Paramount's Cold Snap: The Heat Is On

After several high-profile misses, studio chiefs Jonathan Dolgen and Sherry Lansing could wind up on Sumner Redstone's hit list

By Ronald Grover

Paramount Pictures' big holiday flick is a film version of novelist Michael Crichton's time-travel adventure Timeline. Executives at the studio, which is a unit of Viacom (VIA ), can only hope the title is prophetic. With operating earnings down for each of the last three quarters, Paramount is in the midst of one of Hollywood's deepest funks. A trip to the past could mean a return to a bevy of blockbusters -- and hefty profits.

Paramount's woes have the Hollywood gossip mill working overtime. Speculation is that Jonathan Dolgen and Sherry Lansing, the movie industry's longest-running management team, may be on the outs with Viacom CEO Sumner Redstone and his equally results-oriented president, Mel Karmazin. Viacom didn't make a top studio exec available for an interview, although spokesman Carl Folta denies that either Dolgen or Lansing is in danger of joining the ranks of the unemployed. "Every studio has its cold streak, and we're having ours," says Folta.

Still, you have to wonder. Redstone was asked about the fate of his dynamic duo this summer at the annual Allen & Co. media retreat. Although he pronounced himself satisfied with his top two filmmaking executives, it's not a good thing that the speculation has only intensified over the past five months. After all, the studio may be just a small piece of Viacom's $26 billion media machine, but it's one of the most visible for a company that until recently was among Wall Street's hottest performers.


  And a down year for the studio -- which is all but assured -- would mean that for two out of three years, it has helped depress earnings at the entertainment unit, which also includes theme parks and the Famous Players theater chain. Indeed, profits at the entertainment division have slid 32% so far this year, to $205.4 million. In its most recent filing, Viacom blamed "lower feature revenues" and "higher advertising costs" -- never a great combination.

What makes this all the more puzzling is that for years, Paramount has been among Hollywood's best-run studios. Its financial model was structured by the notoriously tightfisted Dolgen, the entertainment unit's 58-year-old chairman, to take risk out of the often-iffy business of moviemaking.

Dolgen, who learned at the side of the equally frugal Barry Diller, created a model as simple as it is prudent. Paramount almost always shares the costs of making its films with partners -- usually an overseas film distributor -- and never puts more than $100 million of its own money in any one flick. It doesn't pay out more than 25% of a film's total earnings to big-name actors, directors, and producers -- a sharp contrast to other studios' recent payouts of 35% to 40% to the hired help.


  Limiting exposure is great when a film tanks. Paramount was no doubt grateful that it had brought in Japanese theater-chain owner Toho-Towa and even the BBC to help cover the costs of this summer's Lara Croft Tomb Raider: The Cradle of Life. The overwrought special-effects fest cost about $90 million to make and tons to advertise, but with others sharing the cost. Paramount's losses were dampened when the movie grossed only $65 million -- well below the first Lara Croft's $131 million take.

Still, sharing risks doesn't cut the overall costs of making films or cover a studio's overhead. So even if Paramount is footing only a portion of the moviemaking costs, it still has heavy expenses in marketing, as Viacom noted in its financials. That's why it likely lost money on some of its heavily promoted flicks, such as Dickie Roberts: Former Child Star, which grossed only $23 million, or The Core, which was made for around $75 million and sold $31 million worth of tickets. (Paramount declined to comment on costs or profits for its films.)

All the pessimists should bear in mind that Paramount isn't losing money. In fact, it has had some major hits, like The Italian Job and How to Lose a Guy in 10 Days, both of which crossed the magic $100 million mark. Still, the operating-earnings numbers are going in the wrong direction. And some in Hollywood say top talent doesn't always warm to Paramount's tight-fisted ways.


  The biggest problem could be that the 58-year-old Lansing, Paramount's president, may simply no longer have Hollywood's hot hand. In late summer, Paramount dropped the Lisa Kudrow bomb Marci X, which did all of $1.5 million at the box office. And then there was the brooding Angelina Jolie drama Beyond Borders, which grossed an anemic $4.3 million.

As the summer ended, longtime marketing chief Arthur Cohen resigned after 14 years. The studio said Cohen's exit was long-planned, but his departure came just after The Cradle of Life (also starring Jolie) and Dickie Roberts stumbled at the box office. So, that's why some in Hollywood are asking whether more high-level execs may be heading out the door.

That question looms larger as the all-important holiday season approaches. Timeline, which opens Thanksgiving weekend, will be up against some pretty formidable opposition, including Walt Disney's (DIS ) heavily hyped Eddie Murphy flick, The Haunted Mansion, director Ron Howard's creepy The Missing, and Bad Santa, an R-rated comedy starring Billy Bob Thornton.


 To make things worse, Paramount's big Christmas hope is the Ben Affleck sci-fi film Paycheck, due out on Christmas Day. Affleck did all right in Disney's 1998 action-adventure flick, Armageddon. Plus, Paycheck has action impresario John Woo to ramp up the mayhem, so the folks at Paramount's Melrose Ave. haunts are feeling upbeat. But the question is whether the future Mr. Jennifer Lopez still has any box-office mojo after he and J.Lo stunk up the place earlier this summer in Gigli.

No one is saying Dolgen and Lansing need to dust off their résumés anytime soon -- even if both Timeline and Paycheck do less than the Paramount brass predicts. But Redstone and Karmazin aren't likely to wait forever for things to change. And if the studio's fortunes do improve, it will be later, rather than sooner. Even if the holiday films are blockbusters, earnings for the entertainment unit will likely be off by 24% for 2003, figures SG Cowen analyst Lowell Singer.

That kind of Yuletime message probably won't bring smiles to the faces of Redstone and Karmazin. And when Viacom's Big Two aren't happy, the action isn't always on the screen.

Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online

Edited by Patricia O'Connell

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