The Hollywood That Can’t Say No : Entertainment: Holiday box-office returns are lifting executives’ spirits. But profit margins are slim and management is in perpetual turmoil.

In “Leap of Faith,” a Paramount Pictures film that opens Friday, Steve Martin plays a revivalist preacher in a spangled jacket who specializes in fleecing his flock. As he navigates the back roads of the Midwest, Martin wins over his audiences with a potent mixture of religious zeal and Las Vegas pizazz.

“I give people a good show,” Martin’s character, the Rev. Jonas Nightengale, says in self-defense.

Hollywood has also demonstrated a flare for seductive showmanship this holiday season with audience-friendly films such as “Aladdin,” “Home Alone 2,” “Bram Stoker’s Dracula” and “The Bodyguard.”

The pictures are drawing record crowds to theaters, just as the depressed retail industry is attracting more Christmas shoppers. But it would take an enormous leap of faith, experts say, to infer that Hollywood’s fundamental economic problems are over.

For all their success, the holiday films carry steep price tags. Most will have to gross more than $100 million just to break even. Because of high costs and economic woes, historic profit margins have dwindled. The studios also face stiffening competition for entertainment dollars from sources as diverse as cable TV and video games.

Many analysts question whether an industry shackled with a reputation for indulgent, unstable management can ultimately heal itself, as troubled businesses such as IBM and General Motors are attempting to do through wrenching structural changes.

The Hollywood behind “Home Alone 2,” they point out, is the same Hollywood that continues to change executives like socks. Joe Roth, who put both “Home Alone” movies into production, has already moved on, leaving the chairmanship of 20th Century Fox for a producing deal at Walt Disney Studios. Also gone is Brandon Tartikoff, who started “Leap of Faith” before he was replaced by Sherry Lansing as Paramount’s chief. And rumors persist of an impending change at one of the other six studios.

Those changes do more than feed the Hollywood gossip machine or burden studios with expensive contract settlements. They also create a kind of corporate vertigo, analysts say.

Jeffrey Logsdon of Seidler Amdec Securities in Los Angeles estimates that studios suffer a 12- to 18-month business setback each time leadership changes, because expensive projects are shelved and management ranks reorganized.

Jon P. Goodman, who follows the entertainment business as director of USC’s entrepreneurial program, goes even further. She considers the musical chairs style of management wacky.

“The executive turnover is a function of inefficiency,” Goodman contends. “It shows that there’s no long-term strategy or game plan . . . In Hollywood, what you’re often looking at is a bunch of boys playing business.”

High-stakes business, nonetheless. The major studios, which account for the lion’s share of film revenue, will have retail sales of about $20 billion this year. That’s roughly 5% better than in 1991.

But operating margins remain slim. Even with the end-of-year box office surge, the average margin for the studios will be 7% or 8%, compared to an industry high of 16% in the 1970s, said Harold Vogel, an analyst with Merrill Lynch in New York.

Recent earnings reports suggest a link between stable management and stronger results. Walt Disney Studios, headed for eight years by Jeffrey Katzenberg, is Hollywood’s most profitable studio, with about $500 million in annual earnings. Warner Bros., which Chairman Robert Daly and President Terry Semel have run for more than a decade, is second, at $402 million.

But the similarities between the studios end there. Disney’s success comes mostly from classic animation and cheap, live action films such as “Sister Act.” Warner’s biggest hits have been glossy, high-cost movies such as “Lethal Weapon 3” and “Batman Returns.”

“There’s no magic formula for management,” said entertainment attorney Peter Dekom. “People don’t know quite what to do.”

In the search for answers, some corporate parents have settled for stronger supervision.

Besides running his global media empire, News Corp. Chairman Rupert Murdoch has taken a hands-on role in managing 20th Century Fox. New York-based Paramount Communications’ president, Stanley Jaffe, is similarly ensconced at Paramount Pictures, after recently appointing his former business partner, Sherry Lansing, as chairwoman.

“Some studios are almost becoming micro-managed,” said one analyst. “That’s usually a sign of panic.”

For cultural reasons, the issue of corporate meddling is most sensitive at Hollywood’s Japanese-owned studios--MCA/Universal and Sony Pictures Entertainment.

While there are scattered reports of parental interference already, most observers look for the Japanese, known for their adherence to rigid management practices, to become more aggressive once they’ve learned the business.

Pressure to improve earnings is already building. Analysts say Sony Pictures, owned by Sony Corp., and MCA, owned by Matsushita Electric Industrial Co., will both fall short of cash flow needed for capital expenditures on film activities this year.

Sony, which purchased its studio for $3.4 billion plus debt in 1989, is expected to generate operating income of about $200 million. Analysts forecast that MCA, which was purchased for $6.6 billion in 1991, will return about $250 million in operating income to Matsushita. That comes on top of a deep downturn in the electronics business.

“The Japanese are very patient,” said one analyst. “But over time these guys have got to earn fair returns for their shareholders.”

Management became a hot-button issue in Hollywood in early 1991, when Walt Disney Studios Chairman Katzenberg authored a memo about the threat of fast-rising costs. Dekom followed with an equally dire analysis titled, “Was Chicken Little Right?”

An industry not known for substantive discourse gave credence to the warnings because they came on the heels of such costly flops as “The Two Jakes” and “Havana.” But most people agree that the resulting change has been more evolutionary than revolutionary.

Hollywood has made some progress in controlling production costs, which rose 185% between 1981 and 1991--with Disney and Paramount especially aggressive.

Production budgets finally stabilized last year, at an industry average of about $27 million, and seem to be holding firm this year. The studios have also trimmed staffs, cut spending on development and pruned some of their more outrageous expenditures, such as the casual use of private jets.

The onrush of advanced technology has also led to some healthy changes. Steve Unger, managing director of worldwide entertainment for the executive recruiting firm SpencerStuart, says it’s opened the door to more orthodox management.

“The biggest knock on Hollywood studios has been the fact that they were inbred management-wise,” Unger said. “It was ‘the son-in-law also rises’ syndrome. But in the last couple of years that’s changed. The studios have become more aware of the importance of the international markets, new technologies and competition. What this means is that there’s beginning to be an infusion of new blood, which bodes well for the business.”

Analysts, however, say that the bloodletting and financial risk-sharing with outside partners must continue for the industry to truly regain its footing.

On an industry-wide basis, production costs remain high in relation to the return on investment. Significant amounts of money are spent on vanity deals, in which stars and others are provided office space and staff, ostensibly to develop projects. Plus, studios have made limited progress in taming marketing costs, which can exceed $20 million on big-budget films.

“This town has still got to get its act together,” said one executive. “You can only fool the bankers and lawyers for so long.”

One sign of Hollywood’s continuing financial upheaval came with the recent realignment in the talent agency business, which depends on the studios for the bulk of its revenue.

Triad Artists and InterTalent, products of the expansionary 80s, disappeared several months ago, after Triad merged with the William Morris Agency and InterTalent disbanded. Both firms were said to be in financial trouble, and dozens of agents and support people were laid off.

USC’s Goodman says the film business has come to resemble the venture capital business, where companies gamble on the hope that a winning percentage of their investments will pay off. “The problem is that the deals get bid up so high that people are no longer making money,” Goodman said.

Brad Grey, a partner in the production and management company Brillstein/Grey, which was instrumental in putting together the recent hit, “Wayne’s World,” says the odds against success are growing.

The average cost of producing and marketing a film is now $40 million. “In how many industries do you start a new, $40-million business every other week?” Grey asked.

Despite that, studios and production companies continue to make news with mind-boggling, deep-pocket deals. Producer Arnon Milchan, who is affiliated with Warner Bros., paid $2.5 million for the rights to “The Client,” a yet-to-be-published book by John Grishman, who authored “The Firm.” And actor Emilio Estevez recently saw his salary triple, to $3 million, for his next film after starring in the successful B-movie, “The Mighty Ducks.”

Many of Hollywood’s more symbolic excesses also remain: A run-of-the-mill mogul still rakes in a multimillion-dollar salary plus bonuses. Young executives continue to “do lunch” at high-priced hangouts such as Le Dome and The Ivy, and the endless parade of premier power parties still make the news, even though they usually benefit charities.

One of the industry’s most notorious tales of indulgence this year involved Warner Bros., a division of Time Warner Inc. When “Lethal Weapon 3” became one of the summer’s smash hits, the studio brass hosted a lunch for the principal talent. At the end of the gathering, Warner Bros. Chairman Daly stood up and ceremoniously dumped out an envelope containing keys to seven $40,000 Range Rovers parked outside.

In Warner’s defense, the cars made only a minor dent in the studio’s windfall profits from “Lethal Weapon 3,” which has taken in $295 million worldwide. The cars also represented a goodwill gesture on the part of Warner, which will have to negotiate for the services of the same talent when the time comes to make “Lethal Weapon 4.”

But critics see it as symptomatic of Hollywood’s “big gesture” mentality, which results in stars making as much as $500,000 a day and even being paid with private jets.

“Does (Lethal Weapon’s) Mel Gibson, a multimillionaire, really need another car?” asked one skeptic.

Robert F. Felton, a director at McKinsey & Co., one of the country’s leading management consulting firms, thinks not.

Felton, who has advised troubled entertainment companies, acknowledges that Hollywood is a uniquely star-driven business. But he says studio managers have to get tougher and level the playing field with talent before substantive improvements occur. He likens studios to professional sports franchises burdened by runaway player salaries.

“All of the wealth created goes back to the talent over time,” Felton said. “The studios and their owners are taking a disproportionate share of the risk with uncertain return.”

Recent mega-deals include Arnold Schwarzenegger receiving a jet worth $15 million for “Terminator 2: Judgment Day.” Michael Douglas earned an equal amount for “Basic Instinct.” Jack Nicholson was paid $500,000 a day for his brief work on “A Few Good Men.” That came on top of Tom Cruise’s $12.5-million salary for the film.

Each of those deals ups the ante on success, forcing studios to work for bigger and bigger pay days.

While stars usually boost film receipts, Felton says talent agencies often take advantage of the power vacuum at studios. Creative Artists Agency, for instance, won unprecedented concessions for Steven Spielberg, Robin Williams and Dustin Hoffman on “Hook,” because TriStar Pictures felt it needed the film to re-establish itself after a management changeover.

Not everyone sees talent as the problem. Analyst Logsdon notes that only a small part of the return on “Terminator 2” went to its star. Schwarzenegger’s pay for the film amounted to less than 2% of the gross, according to Logsdon.

“No one will complain if Disney makes a half a billion dollars because it’s a company,” Logsdon said. “But people will complain if Arnold Schwarzenegger makes $15 to $20 million as a person.”

Increasingly, there is pressure on talent to share in the financial risks taken on their projects. Universal Pictures has been especially aggressive in that area. Robert Redford agreed to forgo his salary on “Sneakers” for a percentage of the gross. The gamble paid off when “Sneakers” became a hit. He made a similar deal on Paramount’s upcoming “Indecent Proposal.”

Others stars are doing the same. But most studio executives, characteristically, still see new markets, not tougher management, as Hollywood’s ultimate salvation. The latest panacea is the foreign market, which will soon surpass the domestic box office in revenue. Next comes video on demand, which could be a huge windfall for studios.

USC’s Goodman sees new technologies and the Japanese as the biggest instruments of change in Hollywood. She predicts that the industry will slowly but quietly get its act together.

“The changes will be radical,” Goodman said. “But by the time anyone notices, it will have already happened.”

A Few Good Films...

Studios roll out their most ambitious films during the holidays and summers, when theater attendance is highest. This season’s holiday crop is performing well. But most won’t turn a profit before grossing at least $100 million, since studios receive only about half the box-office take.

Gross as of Film Distributor Cost* last weekend “Home Alone 2” 20th Century Fox $55 million $90.6 million “Dracula” Sony Pictures $70 million $75.5 million “The Bodyguard” Warner Bros. $60 million $40.4 million “Aladdin” Walt Disney Studios $50 million $40.3 million “Malcolm X” Warner Bros. $48 million $32.6 million “Distinguished Gentleman” Walt Disney Studios $50 million $10.6 million “A Few Good Men” Sony Pictures $60 million Opened Friday “Toys” 20th Century Fox $50 million Opens next Friday

*Combined cost of production and marketing.

Beyond the Grosses

All six of Hollywood’s major studios are expected to show improved earnings from filmed entertainment this year, thanks partly to a strong holiday season. But operating margins on average remain slim. Analysts say studio management still must find ways to cut spending.

STUDIOS RANKED BY FILMED ENTERTAINMENT EARNINGS:

1. Disney

2. Warner Bros.

3. 20th Century Fox*

4. Paramount

5. Sony*

6. Universal*

* Estimate. Studio does not disclose earnings.

Sources: Financial analyst Jeffrey Logsdon of Seidler Amdec Securities; Exhibitor Relations Co.