queen").

But when it comes to business, the guy's a walking brainstorming session. And, astonishing as it may seem, he and Wagner just may be to cinema's digital age what the Warner brothers became by dragging the industry out of the silent era with The Jazz Singer. Today, as major studios fret about their sagging box-office revenues—and kick and scream about the digital bogeyman at their door—Cuban and Wagner are embracing the beast and embarking on an ambitious series of experiments intended to make better movies, and to make movies a better business. With films forced to compete with everything from TiVo to Xbox to the Internet, they're a study in what it takes to inject entrepreneurial energy into Hollywood.

"If you look around Hollywood and say, Which of these companies are really trying new things and looking at new models, it's an awfully short list," says Peter Broderick, president of Paradigm Consulting and the founder of Next Wave Films. Cuban and Wagner, he says, share "a kind of gleeful quality, and I think Mark in particular loves the idea of being David to the studios' Goliath."

We view innovation and taking chances as part of our business.

"It's not inherent in the industry to be entrepreneurial," Wagner says. "It's a culture of cover your ass: 'As long as I keep getting a big star in my movie, I can't get fired.' We view innovation and taking chances as part of our business. If we don't do it, someone else will, and they'll knock us down."

The cluster of companies Cuban and Wagner have assembled is tiny compared with the media giants behind the major studios—Sony, Viacom, Disney, and NBC Universal, itself owned by GE. (2929 Entertainment and all of its components are privately held.) But the point is not to rival the big studios, it's to actually achieve the synergy others just jabber about—and, naturally, to make a lot of money (these are the guys, after all, who sold Broadcast.com to Yahoo for more than $5 billion).

It's common knowledge that among the things Cuban purchased with the money he made from the sale of Broadcast.com were the Mavericks ($285 million), a 24,000-square-foot mansion in Dallas ($15 million), and a Gulfstream G-V private jet ($41 million).

Less well known is that he also bought a high-definition TV and signed up for DirecTV. "There was one channel, Channel 199, that just looped the same 90 minutes of high-def content," he says. "I just kept watching it all the time. I'm like, either something's wrong with me, or there's an opportunity here."

It didn't take long for Cuban and Philip Garvin, a veteran TV producer, to vow to fill the void with their own network. "That was in July of 2000," Garvin remembers. "A year and two months later, we launched HDNet." (In 2002, they launched a second channel, HDNet Movies.)

Wagner, meanwhile, had set off on his own in the wake of the Broadcast.com sale and was busy learning the movie business from the inside out. "I spent 18 months just meeting with studio heads, directors, and producers, and just asking questions," he says. "Why is it done this way? What's broken?" Wagner cofinanced several movies to get "behind the curtain," including three with Steven Soderbergh, the director of such hits as Ocean's Eleven and Traffic.

Wagner noticed all of the things that drive studio execs to the Mylanta bottle: giant budgets, greedy talent, union labor, high costs for making and shipping prints of films, and the eternity that passes between a movie's theater run and when it shows up on DVD, by which time consumers may have forgotten about it entirely.

Cuban and Wagner decided to reunite in late 2001, buying Rysher Entertainment, a library of television and movie properties and, in 2003, the Landmark Theatres chain. They bought the remainder of Magnolia Pictures, a New York distribution company they'd invested in earlier, and started financing more features and documentaries through 2929 Productions and HDNet Films.

The duo admit there was no initial plan to build a vertical media machine. The acquisitions were designed to tip the movie industry's daunting odds in their favor. "If you just invest in [producing] movies, that's like going to Vegas," Wagner says. "You might get lucky and win at blackjack. But if you go to Vegas often enough, the casino's going to beat you." With 2929 Entertainment, he says, "we wanted to start making ourselves look more like the house. We could make a movie, put it on our screens, play it on our TV stations." (The two of them are also rumored to be building their own DVD-distribution business.)

Cuban and Wagner immediately focused on controlling the costs of their productions, as well as on boosting revenues by making it easier to consume their movies—in whatever format moviegoers wanted.

One early experiment was to offer incentives for going to the theater—a free soundtrack download to ticket buyers, or putting CDs and DVDs on sale in the lobby. "What we've learned is that if it's a product that's hard to find or ties into something going on in our theater, that does well," says the CEO of Landmark and Magnolia, Bill Banowsky. The soundtrack to Garden State was a hit, as was the DVD of Richard Linklater's Before Sunrise, when Landmark was showing the sequel to that movie.

They're looking at other offbeat and technologically avant-garde ways of moving product as well (selling movies loaded onto key-chain USB drives, for instance). And while other theater chains have dragged their heels on installing digital projectors, Landmark is committed to doing so—just as soon as it can get ahold of some.

Digital projection would not only ensure a consistently high-quality image over the course of a film's run (no scratches or blotches) but also open the door to entirely new forms of on-screen entertainment. In fact, HDNet has already brought unconventional content to theaters: In 2003 it delivered MLS soccer games to Regal Cinemas, a more mainstream chain of cineplexes. But when Cuban talks about the possibilities down the road, his eyes get wide and his speech accelerates from light speed to warp speed. "Can you imagine what the season premiere for Lost would be like? You'd make it like a VIP environment. People would pay 20 bucks. And they might even flock to see every episode in the theater first, with all their fellow Lost fans. And they'll buy the DVD of the single episode for $15 on the way out."

Perhaps unsurprisingly, the networks' contractual constraints have thwarted that plan for now. So Cuban and Wagner are building their own digital-content machine to feed their theaters and networks. Their most strategic coup to date: signing up Soderbergh, at this year's Tribeca Film Festival, to direct six movies. With a single deal, they signaled to Hollywood that it was time to overhaul the business. "We'd go and grab lunch in New York," Wagner says, recalling how the deal came together, "and I'd walk Steven through this whole strategy we'd developed. I told him we didn't need anybody's blessing to decide what movies we'd do. His eyes lit up, and he said, 'I've got some things that would be perfect to do.' "

Soderbergh's films will all be shot digitally, on low budgets (HDNet says it generally keeps budgets under $2 million; it's also pursuing other directors). But there's an even more novel component to the deal: His upcoming drama Bubble will be released in January simultaneously in theaters, on DVD, on HDNet Movies, and possibly as an Internet download.

It's hard to overstate the challenge this poses to the status quo. For the past 25 years, the studios have operated on the assumption that wringing maximum revenue out of a film meant controlling the public's access to it via a series of "release windows." The first, most restrictive window (and the costliest to the customer) was the theatrical release; months later came DVD, pay-per-view, cable, and finally the thing was thrown to the masses on free TV. But with the rise of services such as TiVo, Netflix, and video and music downloads (not to mention online piracy, an estimated $858 million-a-year business and growing fast), consumers are no longer willing to take their entertainment on someone else's schedule.

By releasing new movies in several formats on the same day—"day-and-date release," as it's known—Cuban and Wagner believe they can make more efficient use of the marketing dollars spent on each film. Studios typically mount separate campaigns, months apart, for the theatrical and DVD releases. (The DVD marketing campaign for a major movie can cost north of $15 million, according to Nielsen Monitor-Plus.) All too often, however, by the time the movie is out on DVD, it has been battered by critics, overshadowed by newer releases, or has simply faded into oblivion. "I look at my own movie consumption habits," says Cuban, "and a lot of times I'm saying, 'Boy, I want to see this movie,' and 'Damn, I missed that one. I'll buy the DVD when it comes out.' And I never do it." Cue the millions of cheering parents who'd like to see King Kong on the same day their single friends do.

Each of the six Soderbergh movies will be released day-and-date, with showings on HDNet and DVDs initially priced at a premium—perhaps $30 or $35. There may also be rental DVDs simultaneously available from Netflix, or downloads from CinemaNow, an online service.

It's a counterintuitive idea, and it stirs near panic in just about everyone involved in making, distributing, or showing movies. It could encourage moviegoers to just opt out—to buy the DVD or watch the movie on cable, skipping the hassles of parking, the $7 popcorn, and finding a good seat. "Is it a better model?" asks Wagner. "It makes total sense to put the customer in charge. The more complex question is whether it's a better model for us. I think time will tell. It's not about one or two movies. It's about a slate. How should they be priced, how should the model be tweaked?"

The release of the Enron movie was their first partial trial of the idea. On the day of its theatrical debut, it was also shown once on HDNet Movies. The reaction from other theater owners was harsh: Some refused to screen the film at all. So Cuban and Wagner developed a scheme to appease them in the future, a "bonus pool" made up of 1% of gross DVD sales, on the rationale that theatrical showings promote the DVD.

Of course, no release strategy or digital key chain can get around the challenge of making movies that people want to see. Cuban knows this, and he has boiled that imperative down to a Yogi Berra-esque koan: "If there's bad movies, people don't go. If there's good movies, people go."

In august, Cuban and Wagner received a sign from above—well, from Bob Iger, Disney's new CEO—that probably did more than anything else to put the stamp of approval on their strategy. When Iger, during his first conference call with analysts, conceded that day-and-date release might be inevitable, he put the old guard on notice that "all the old rules should be called into question."

And so an orthodoxy begins to crumble. The arm's-length relationship between studios and theater chains (which dates back to 1948, when the Supreme Court required the studios to sell off the movie houses they owned) has meant that studios supplied the pictures and then took a cut of every ticket sold. But now the studios are being forced to choose between those longtime partners and their own long-term interest.

"If you ask some of the studio guys behind closed doors," says Banowsky, "they all have a theory that's similar to ours, that simultaneous release is going to increase the pie, that it's not going to be a negative thing."

But Banowsky points out that even if the big studios jump in, 2929 Entertainment has an advantage, not only because its component companies—cable channel HDNet Movies, for instance—will benefit from simultaneous release but because the company also controls its own screens with Landmark. (With so many outlets for new movies, antitrust is less of an issue today than it was pre-TV.) As for other theater owners, "the collapsing of release windows scares them more than anything I've witnessed," he says.

John Fithian, the head of the National Association of Theatre Owners, a trade group based in Washington, DC, called Iger's suggestion this summer a "death threat" against his members. Fithian says that "if [release] windows were eliminated, what you would have would be fewer movies, fewer total dollars for the industry, and less choice for the consumer." He thinks movies would become little more than commodities and that hundreds or thousands of theaters would close.

Wagner's reaction to that kind of alarmism is typically suave. "I don't view this as, 'We're taking on the studios or the theater owners,' " he says. "All we're doing is experimenting to see if we can make our business model better. We'll see where it takes us."

Cuban's reaction is no less characteristic: "I don't give a s—t." Innovators, he says, have always encountered doubters at points of transition. "You can't find a great business where somebody didn't say the exact same things at the beginning."

Scott Kirsner (skirsner@fastcompany.com) is a Fast Company contributing writer based in San Francisco.

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