The Hobbit Goes Hollywood

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Pierre Vinet / AFP / Getty

Director Peter Jackson on the set of the movie The Lord of the Rings: The Fellowship of the Ring.

Bilbo Baggins is finally progressing on his most fraught journey — landing a leading role on the big screen. After three years of legal wrangling and public sniping, director Peter Jackson and New Line Cinema have reached an agreement to make J.R.R. Tolkien's The Hobbit, the prequel to the Lord of the Rings blockbuster trilogy that made nearly $3 billion at the box office and earned 17 Oscars. The Hobbit is Tolkien's most accessible and popular book, a fairy tale about the reluctant adventurer Baggins, who embarks on a trip with 13 dwarves and the wizard Gandalf.

Jackson, who directed the Rings trilogy and inherited creative stewardship of Tolkien's massive fan base, will serve as executive producer for The Hobbit with his wife, Fran Walsh. A director and screenwriter will be chosen in the New Year, when Jackson and Walsh meet with the studio heads. MGM, which owns the distribution rights to The Hobbit, will co-finance and co-distribute.

The reconciliation between Jackson and New Line was set in motion when Bob Shaye and Michael Lynne, co-chairman and co-CEOs of the studio, approached Jackson's agent at the Cannes Film Festival in May. "We said, 'Let's get past the acrimony that's been created by each of us and the rest of our clans,'" says Shaye. "Let's talk about something productive and creative."

After the resounding critical and commercial success of Rings, relations between Jackson and New Line should have been rosy — studio and director each deserved credit for the other's good fortune. But the partnership soured over disputes about New Line's accounting for that fortune. In 2005, Jackson sued, claiming that New Line committed fraud in its handling of the revenues generated by 2001's The Fellowship of the Ring, underpaying him by millions. As Jackson and New Line's lawyers and accountants tangled over paper, the director and Shaye engaged in a bitter battle via the Web.

Last November, when Shaye told Jackson he was looking for other directors for The Hobbit, Jackson posted on the fan site The OneRing.Net, "[We were told] that New Line would no longer be requiring our services on The Hobbit. This was a courtesy call to let us know that the studio was now actively looking to hire another filmmaker." In December Harry Sloan, chairman and CEO of MGM, invited Jackson and Walsh over for dinner and heard Jackson's vision for The Hobbit. Yet Shaye was still bitter, telling the Sci Fi Wire website in January, "I don't care about Peter Jackson anymore. He thinks that we owe him something after we've paid him over a quarter of a billion dollars!"

Sometime between making that bold statement and Cannes, Shaye softened his stance. "Each of the respective sides looked at our confidantes, wives, etc. and said, 'This is really getting out of control,'" says Shaye. "Maybe it's worth a voice-to-voice conversation instead of letting a bunch of lawyers and intermediaries get in the middle and muck things up."

New Line's tough last couple of years at the box office has also magnified the studio's need for a sure hit like The Hobbit. Shaye and Lynne's latest attempt to recreate the box office magic of Rings, the fantasy adaptation The Golden Compass, underperformed, with $25 million at the box office its opening weekend.

Since Cannes, New Line and Jackson have been hammering out an agreement. "We came to a place where both of us didn't get exactly what we felt we should, but both of us felt it was still worth doing," says Lynne.

Jackson delivered his stamp of approval in a statement: "I'm very pleased that we've been able to put our differences behind us, so that we may begin a new chapter with our old friends at New Line. We are delighted to continue our journey through Middle Earth."

Principal photography on The Hobbit has been tentatively set to start in 2009, with the goal of releasing the film in 2010. And Jackson and Walsh have already come up with the plan for a sequel — a film that would link the conclusion of The Hobbit with the start of The Fellowship of the Rings. Expect that one in 2011. Which should give everyone time to start fighting again.