(FORTUNE Magazine) – Awhile back a young Sony Pictures employee was giving a tour of the troubled studio's back lot. Spotting chairman Mark Canton, he said: "That's the head of our movie studio--for now." But not for long. FORTUNE has learned that Alan J. Levine, the mild-mannered lawyer who took over Sony Pictures Entertainment two years ago, has decided to jettison Canton. A string of disappointing summer films, including The Fan and The Cable Guy--which fizzled despite the presence of superstar Jim Carrey--sealed his fate. Canton didn't return phone calls.

It's been nearly two years since Sony, the Japanese electronics giant, all but conceded what Hollywood insiders knew by then: that its $7 billion investment in Sony Pictures, left unattended, had created a studio rife with unbridled greed, runaway spending, back-stabbing executives, and impaired judgment. In 1994 the company ousted profligate studio chief Peter Guber, who with his partner, Jon Peters, had nearly wrecked the business. It took an eye-popping write-off of $3.2 billion and installed Levine to restore some semblance of fiscal order. He has--the flood of red ink has been halted. No small accomplishment, but that's about all he's done. These days, the movie division of Sony Pictures is a virtual bomb factory and the halls of the stately Thalberg Building are again thick with political intrigue, finger pointing, and vicious gossip.

None of that, of course, comes as good news to Sony Corp. President Nobuyuki Idei, who took direct responsibility for the Hollywood operations only last December when he ousted Mickey Schulhof, Sony's top U.S. executive and a Guber pal. Idei, who is proceeding with understandable caution, must now figure out what to do--sell the studio, find a partner, or restructure it. He has embarked on a crash course in show business, meeting with, among others, Michael Eisner of Disney and veteran TV programmer Barry Diller. These fact-finding missions--and that he hasn't always brought Levine along--have given rise to speculation that Sony is recruiting a new leader for the studio, although there's no solid evidence of that. Most likely Idei will make a move sometime this fall.

In the meantime, Levine, as head of Sony Pictures, is trying to clean house and, not incidentally, save his job. This summer he eased out the presidents of Columbia and TriStar, Sony's main film units. They joined a long line of executives--including Schulhof, Guber, and Peters, and enough production and marketing chiefs to fill the dining room at Mortons--who have lost their jobs as a result of Sony's long-running misadventure in Hollywood.

Is the Hollywood beast really that tough to tame? Or, as philosopher-manager Casey Stengel once said of his hapless New York Mets: "Can't anybody here play this game?" For the moment it is Levine's turn to prove that he's got what it takes.

Little in this man's background, however, suggests that he's the guy to turn around Sony Pictures. The 49-year-old Levine has deep family roots in show business--his grandfather was an agent and his mother acted in The Little Rascals--and, as a prosperous entertainment lawyer, he represented such top-drawer clients as Grant Tinker, Aaron Spelling, and David Geffen. But he never ran a business, let alone produced a TV show or movie, until another former client, Peter Guber-- not the ideal management model--brought him to Sony in 1989.

"That was then. This is now," says Levine, delicately explaining that he wasn't in charge during the Guber-Peters era. "My challenge has been to put behind us the style and the results of previous management." No kidding.

To his credit, Levine has brought costs under control, consolidating the marketing and distribution arms of Columbia and TriStar. By his own accounting, he has brought movie production costs below industry averages. Most dramatically--although he won't talk about this--he has taken on Guber. Sources say Levine last spring got the former studio chief to renegotiate the sweetheart deal he got when exiting the studio. Guber had been promised access to $200 million in production money for his company, Mandalay Entertainment, and, astonishingly, the right to cherry-pick film projects from Columbia and TriStar. No more, say Sony sources.

Levine likes to boast that Sony Pictures has enjoyed six consecutive quarters of profitability, but the numbers don't mean much in the movie business, with its creative accounting practices. Senior entertainment industry analyst Harold Vogel of Cowen & Co. says that while Sony's TV business is prospering, the movie studio, with all its recent flops, cannot be making much money. "Without more detail, it's hard to know how they're really doing," he says.

Revenues for the Pictures Group--which, unlike profits, are publicly reported--have been all but stagnant during the 1990s. With last year's $3 billion in sales up 13% from fiscal 1995, but below the 1992, 1993, and 1994 numbers, there's hardly cause for celebration. It is true that Sony's movie and TV studio accounts for only 7% of the consumer product giant's $43 billion in sales. Even so, at image-conscious Sony, the studio's well-publicized problems really sting.

What much of the reporting has ignored is a bona fide success story for Sony--the growth of the studio's television business. Levine hired the current management of Sony TV, which produces hits such as Mad About You and Wheel of Fortune and is the cash cow that pays for a lot of failed movies. While movies get all the ink, television "is why the studios are still in business," Levine says (see box).

Nice, but what Sony needs most is hit movies and strong leadership. Levine has failed to convince either Hollywood or Wall Street that he's the man to turn around the studio. To the contrary, says a respected media insider, Sony Pictures is widely perceived to be in disarray. "Nobody is running the show," says this source. "It's madness. They are running around in circles."

It's no wonder that Sony has become rumor central in Hollywood. Levine backers whisper that Jeff Sagansky, Sony's executive vice president in New York who is plugged into Tokyo, is angling for Levine's job himself. One recent embarrassment: A New York Times story reported that Levine's job had been shopped around to former HBO chief Michael Fuchs, among others. Not so, said Sony Japan and Fuchs. The denial set off another round of rumors and finger pointing, with top people inside and outside Sony blaming each other for planting the story.

Meeting Levine for the first time, it's easy to see why moguls and investment bankers are underwhelmed--he's owlish, unpretentious, and amiable enough, but neither focused nor forceful, particularly when asked to articulate his mission. Says a former client: "To run these studios you need somebody with vision, somebody dynamic, somebody who can inspire people. That's not Alan."

To silence his critics, Levine must assemble a strong, seasoned, creative team to run his movie division. This summer he made a good hire in former HBO executive Bob Cooper, whom he named president of TriStar. But paradoxically, uncertainty about his own tenure is making it difficult for Levine to attract other top Hollywood executives. That may be why it has taken him so long to replace Canton, who arguably should have been moved out long ago.

Let's be blunt: Canton, a Guber-Peters protege who's been with Sony since 1991, has a dismal track record. Sony has been-- and remains--a blockbuster-free zone: The only major studio in the 1990s that has yet to produce a megahit on the scale of Jurassic Park or Toy Story or Independence Day. Smash hits spawn merchandising deals, the possibility of sequels or TV spinoffs, home video and international sales bonanzas, and enough profits to cover for a lot of other missteps.

To be fair, Sony has produced some big winners, like Sleepless in Seattle and last winter's Jumanji, and Canton probably bought himself some time with a good 1995, thanks to such classy and profitable releases as Legends of the Fall and Sense and Sensibility. "They really know how to make and how to sell adult movies," says producer Lindsay Doran, who made Sense and Sensibility for $15.5 million. The movie has grossed about $125 million in the U.S. and abroad.

But Canton has scant interest in small-scale movies, preferring instead formula movies. He's known for paying whatever it takes to get proven stars--a record $20 million, most famously, for Carrey to become The Cable Guy. Even so too many of Canton's star vehicles have exhibited a nasty tendency to roll off the production line with design defects, most often second-rate scripts. (Think of Arnold Schwarzenegger in the confusing Last Action Hero.) Canton, say his legions of critics, is a repository of conventional wisdom, with no gut feel for what connects movies to audiences.

So far this year, Sony has released 17 movies without a big winner. The effect will be felt for years as today's duds move into home video, pay TV, and broadcast television. Recently, a Sony salesman came calling on a TV network executive to offer a movie package that included such forgettable titles as Mrs. Winterbourne and Sunset Park. The network buyer scanned the list incredulously, glanced up and said, only half-joking, "I hope you're not getting paid by commission, or you're going to starve."

Sony's fortunes hit bottom last month with the release of The Fan, a third-rate baseball thriller starring Robert DeNiro as a psycho. (Now there's a fresh idea.) The movie somehow emerged from Peter Guber's Sony-backed production company, and it was produced by Canton's wife, Wendy Finerman, who, alas, made her megahit Forrest Gump for rival Paramount. Once again Sony spent untold millions marketing and distributing a film that was booed by moviegoers and critics alike. As Todd McCarthy wrote in Variety: "Anyone looking to characterize the stuff Hollywood foists upon the public as vile, vulgar, and unentertaining need look no further than The Fan."

The chronic problems at Sony Pictures raise the question of why Sony Corp. is in the movie business at all. For one, the company still believes in convergence, that it makes business sense to marry its hardware--Trinitron TVs, VCRs, CD players, the ubiquitous Walkman--with content like movies, TV shows, and Hollywood special effects. For instance, Sony Picture executives talk gamely about creating the consumer interfaces for Sony PCs or interactive television. The fact is, though, that buying a studio is an expensive way to get access to animation and special effects.

Over the past year or so, one of Sony's biggest experiments to date with convergence fizzled. Despite its clout in Hollywood, Sony wasn't able to set industry standards for its fledgling digital videodisk technology that stores movies on CDs. "To launch a consumer electronics product, you really need all the software vendors behind it," says a prominent media investor who insists on anonymity. "Just having your own studio is not enough. That's a bankrupt theory."

On a much more basic level, convergence has been elusive. Sony's New Jersey electronics unit supplied much of the hardware for DirecTV's thriving direct broadcast satellite business. But no one thought to ask DirecTV to carry Sony's 24-hour Game Show Network, which is suffering from limited reach.

In a way, you have to feel sorry for Sony. Its top Japanese executives went shopping for Hollywood content in the late 1980s with bulging wallets and the best intentions, kept a respectful distance when they were told that only American managers can understand the movie business--and then got royally fleeced. Idei isn't buying that argument anymore and is hunting for a way out of this morass. But should he? When Matsushita grew weary of trying to run MCA Universal from across the Pacific, the Japanese electronics firm sold the studio, even at a loss. From Sony headquarters, a senior executive close to Idei says, insistently, that the company considers its entertainment divisions "extremely valuable assets" and "currently...has no plans to sell," in part or as a whole. Interestingly, some savvy media types think that selling is exactly what Sony should do.