Michael, when did you first get interested in the entertainment business?

I started covering it in 1984 for the Wall Street Journal, and had actually never spent five minutes looking at the business before 1984. I just came in cold, started covering the movies here on the West Coast -- actually movies and television -- and wound up pretty much covering it from that point until now. Either that, or working within the industry.

What fascinated you most about it at first?

When I started, I had I had come to the Journal from working on Forbes magazine. And for Forbes, it covered every other kind of business in the universe -- anything but entertainment. I worked on the West Coast, worked in Tokyo, worked up and down to everything from metal work and steel companies to the rest of it. [I] looked at the entertainment business and thought, this is the one thing, it seemed to me, to work outside the rules. It seemed completely different from the rest of the corporate universe. And I think, at that time, that was true.

Elaborate on "working outside the rules."

If you looked at 1984 ... it just turned out that there were big, big changes that had to do with the flow of money into the business. That was approximately the time that Saul Steinberg started an assault, trying to take over the Disney Corporation. Ultimately, that loosed a chain of events that brought in the Bass brothers, that brought in Michael Eisner, that eventually created a different kind of Disney that became merged with ABC.

If you looked at the years prior to that, the movie industry had generally been a backwater, financially speaking. You could stand at the Wall Street Journal bureau and go through enormous clip books we used to keep, and you would find that, prior to 1984, there might be three pages in an entire year devoted to Disney. After 1984, there would be about 33 pages in those clip books.

What happened actually was that creatively in the 1970s, it was a wonderful crazy rock and roll kind of business that created movies that you loved. The whole cycle of films that came out of from 1969 into the 1970s -- films from "Easy Rider" and "McCabe and Mrs. Miller." Everybody knows the list, the stuff that you love. It had been sort of creatively wonderful, [and] financially, a disaster. They had come out, and it was just a bad, bad decade. And that was good for creativity.

Starting in 1978, 1979 two things happened. Cable was invented. You know, HBO created its own revolution, just about the same time the video cassette recorder came to the United States. Everybody took the movies home. That took a few years to have an impact on the business. But by the time you hit 1984, very rich guys, very big bankers -- notably Mike Millken here, who was doing a lot of junk bond financing -- suddenly realized that there was enormous value in the libraries that had been created.

So what was a very tiny business was now a business that they could fund. They could loan money against it, because they could project out the impact of cable, of video and say, "Hey, we can resell every movie that's ever been made." So there's huge hidden value here. Money flowed like a tidal wave into this business. That's when the takeover hit. That tidal wave of money started a long, long trend that completely transformed what the movie industry is. ...

There are some very interesting numbers that go along with that, by the way. ... Beginning in about 1978, the movie industry went through a 21-year period when it showed compound annual revenue growth of 12.5 percent. Now, that's almost unheard of. That level of growth, year after year, that's compound in double digits, very serious double digits that that really supported kind of a gold rush mentality. And it opened up through the 1980s into a wonderful sort of rock and roll thing that went on for the executives; I mean, great fun for the executives, because there was just money rolling left and right; they could do no wrong. Their mistakes turned into great successes.

That has slowed. That's fallen apart in the 1990s, and really, as of about three or four years ago, hit a point where the whole industry is now growing on a revenue basis at less than half that rate. People who are pretty sophisticated in projecting forward think it's probably going to stay around the 6 percent, 7 percent level for the next five or six years to come. So you suddenly have an industry that is now far more ordinary than it was in the 1980s.

What caused the slowdown?

I think it's just sort of a natural ebbing of that huge wave. When you think about it, the real revolution of cable and video was that, for the first time, movies were fungible. You could pick them up, carry them home and watch them again and again and again. America watched the whole library. We've now taken them home and we've seen them all. And so it's not quite as exciting to take those same movies put them on DVD and watch them for the fourth or fifth or seventh or eighth time.

So really everybody's looking for the next revolution. But the next revolution may not be as dramatic as the revolution that unleashed that tidal wave of money. What's happening now is kind of a routinization of business behavior. There's almost kind of a modernization of glamour going on, where corporations who invested in these movie companies at a time when they saw a huge growth and huge expansion going on are now stuck with companies that aren't really growing at the same rate. So they're trying to kind of tame them, and figure out how to get them into a mode where you can rely on them or you can get predictable amounts of profit out of them year to year. And that's really what kind of sets the tone for the movie industry now. ...

[The corporations] more or less let the business alone back in 1984, when it was booming. Are they getting more into the managing of them now?

... I'll tell you there has been, or had been, a real tradition of corporations coming to Hollywood. ... Transamerica owned United Artists at one time. Gulf&Western owned Paramount. This is not new. But they largely did observe a rule that said the movie industry operates according to its own logic. What happened was in the 1980s, because the amounts of money were so large, there was a rationale for allowing them to be [left] alone.

So you had a whole group of executives who came up who were kind of very full of themselves and operated as sort of lords of the universe here, who were movie-oriented people. You're talking about the generation -- Peter Guber and Jon Peters and Sid Sheinberg and Lou Wasserman and Barry Diller and Michael Eisner. Now that whole gang, who had just a wonderful time sort of raping, pillaging, taking money out of the business, having lined their own pockets while lining the pockets of corporations, were kind of the last wild radical generation of executives I think this business is ever going to see.

What's happened now is that the big corporations, as they're taming it, have been sort of gravitating toward a much more buttoned-down, quieter, more reliable, less interesting set of managers. So you have a very, very different mentality inside the managements of the companies.

You were in a unique position when you moved from journalism into the studios.

Yes, I actually did in 1991 ... spent eight and a half years either producing or trying to produce movies and TV programs. I spent all but one of those years on the Sony lot in various capacities. For a while, [I] had my own production deal, for a while worked with other producers, started as a production executive. For one, [I] wound up consulting with Ray Stark Productions, and got a pretty good dose of what the business looked like in the 1990s -- a time which, by the way, was not very easy for producers. There were enormous changes affecting the way producers operate and how middle-level producers navigate the town in those years. ...

What was the most frustrating thing about working in the studio?

The most frustrating thing, I suppose, is that you come to the conclusion ultimately that the great lie in the movie business -- and one that you'll hear all the time -- is the material is everything. The material is actually nothing, OK? The material doesn't matter. You can you can show up with the greatest script on earth and plop it down in front of a studio executive and they can come back with the greatest reasons on earth not to become involved with it. And you realize that what really drives the entire business is attachment -- particularly in the 1990s -- it's heavily driven by star power. That was an enormous revolution that occurred. If you looked at the 1980s, the business was largely driven by producers and directors. ... And I think there were actual monetary reasons for the rise of star power.

As the foreign markets became more and more controlling in the 1990s, you realized that in order to pre-sell a movie, in order to convince somebody in Germany or somebody in France that they should put enormous amounts of money on the line to take a share of the risks on the film, that the script was not what mattered. It's very difficult for them to bet on a script. They could bet on a star. And studios began to think the same way. When they started to get half or more than half of their own money back from abroad rather than from the United States, they also shifted into very serious star-oriented thinking. ...

I've had the experience of taking a script, sending that script to everybody in town, and having everyone tell me what was wrong with it, coming back with that very same script with a star attached and then having some of the same people who had overlooked it the first time say, "This is brilliant material. I've never seen material like this. Where do you find this stuff?" You realize that it's all read through the filter of who's involved. That's what makes the town work.

Bill Mechanic [former head of Twentieth Century Fox] told us you have to attach so much money to films to play it safe that even your best films no longer make money.

Well, I think that's true. I've had projects with Bill Mechanic as a producer. I've worked with Bill and found him a very, very, very smart executive. And yet, at the same time, you could see that he was caught in that same situation. What happened for Fox when Bill Mechanic was there, and a lot of these other companies, is they got driven to again away from the middle. They statistically figured out that if they made a picture in the middle zone -- the middle would be defined as $40 million and then $50 million and $60 million budgets. It's hard to believe, but that is middle -- that they were virtually always losing money.

And so they started to get into a posture where the only ways they could reliably make money ... were to make enormous, enormous movies. Oddly enough, the bigger the investment a la "Titanic," the more likely that they would make profit, because the investments were going into things that were so calculated to trade on a franchise, to trade on effects, to trade on major, major star power -- whatever it was that they knew around the world, they would ultimately come out.

So they had to roll very large or make little niche movies that were so small that all the stars would have to do them on price breaks. If you were going to get involved at all, you had to get a $10 million star for a million dollars. It had to become a labor of love that, as a producer, you had to cut your fee, sometimes to zero. Often these movies are made with a zero-dollar producer fee now, and your whole take is on the comp. You know you might make money down the line. And so the studios got into that zone, where they would dabble around with little things that they knew they wouldn't lose on, or they would roll the whole on an enormous film all at one time. And that's what the game has been like for probably half the majors right now.

How is that changing the kinds of films we see?

It changes it a lot. What basically happens is that all Hollywood films -- other than the niche films the very tiny ones that dribble out sometimes into theaters successfully and largely are seen on video -- but all major Hollywood films become genre films. You're not really making choices based on creative drive. You're making choices based on power or franchise.

Right now, you can do a very interesting exercise. Because of the threat of a writers' and actors' strike this year, everybody accelerated production and banked a lot of films ahead for the year 2002. So you're really in an unusual position where you can look ahead into the summer of 2002 right now, and see what's going to be scheduled what it's going to look like. Well, what you're going to see in 2002 are an entire series of sequels and comic book franchises. There are "Austin Powers 3" and "Stuart Little 2" and "Spiderman" and right up and down the line, virtually everything being done.

Sometimes they actually shot, as in the case of "Lord of the Rings" or "The Matrix," two or three movies back to back, all at one time, just shooting the entire franchise all at once. And the reason for that is ... [that] it's a manufacturing decision. Basically, you can manufacture three films based on one franchise far more cheaply than you can manufacture three different movies using three different creative combinations, three different crews, three different sets of costumes and special effects, all at once.

And there are also marketing decisions. So there there's a tendency to move toward what is already pre-sold, what the public already knows, because what corporations need to do is sell predictability. Their greatest fear is an unpredictable cycle. The ideal life cycle for a corporate entity is 15 percent profit increase every year. They love earnings. Management loves to know where they're going. And in the movie business, the only way you can begin to manage earnings that way is to trade on what's already worked. So it really makes risk almost impossible.

What does this do to talent?

Well, talent essentially winds up also being driven both up and down. ... An actor can get enormous, enormous fees if he or she does what least interests him or her. And it's a great frustration to actors. ... But what the actors find is if they'll step into a reprise of a role they've already done, if they step into a comic book franchise, if they step into a stock fill-in role, they can pull down $15 million, sometimes $20 million. If they want to do what they know in their gut is an interesting role, they'll have to cut their fee sometimes to 10 percent of that, take it all on the comp, and absorb all of the risk.

There are some actors -- I guess Bruce Willis is probably a good example -- who systematically do that, and do very well by that. There are a lot of actors who are afraid to undercut their quote by taking the risky role and working kind of off-cycle. And so they are leery of getting into this kind of split fee, because they're afraid they'll get trapped in the lower fee if the little movie works and the big movie doesn't. So that's the game that they're forced to play.

How about the fascination that the entire country now has with the weekend horse race?

... The interesting thing about the weekend horse race to me is that, when you actually you look at it each weekend, you think, "Oh, my God, what an enormous number, how fantastic." "The Mummy Returns," $68 million open for the weekend. And you think this industry must be flush. This is just incredible that, week after week, they they're beating the game.

And then you realize, when you peel it all the way, that that is not always true. There are some years when the industry itself is getting ahead by 6 percent or 7 percent. There have been some years lately when the industry appears to have fallen behind in a profit sense. Movie economics is a very fragile, marginalized system right now, and a very uncertain system, because essentially, the amounts of money being rolled into each movie are colossal. And every year, new marks are set for the amount spent. That money only rolls back over a six- or seven-year cycle. So nobody's ever quite certain if they are totally going to come out, or how much they are going to make six or seven years from now. So what you get is kind of a false flush every weekend.

...The U.S. box office accounts for about 15 percent of every dollar that's made on movies. They make another 85 percent from other kinds of markets. And so we're all watching this one tiny little blip and thinking, "How wonderful, how great, how big, oh no, that one failed, that one flopped," when it bears very, very little relationship to the actual success- failure profitability hopes and dreams of the people involved with movies. It's kind of just a completely separate system with a life of its own, and is no safe indicator of anything real.

But if your movie opens at number five, you're deemed to be a failure?

Well, yes, at number five you are deemed a failure, because nothing tends to hold unless it grabs the number one spot. The great fight is to be deemed number one. Even on a weak weekend, there are companies that would rather be number one on a weekend when they don't make that much than be number three and make a little bit more, because the perception of strength in a movie simply feeds all the after markets.

There are now about eight major after-markets that a film has to get through. And so the whole box office game is about getting enough momentum as you come out of the front of the gun to get the muzzle velocity to punch through all of the other markets. The great fear is that, if you're perceived to be a flop in market one, even though it's only 15 percent, that you'll then just fizzle and never get through foreign and video and cable with the kind of numbers that you really need. So what the hoopla is about is actually trying to create the impression of success, in order to capitalize on real success down the line.

Where does that real success come from? What are the other markets?

There's an extremely complex kind of cycle of markets that that a movie will go through. Generally, they are sequential. They're not always sequential. Sometimes you'll see them released in several of these markets at one time. But it's pretty simple. You go through a domestic box office, and then you go from there into certain kinds of pay-per-view. The big one is video. U.S. video is the very largest source of income. Video now is both cassettes and DVD simultaneously.

Then you get out into cable markets, free TV markets. Simultaneously, you'll have gone through exact parallels to those markets in foreign territories. You very often do them all at one time. There it adds up to about eight different tracks, each one contributing slightly more or less. The biggest is video. Probably the second biggest is U.S. box office. Foreign right now accounts for just about half of all the dollars that come in. ...

Are all the layoffs we're seeing now a result of corporate management?

It's largely a result in corporate management being very carefully attuned to immediate market conditions. A lot of it has to do with declining advertising markets, because all of these corporations. You look at Disney, you look at Fox, you look at Viacom -- all in businesses that are heavily driven by media markets, by advertising markets. They have big television operations; some of them have big cable operations. They have big magazine operations. Movies per se have become a backwater in these companies.

The movies which have a longer-term kind of thinking are not controlling. And so these companies, when they feel advertising downturn, they can pretty much quarter by quarter tell they're going to be in trouble. And they're just ruthless. They go in and cut at this point. They're not going to sit around and absorb losses for a couple of quarters, because they know very well that if they need to put 4,000 people back on at Disney, they can find them.

That's a change of thinking from the old way of doing business.

Well, it is. You know, there was a lot of bad in the old way. The old way in Hollywood definitely was rock and roll and musical chairs, and people were in and people were out. It was quite tribal. But the old system of doing business here was also quite ingrown and very loyalty-driven. It was as if it were one gigantic clan, with all the important players taking care of each other. And if you were bounced out of this job, you had done enough favors for people who put you in the next job within a week, and that sort of thing.

Now it's a far more abstract business. The numbers of accountants that simply get involved with a single film has skyrocketed. When I was on the Sony lot, one of the complaints I used to hear from people in the physical plant department was they couldn't find room for any more accountants. ... You would have you know literally dozens pouring over the books of an individual film. ... So there has been an enormous increase in the financial control structure over these entities.

What do you think the biggest impact of these giant corporations getting involved in the business has been?

Well, it's the end of creativity. There's just no question about it. To be a movie executive is not a creative job. You are really in a commodities business; you are really managing an enormous glamorous commodity now. There are exceptions out there, but the last thing that you're going to do is kind of roll with your gut. ...

Let's think about a little movie like "American Graffiti" that an executive at Universal, Ned Tannen, made quite a long time ago. "American Graffiti" had no major stars. It cost almost nothing. It had kind of a strange mentality to it, rhythms didn't match anything normal or anything known about a movie. And Ned Tannen loved it. He made that movie, and they made a fortune and made enormous careers out of it.

A phenomenon like that today inside of a studio is just like the toughest decision you can make. It's much easier to make a decision to go out and make "Spiderman" for tens and tens and tens of millions of dollars, because "Spiderman" is rote. That's something that you know all about before you see it.

So I think the great effect is to force anything new in movie thinking outside of the studio system. It forces it way off onto an independent track, where it's catch as catch can. It might be cobbled together, and you might ultimately see it together at the Academy Awards. It might become "Crouching Tiger, Hidden Dragon" and make $100 million, but it will not be created inside of this system.

Does it make you sad?

Well, no, it all fascinates me. ... I love seeing what works and what doesn't work. And I stopped a long time ago fretting about what's on the screen and what's not, because the really great stuff on the screen will come, but it will be in different places. It will be harder to find. You'll just have to scratch and become more sophisticated as a viewer, and find those little movies that you love. ... But I'm just absolutely fascinated by the fact that big changes in control at the top actually do effect what comes out of the machine. ...

How do the actions of corporate management look to the people on the outside? Specifically address the layoffs.

It obviously looks arrogant and troubling. ... It's no secret that Disney, at the same time that it laid off 4,000 people, launched an enormous -- I guess $5 million premiere party or will launch in another week -- for "Pearl Harbor." And I think that essentially that's just a public relations disaster. You can make a case that it makes perfect sense. You can pencil out what that movie cost, what that movie will bring back, what the potential effect of the premiere is. And the $5 million probably evaporates and probably doesn't make a whole lot of difference.

I think, though, that that step very nearly upset the apple cart in these labor negotiations. The point at which they were tagged by the Los Angeles Times in a page one story just before the settlements for essentially pulling that little stunt was the one point at which I thought the psychology in the negotiations started to shift. And I think that they're flirting with disaster when they do pull stunts like that. ...

You said the power has shifted from producer to actor and star power. Is that necessarily bad?

It's not bad; it's not good. It's just real. And it does change the nature of what you see. You sit and read a script and you're thinking, "Can I make a movie out of this script? Can I not make a movie out of it?" Some of the very best scripts, some of the very best stories in the world are very slow to catch hold and get going. You know a perfectly written piece of work can start at the edges and build and work to a kind of momentum and impact that will carry you away like "Raging Bull" in the end.

OK, that that can be a beautiful thing on the page. If you're sitting down and you're reading the script and trying to decide, "Can I place this? Can I set this up as a movie?" That can never happen now, because in a star-driven business, the executive who looks at that the manager who looks at the attorney, the agent -- all of those people have to know within one and one half pages who can play this role. "Is this right for my guy? Is this not right for my guy?"

It results in an enormous kind of frontloading process, creatively. And the writers know it or it's Darwinian. If you don't know it, you just don't register. And so it really does affect what happens. It's why third acts notoriously in movies in Hollywood in the last 10 years are so very weak. Third acts don't matter, because everybody in the process frontloads into the first page into the first act, because it's all about grabbing the star. If you don't grab the star, you don't have a movie. And so you structure your thinking right down to the core around that economic reality.

We've interviewed many mid-level actors and writers, who say that they have to pitch everything and set it up anew each time, and their lives are not going to change as a result of the strike settlements.

No, not at all. And I think what they're saying is exactly true. I think what they're saying is probably not even localized in the film business. A blockbuster mentality has taken over a lot of the culture. This is true in the book business, and in the television business, as it is in the movie business. It's very true in the movie business. And I think that the middle-level actors, even more so than the writers, are where you get a lot of that kind of thinking.

A great example would be somebody like Harrison Ford who, on a movie like "Random Hearts," can carry away an enormous -- tens of millions of dollars -- fee. In order to cover that fee and the things that go with it, his trainer, his security people, everything else in the movie has got to be squeezed a little bit. You might have an actor like Peter Coyote in the same film being paid far less than he was paid for many, many roles across time.

It's the Peter Coyotes of the world, tremendously talented veterans who many viewers love to see, but [who] didn't take the leap up into hyperspace, who wind up paying for the people who did take that leap. It's interesting that, when you really think through movie economics, the villains honestly are not always the corporations. If you follow where the money goes, the money is very often going to your fellow talent, his agent and his lawyer. The money is very often driving around the streets in Beverly Hills, absorbed by the people who made a grab and got it. And then the corporation turns around and says, "I'm sorry, buddy, but you're going to have to pay for it."

What's the most fascinating trend you think we should keep our eye on?

Wow, that's a tough one. To me, the diminishment in the movie unit. ... Just watch how they will now slide into insignificance within the corporations that cover them. You can go back just two or three years ago and find that, let's say, Warner Brothers, its movie and TV operation within Time Warner -- who is already a merged gigantic corporation -- was accounting for about 35 percent of the company. It's probably down to about 25 percent, 20 percent at this point, or slightly over that of AOL Time Warner.

And I think there's every reason to believe that the heavy growth, once we get through the current economic hitch, will still be on the AOL side. That's got a lot of expansion potential still there, which means that that movie and television unit's going to recede down to 15 percent.

When Sony bought Columbia Pictures back in the late 1980s, they fully expected that movies, television and music together would wind up accounting for a huge portion of what they sold. I think they thought movies and TV were going to go to 25 percent of the corporate take. It stuck at around 7 percent. It's just never been able to get over that.

The growth levels inside of the movie business just aren't there anymore. And therefore, you're going to find that, every year, they are going to matter a tiny bit less. And the energy in the corporations, and even the energy in the culture is going to start shifting out and into other pursuits, other things. That could have a very interesting and positive impact on film. You could very easily get back to a position that we enjoyed in 1969 and 1970, when movies weren't so lucrative, and therefore the people who made them were freer to make them better.

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