Company Town : The Screws Just Got a Lot Tighter

If Frank Biondi Jr.’s firing doesn’t send a shudder through Hollywood, it should.

It’s a reminder that this is an era in which corporate entertainment giants, many saddled with acquisition debt and owned by impatient institutional stockholders, are increasingly paying less attention to traditional, but relatively insignificant, performance gauges such as market share and box-office grosses.

Rather, the Sumners, Edgars, Ruperts and Nobuyukis of the world are asking even more pointedly than they did before why films aren’t more profitable, if at all, and why margins aren’t bigger.

Not that executives didn’t care before, or that caring about profits is such a bad thing. What’s clear is that the heat is on, whether you are Jonathan Dolgen and Sherry Lansing overseeing Viacom’s Paramount Pictures unit or Alan Levine and Mark Canton overseeing Sony’s Columbia and TriStar pictures.

“There was always pressure before. It’s just the screws got tighter,” said Cowen & Co. entertainment analyst Harold Vogel.

To be fair, Biondi’s firing by Viacom Chairman Sumner Redstone had deeper roots than Paramount’s sluggish fourth quarter, marked by disappointments such as “Home for the Holidays” and “Sabrina,” which followed three pretty good quarters, bolstered by profit makers “Clueless” and “The Brady Bunch.”

Redstone is as hands-on as it gets--studios expecting payment from his National Amusements theater chain still wait until he has personally signed the check. Biondi wasn’t so hands-on, and Redstone felt Viacom was so big now it needed someone like himself.

The future seems to be one in which executives will be held more accountable for costs, studios will be expected to say no more often--at the risk of offending stars, directors and agents--and spending two years on “Saturday Night Live” won’t Jonathan Dolgen

guarantee that you get to star in a dumb teenage comedy.

A few years back, it was easier to paper over your mistakes. Growth in revenue from foreign markets, video and other places was soaring at such levels that you could put out a few turkeys and it wasn’t such a big deal. Maybe selling movies on compact-disc-size platters will bring those days back for a while, but don’t count on it.

Costs for talent and marketing are far outstripping revenue growth, with the economics of Hollywood turning from mediocre to terrible. Second-rate stars can command $5 million a picture. Foreign revenue, although still growing, isn’t keeping pace with rising costs. And video markets domestically are maturing, although there is room to grow internationally.

Stuff that distribution pipeline with movies, the logic went a few years back, because the hits would cover the duds and you could amortize your overhead costs over more pictures. Besides, selling pay-TV rights in Sri Lanka would help pay the bills. At one point, Walt Disney aimed at distributing 60 films a year, which works out to one every six days.

Anyone suckered into paying $7 to see “Cabin Boy” or “Wagons East” before the movies were trucked to the video store knows that the pipeline needed a good Roto-Rooter job. Even decent movies cannibalized each other during key parts of the year.

Paramount went along with that more-is-better logic for a while. Criticized for releasing too few films, the studio went into higher gear, aiming toward 25 or more. Sources say Redstone’s instincts--this is someone who became a billionaire starting with a few theaters--told him early this year to scale back. But he didn’t want to overrule his CEO, Biondi. In the end, he regretted it.

By all accounts, Redstone appears to have absolved Dolgen and Lansing of any blame for the strategic error, as he should, because he ultimately signed off on it. Both received a vote of confidence when he signed them to new contracts recently. And Viacom executives speak highly of Dolgen, no doubt partly because he cut $50 million in overhead from Paramount through attrition in his first year there.

For their part, top Paramount executives said they don’t expect a sea change for the studio and its top executives. For Dolgen and Lansing, it means talking to Redstone four or five times a day, as they once did with Biondi. That’s good if they need a quicker decision, bad if things eventually get tense.

Lurking in the background for most studios is the huge expectations that have come from the flurry of mega-mergers of the last few years. There’re also the huge debts yet to be paid, which is why success these days never seems to be measured by net income but by the arcane accounting term “EBITDA.” Translated, it stands for earnings before interest, taxes depreciation and amortization--and is usually called cash flow.

“Cash flow decides whether you handle your debt comfortably or with pressure,” explained one former entertainment chief executive.

That’s why new MCA owner Edgar Bronfman Jr.’s mantra these days is “margins,” as in improving them. And why Redstone says he doesn’t care about market share, just making good movies that presumably make good money.

The concept has even taken hold in Japan, where gaining market share at the expense of profit has always seemed to be the first goal of industries there. Last week, Sony President Nobuyuki Idei interrupted a discourse by Sony Pictures President Alan Levine at a small gathering of reporters on how Sony’s movie market share was improving.

“I don’t care about market share,” Idei said. “I care about profits.”