• U.S.

Out Of the Pictures

6 minute read
John Greenwald

Last Tuesday was a bittersweet night for Hollywood. At the world premiere of the feverishly awaited Warner Bros. movie Eyes Wide Shut, the last work by the late director Stanley Kubrick, stars Tom Cruise and Nicole Kidman effervesced with the town’s glitterati. But Warner Bros. co-CEOs Robert Daly, 62, and Terry Semel, 56, struck some as oddly distracted. Moments before the screening, producer Paula Weinstein found Semel alone in an empty lobby, where the two reminisced about a previous Kubrick premiere. “The moment I saw him, all these memories flooded back,” Weinstein says. “I was filled with a sense of history and completion. It felt like closure.”

It was. Scarcely 24 hours later, Daly and Semel flew to New York City, where they stunned the entertainment world by telling Time Warner chairman Gerald Levin and other directors of the studio’s parent company that they would not renew their contracts. Vice chairman Ted Turner, who had wrangled with the two over their lavish spending, was moved enough to hug them.

Their departure was not without other large dollops of irony. In an open letter to Levin, Daly and Semel cited their “two spectacular, unbelievable decades” at Warner, a 19-year tenure spent mostly at the top of the film heap. And in recent years Warner’s highly profitable television business even eclipsed the movie studio, creating such TV hits as ER and Friends and the rapidly rising WB network. Along the way they took the reins of Time Warner’s vast $4 billion music empire following one of the brutal power struggles that periodically boiled up after Time Inc. merged with Warner Communications in 1989.

But as with the Batman films that Daly and Semel originally launched to box-office bravos, the thrill was in fact fading fast for the dynastic duo. Warner’s had produced a string of costly flops in the past two years before rebounding in 1999 with such hits as The Matrix, a sci-fi action flick, and the mob comedy Analyze This. The Daly-Semel formula centered on the relationships the two had with stars like Mel Gibson and Clint Eastwood and producers like Joel Silver. The movies were big–Lethal Weapon, Unforgiven–the dollars were bigger, and everyone got a piece of the action, including the studio bosses, who each reportedly earned some $25 million annually.

Despite the known passion the pair have for moviemaking, a studio executive who knows both men well said that lately they appeared to be tired and unhappy with the increased pressures from top executives in New York City. In the past they clashed with Turner about the WB–he was against launching it–and about the price Turner’s cable channels would pay for Warner movies. Just last week Levin said he wanted to sell part of Warner Bros. retail stores, a piece of their empire and one in which they have a direct financial interest.

So Daly and Semel almost seemed to be kissing off their employers before they got the kiss-off themselves. The two men long ago became centimillionaires by virtue of their salaries and zillions of stock options. Says Semel: “For the first time in my life I will not have a contract, a road map to follow. This could be the first time I can choose what direction I’m going in.”

The departure marked a turning point not only for Daly and Semel but also for Levin, 60, and for Time Warner–not to mention for the era of all-powerful studio bosses in Hollywood. As the last major Warner-side executives left over from the merger, the two were accustomed to running a semiautonomous fiefdom. This inevitably clashed with Levin’s drive for increased top-down control of Time Warner’s units as the new opportunities of the digital age–from cable modems to downloadable music and movies–placed a premium on coordination among all the far-flung entertainment and information businesses.

The joined-at-the-hip pair, who often rode to work together, showed their clout when they signed their last megacontract with Time Warner five years ago. With the company’s stock scraping bottom and Wall Street wondering whether Levin could hang on, the beleaguered chairman was so eager to keep the studio heads that he threw in a piece of the revenues of the Warner stores. Levin later handed Daly and Semel control of the troubled global music group, which has remained an erratic performer.

But this year Levin held the cards, as his strategy of integrating Time Warner’s digital assets with its vast cable-TV holdings helped the stock continue to outperform the market. (Time Warner shares closed at $76.31 Friday, up 56[cents] for the week.) With Warner Bros. becoming a shrinking contributor to Time Warner profits in relation to cable, all parties could agree to an amicable parting. Levin said he was “deeply saddened,” but he did not ask them to reconsider. In fact he noted that the company enjoys “tremendous depth of management.”

Nonetheless, the studio bosses’ decision to leave hardly came easily. With their contracts set to expire at the stroke of the millennium, Daly and Semel advised Levin in May that there was only a fifty-fifty chance that they would stay. When Levin asked for their thoughts two weeks ago, the duo said they would decide on their future after separate European vacations. By the time they boarded a corporate jet in France to head home, the decision had virtually made itself. “I looked at [Terry’s] face, and we both knew,” Daly says. “We began together, and neither of us wanted to stay behind.”

For now, Levin is in no hurry to name a successor to run the studio, although everyone from HBO head Jeffrey Bewkes to outsiders such as Fox’s Peter Chernin or Disney’s Joe Roth has been bruited as a contender. Levin could create a top slot at Time Warner headquarters in Manhattan for an executive who would oversee the studio and the music group–a high-profile way to bring both units to heel. Analyst Philip Olesen, who follows the media for Warburg Dillon Read, predicts a “reseparation” of the film and music divisions.

Time Warner can also engage in some strenuous rethinking of how to mesh all the pieces of its 1989 merger into a truly vertically integrated company. Daly and Semel “put a model in place and have been running it [Warner Bros.] 19 years with unbelievable success,” says Time Warner president Richard Parsons. “But is that still the right model? Are we structured correctly, given all the changes that digital technology brings about?” As for Daly and Semel, Parsons says, “it’s kind of like the ’98 Yankees. It was a beautiful season. And every season comes to an end.”

–Reported by Cathy Booth and Jeffrey Ressner/Los Angeles and Georgia Harbison/New York

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