LESSONS FROM HOLLYWOOD HIT MEN You think your business faces uncertainty? Studio chiefs grapple with some of the worst. In this super summer for cinema, a few demonstrate the secret of success.
By Christopher Knowlton REPORTER ASSOCIATE Edward C. Baig

(FORTUNE Magazine) – AMONG the more improbable scripts to emerge from Hollywood in recent years is the story of the movie industry's own box office comeback. After a drop in admissions and theatrical revenues in the mid-Eighties, largely attributable to the quick spread of cable television and the videocassette recorder, the box office is boffo again. Americans will spend well over $4 billion at the movies this year, not counting popcorn, and this summer looks like the strongest in Hollywood's 80-year history. Why the surge? Paramount marketing chief Sidney Ganis makes a self-serving but valid point when he says, ''Only one thing accounts for the strength in box office: good movies.'' Quality may be a matter of taste, but certainly many of today's top grossers, such as Bull Durham and Moonstruck, appeal to an audience that is older and more diverse than the teenyboppers who looked like the movies' main clientele just a few years ago. Other factors have also boosted the box office. The VCR, found in half of all American homes, may have belatedly helped the industry by making movies more readily available and rekindling interest in moviegoing, say studio executives. A strong economy and the moderate cost of a tank of gas have made the trip to a flick at the mall more affordable. And the renovation of dilapidated theaters in recent years, combined with the spread of high-tech multi-screen cinemas, contributed by spiffing up the movie-viewing environment. Perhaps the most important reason for the upturn is simply better management. Through effective strategies for producing, marketing, and distributing films, executives at the major studios have shown they can maximize the box office performance of their infrequent hits and control some of the uncertainty inherent in the picture business. Since this is world-class uncertainty, these strategies hold lessons for managers who seek to master volatility in a wide range of industries. The job of creating and selling motion pictures has never been for the fainthearted. Studio executives need a gypsy palm reader's knack for forecasting the tastes of the masses, on which they bet formidable amounts over an 18-month production cycle. Each Hollywood movie costs an average of $20.1 million to produce and $6.6 million to promote, and must be launched into a glutted marketplace where brand loyalty scarcely exists. The product's usefulness cannot be measured nor its appeal tested. Rarely can it be sold at discount, and a line extension in the form of a sequel makes sense only if the picture is a hit -- which it hardly ever is. It's all enough to drive the average marketer mad. Here's how the cruel economics works in practice. As a rough rule of thumb a Hollywood film must gross three times its production cost to have a hope of breaking even (see chart). Merrill Lynch analyst Harold Vogel reports that out of any ten pictures produced, three or four are likely to be profitable and one will break even, after including all revenues the films accrue in other markets, including foreign exhibition, home video, and pay and network television. Perhaps only one in 20 movies turns a profit at the box office alone. The major studios, which by definition distribute as well as produce films, do considerably better because in return for placing the films in theaters they collect a generous third of the gross rentals -- that is, of the amount remaining after the exhibitors' standard 50% cut of the box office take. But in a business where only one out of three films is profitable, a costly bomb can still sink a studio. By necessity a few studios have figured out ways to quell the industry's vagaries and consistently make money. The leaders: Warner Bros., Paramount Pictures, and Walt Disney. All have certain common attributes: They are divisions of larger corporate enterprises, they have chalked up substantial hits this year, and they are run by tested, enduring management teams -- rarities in the movie business. Despite such similar clothing, they have fashioned contrasting strategies for attacking their universal business challenge. By no accident they lead the industry in market share, with a combined 45% of the box office, according to Variety. While nothing in the movie business is certain, a few things are nearly so. Foremost among them: stars. Warner Bros., part of Warner Communications, maintains a special appreciation for stars' drawing power and has shaped its strategy around relationships, often noncontractual, with established talent. Almost every year brings a new Warner star vehicle for Chevy Chase, Barbra Streisand, and Goldie Hawn. The Dead Pool, Clint Eastwood's fifth Dirty Harry movie and a major hit this summer, marks his 16th film for the studio. Warner spends lavishly to ensure the convenience and comfort of top stars, regardless of whether they are under contract to the studio. The company's two Gulfstream III jets and its IPTN Super Puma helicopter regularly transport the likes of Streisand and director Steven Spielberg between coasts or to and from vacation homes. Warner Chairman Steve Ross spends a lot of time with the talent, making sure these people feel appreciated. Such favors help smooth the courtship of top entertainers and build good will for the studio. Says a producer: ''One of the smartest things Steve Ross ever did was to buy those G IIIs. You cannot put a value on them.'' ONLY TWO MEN have run the Warner Bros. studio in the past 20 years, a stability that helps foster long-term talent relationships. The current boss, Robert Daly, former entertainment chief at CBS, arrived at Warner eight years ago, making him the longest-serving head now in charge of a Hollywood studio. A cautious executive who keeps a low public profile, he wins respect more for his managerial acumen than for his creative smarts. He has kept Warner among the top three studios in market share for five years running. Paramount Pictures, a division of Gulf & Western, takes the notion of star- courting a step further. The company acquires human assets, luring not just top actors but also acclaimed directors and producers onto the 54-acre Paramount lot with lucrative, long-term, multimovie contracts. The movies these chosen few spin out -- potential blockbusters and sequels to past smashes -- are ''tent-poles,'' as Chairman Frank Mancuso calls them, that pay for the less successful films in the studio's lineup. Crammed with special effects and 24-karat talent, these pictures often cost upward of $30 million to produce. Among Paramount's prize tent-polers: actors Eddie Murphy (Coming to America), Paul Hogan (''Crocodile'' Dundee II), and the producing teams of Simpson and Bruckheimer (Top Gun) and Jaffe and Lansing (Fatal Attraction). Last year the strategy pitched a tent that would have made Barnum & Bailey proud. The company finished first in market share by producing the three top- grossing films of 1987 (Beverly Hills Cop II, Fatal Attraction, and The Untouchables), a trifecta unprecedented in the industry. Refining the story concept is another way to enhance a film's marketability. Some years ago Paramount fastened on the notion of the high-concept film, one based on a simple but unique, or at least appealing, premise that teases the imagination when expressed in a sentence or two. (Examples: An African prince moves to Queens, New York, to find a liberated bride; three bachelors inherit a baby.) If a movie's concept is attractive and easy to express, it will be easy for people to remember and tell their friends about -- and word of mouth is still the most important force in selling movies to the public. The development strategy at Walt Disney Studios usually elevates the story over the stars. The current regime, which took over four years ago, quickly made its mark by conceiving a genre of slapstick, class-warfare comedies typified by the movies Down and Out in Beverly Hills and Ruthless People. These movies appeared under the Touchstone label to differentiate them from Disney family features. The genre apparently tapped a strong undercurrent of irreverence in audiences of the Reagan Eighties and has become wildly popular. This summer Disney's big hit Who Framed Roger Rabbit? revitalized the cartoon genre. Disney hedges its bets on high-concept films by keeping average production costs down to $12 million. Instead of just wooing expensive stars and paying exorbitant salaries, often the largest element in production costs, the studio looks for gifted but out-of-favor actors whose services can be bought cheap. Twenty-nine of the studio's last 30 films earned profits, and some of Disney's down and out stars -- Bette Midler and Richard Dreyfuss in particular -- have regained their luster. Says studio chief Jeffrey Katzenberg: ''We have had an unnatural, uncanny, and probably unrepeatable string of successes here.'' Katzenberg, 37, gets much of the credit. Says Peter Dekom of the entertainment law firm Bloom & Dekom: ''Jeffrey is probably the best-organized human being in the universe. If we were in World War II and he was managing D-Day, Germany would have surrendered in days.'' ALL THE STUDIOS exploit sequels, for two sound reasons. First, they carry immediate name recognition; a movie's identity need not be created afresh and distinguished from the three to five other films that open in a given week. Second, sequels sport flashy economics. Though often a pale imitation of its original, a sequel will do its biggest business on the opening weekend, when it can be relied on to draw legions of devoted fans. The distributing studio earns a higher percentage of the gross in the early weeks of exhibition, so a sequel doing the same aggregate business as the original can be more profitable. The odds of a film grossing $30 million improve if it is the sequel to a blockbuster that brought in $60 million. Squeezing sequels for all they are worth, Columbia Pictures Entertainment, formed last year by the coupling of Tri-Star and Coca-Cola's entertainment business (including Columbia), lists 25 sequels and remakes in development -- based on originals as diverse as Ghostbusters and The Big Chill. If producing the right films is the first critical part of a studio's success, selling what is produced is the next -- and just as tricky. The bulk of the effort focuses on ensuring that a movie opens strong. So-called ancillary markets -- videocassettes, pay and network television -- bring the studios more than $4 billion annually, about half of all revenues from the sale of motion pictures, and a film's value in those markets depends on its performance during theatrical exhibition. Says HBO executive Stephen Scheffer, who buys movies to be shown on the cable network: ''The box office is the only barometer of value that works with relative consistency.'' Consequently, studios put ulcer-inducing pressure on their marketing staffs to goose the early grosses. After the first seven days, word of mouth determines whether a movie continues to draw audiences. If it doesn't, exhibitors yank it fast. Last year only 20 of the 497 films released took in film rentals of over $20 million, and that was a record high for this decade. No film was more important to Paramount this summer than the Eddie Murphy movie Coming to America. Sidney Ganis, the effusive head of marketing, faced a twofold task: ''First, to let the audience know that Eddie is back. Second, to be sure the audience understood that you get Eddie and you get something different, too. The tweak, the extra added attraction, is that Eddie and co- star Arsenio Hall each play four roles.'' Ganis's marketing plan included a blitz that, among other things, sought to broaden Murphy's appeal by softening his streetwise, foul-mouthed image to that of a versatile, romantic comedian. Press kits aimed at black media helped place shots of the star on the covers of Jet and Ebony. The strategy paid off: Over the July 4th weekend, Coming to America broke box office records for a nonsequel film, raking in an exceptionally high $10,000 per screen. PARAMOUNT MAKES especially smart use of trailers, which remain the most direct form of motion picture advertising. Cognizant of the teen-and-20s demographics of the Murphy movie's audience, Ganis attached to prints of Coming to America the trailer for an upcoming rock concert movie featuring the immensely popular Irish rock band U2. The trailer initiates a series of carefully coordinated marketing moves designed to build hype for the concert film. The high point: In October, three weeks before the movie opens, the band will release a new album, its first in almost two years, allowing it ample time to climb the charts before the premiere. As Ganis says, ''Everything fits.'' For last-minute marketing tuneups, the producers turn to research screenings. The studio has already placed its bet: Production money has been spent and theaters booked. But on the basis of early audience viewings a filmmaker may tinker with the movie. In some cases -- Fatal Attraction, for example -- an ending that disappoints audiences will require reshooting. (Originally shot to end with the Glenn Close character committing suicide, the revised version set her loose on a murderous rampage.) In the case of Beetlejuice, Warner Bros. biggest hit this year, the character of Betelgeuse, played by Michael Keaton, prompted such an enthusiastic audience reaction in an early screening that a new scene was shot and the character introduced sooner. Unfortunately, no amount of research screening can predict the size of the audience turnout or how the reviewers will react. Increasingly, stars collaborate with studios to promote films. With top actors receiving a cut of a movie's gross as partial payment, such tactics are in their interest. Walt Disney Studios President Richard Frank credits much of the success of Three Men and a Baby to the willingness of stars Tom Selleck, Ted Danson, and Steve Guttenberg to chat up the movie in guest appearances on radio and TV talk shows around the country. Despite indifferent reviews, the film has grossed $167 million since it opened in November and stands as the biggest hit of the past 52 weeks. LAST IN THE CHAIN of delicate marketing chores comes distribution. Timing is critical. Paramount, which earns excellent marks in the industry for its distribution prowess, occasionally dodges the traditional big moviegoing holiday weekends in hopes of encountering less competition from other films, including its own. Paramount knew it had a likely blockbuster in the sequel to ''Crocodile'' Dundee and said so to exhibitors. That helped the studio book the film into a record 2,837 North American theaters. The company scheduled the release for late May, well in advance of its own Coming to America. ''Crocodile'' Dundee II opened to huge business and set new attendance marks in Britain. The film cost only $15 million to make and, like the Murphy movie, has pulled in over $100 million at the box office. ''If you had your choice,'' says a producer, ''you would take your picture to Paramount first. They get behind their pictures and are willing to spend a few bucks to push them. And no one knows distribution like Frank Mancuso.'' A courtly, soft-spoken man and a 26-year veteran of Paramount, Mancuso rose through the distribution side of the business. The central lesson of successful studios is that a highly creative business -- one in which such vital factors as a star's attitude or a director's imagination cannot be quantified or guaranteed -- works best under relentlessly strict hands-on management. In an industry full of uncertainties, the executives of Paramount, Warner, and Disney turn in remarkably consistent performances by managing every detail of what can be managed. No businessperson is master of his fate, but these have shown they can come as close as any FORTUNE 500 executive to ensuring that their companies survive and prosper.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: HOLLYWOOD'S BREAKEVEN SCENARIO The hypothetical film whose performance is shown above had average costs of production, prints, advertising, and video and TV distribution. The exhibitors' fee and movie distribution costs are determined by box office receipts. Though this film only breaks even, most don't do nearly as well. DESCRIPTION: Total receipts and costs for typical film. film.