HOLLYWOOD FADES TO RED

By KIM MASTERS/LOS ANGELES

When the Olympic torch was lit earlier this month, Hollywood watched its box office go up in flames. Moviegoing dropped more than 20% as four new films--Disney's Kazaam, MGM's Fled, Universal's The Frighteners and Columbia's Multiplicity--withered in a dreadful midsummer conflagration.

It would be easy to say all eyes were on Atlanta, but the film industry has problems that won't end with the closing ceremonies. "The movie business isn't bleeding to death, but it's bleeding," says Herbert Allen Jr., the entertainment industry's eminent investment banker. It wouldn't appear that way from the resounding success of such megahits as Independence Day and Twister, but Hollywood's economics are a mess. Last year the industry brought in $5.5 billion, and through the first half of this year ticket sales are up 14% compared with 1995, according to the Exhibitor Relations Co. Inc. Trouble is, the number of films in wide release has risen 13% over last year even as the cost of making and marketing films rose sharply. Not only did the competition for filmgoers' dollars get stiffer, some executives contend that the quality of the films declined as the studios scrambled to shove more and more product into their pipelines.

Already several studios are taking the obvious solution and cutting back the pace of production. But that won't be enough; they face other difficulties that will be harder to address. Costs are soaring so dramatically that it's getting tough to make a buck. "Every day I have two choices," says Peter Chernin, chairman and chief executive of Fox Filmed Entertainment. "One is to make a series of absolutely insane deals and the other is to make no movies at all."

Trimming the number of films is simpler than cutting production and advertising budgets. Ironically the most aggressive trimmer has been Disney, the same company that started the more-is-better strategy a few years ago. Studio chairman Joe Roth says the company will cut its output from 35 movies a year to 18; creative types are already bracing for a Disney downsizing.

Others are following the same script. DreamWorks--the fledgling entertainment company founded by Steven Spielberg, music mogul David Geffen and former Disney studios chairman Jeffrey Katzenberg--originally planned to release three films in 1996 and five in 1997. But don't go running to the multiplex: DreamWorks has put only one film in production. "It's a very, very crowded marketplace, where films are going to be pushed out of theaters," Geffen says. "It's sane to make fewer films."

Katzenberg was part of Team Disney when the studio began to ratchet up. At the time Disney did not own a network or any other pipeline into viewers' living rooms. The company calculated that it needed to become a dominant supplier of programming so that it wouldn't be squeezed out by rivals like Fox and Time Warner, which owned cable systems or other outlets for their own movies. Once Disney stepped on the gas, some of its rivals followed suit. Soon a glut of pictures was fighting for screen space. The result: opening-weekend carnage.

Since then Disney has acquired Capital Cities/ABC, and with it a TV network, so the rationale for the expanded slate has vanished. But Roth says the strategy didn't work anyway, because the frantic pace eroded the quality of the movies. Disney thought it could attract audiences to all its formulaic pictures but came away disappointed. "Frankly, it's a cynical notion, and anyone historically who gets away from 'The story's the thing' loses money, period," Roth says.

Good story or not, the glut of celluloid also required studios to lavish money on advertising. Not only were there more films to sell, but the battle to grab attention in an overcrowded market became ever more heated. Marketing costs this year jumped an estimated 20% over last year. Chernin says several of his rivals have spent more than $20 million to launch a single film. "It's just mind-boggling," he says. "Two years ago, I don't think anybody had spent more than $14 million."

Does this mean a pay cut for all that high-priced talent in front of the camera? Agents insist that marketing expenditures--rather than their star clients' paychecks--are the real culprits. "The studios better stop chasing an opening weekend where they're spending 80' to make a dollar," says Jeff Berg of International Creative Management. Studio executives agree that marketing costs are crippling the business, but that doesn't mean star salaries don't take their toll. Talent fees have risen rapidly in the 1990s with the help of several accelerants. Until recently unprecedented power rested in the hands of agents--notably those at the Creative Artists Agency--who used their clout to demand ever increasing paydays for their clients. C.A.A. could push the pay envelope because it represented so much A-list talent, from Tom Cruise to Tom Hanks and Steven Seagal to Steven Spielberg.

Former C.A.A. partner Ron Meyer, feeling the sting in his role as head of Universal Studios, obliquely acknowledged the agency's impact at a recent company meeting when he jokingly grumbled, "Agents are screwing up the business." Meyer says he was just kidding--sort of. "If C.A.A. was responsible for anything," he says, "we should be blamed for making it happen [a few] months earlier." He adds that the agency too faced a dilemma. "We didn't want to kill the goose that laid the golden egg, but we also had a responsibility to do the best job we could for our clients." The stars who gave C.A.A. so much clout would have been quick to seek other representation if the agents tried to hold the line on salaries, he notes.

Hollywood inflation was also fueled by the Sony Corp.'s multibillion-dollar incursion into entertainment. Once the electronics giant bought Columbia Pictures in 1989, its management went on a spending rampage that exploded prices for talent and executives. Sony studio chief Mark Canton stuck it to the system yet again last year by paying Jim Carrey an astonishing $20 million to star in The Cable Guy, which has grossed $60 million, of which the studio keeps roughly half. The film cost more than $40 million to make--before marketing costs. "You had the top guys at $15 million, and Mark leapfrogged the marketplace 20% to 25%," says Fox's Chernin.

Warner Bros. co-chairmen Robert Daly and Terry Semel were seen in the industry as Canton's sharpest critics. But this month they agreed to pay Arnold Schwarzenegger $25 million to appear as Mr. Freeze, the villain in the next Batman installment. Some executives are complaining that Warner is compounding the cost problem. Daly says the deal makes sense because Schwarzenegger's presence will boost the film's grosses, particularly overseas. Arnold is also taking "a lot less" of the film's gross profits than usual--he generally gets up to 20%--as well as a reduced share in profits from Batman-related merchandise. The studio already has $50 million in guarantees from licensees. "Arnold will make more money out of doing Eraser than he will on Batman," says Daly.

Rather than raising the salary bar in the business, Daly says, "this was not a groundbreaking deal." But he acknowledges that he is "very worried" about the perception, even within the industry, that Warner has raised the stakes yet again. "Some of the agents in town who [understand] the deal--they have a client problem," he says. "The clients think the price is $25 million, which is not true."

Studios admit that attacking the cost of top talent will be next to impossible. "The weakest studio sets the marketplace," Chernin says. "Whoever is the most panic- driven will hike up the costs." Instead, they will set their sights on mid-level stars without a proven ability to attract crowds. "Michael Keaton (Multiplicity) or Alec Baldwin (Heaven's Prisoners)--they better deliver the goods," says a studio chief.

Paramount boss Jon Dolgen says studios will make more films together to share costs and spread risks. TriStar is teaming with Disney, for example, on Starship Troopers, an expensive sci-fi epic directed by Robocop's Paul Verhoeven that is taking the same July 4 slot occupied so successfully this year by Independence Day.

Starship Troopers boasts no major stars. But such films could do as much damage as those packed with expensive talent. Even as he enjoys the success of Independence Day, Chernin is concerned that so many of the summer's hits were driven by special effects. Next summer will bring even more. "You're looking at the Batman sequel, the Jurassic Park sequel, Starship Troopers, Speed 2, Titanic and two volcano movies," he says. Such pictures routinely cost $100 million or more to make even without major stars.

Like Godzilla rampaging through Tokyo, the gigantic cost of big-event pictures has shaken the old studio dynamic in which the blockbusters covered the tabs of smaller flops. While a film like Independence Day generates a multimillion-dollar profit, the big pictures often don't clear enough anymore to make other problems disappear. That means studios will have to scrutinize smaller films more carefully. There are no easy answers, says Chernin, and no radical solutions available. The bottom line, says Universal's Meyer: "You have to choose well and be lucky."