Karmazin exit starts dominoes falling at Paramount Pictures ...

Is Paramount Pictures ready to return to its blockbuster creative days?

Last week's resignation of Mel Karmazin as president and chief operating officer of Paramount parent Viacom Inc., followed the next day by the resignation of studio head Jonathan Dolgen, has Hollywood speculating that the risk-averse movie company might be prepared to go after more high-priced talent.

While Karmazin and Dolgen kept a tight lid on spending, Viacom Chairman Sumner Redstone has indicated an interest in taking more chances, which in moviemaking these days can mean budgets routinely approaching $200 million.

It's still too early to know how that will happen. Dolgen's successor has not been named (his resignation is effective July 15), although Karmazin will be replaced by MTV Networks Chairman Tom Freston and CBS Chairman Leslie Moonves, who take over as co-presidents and chief operating officers. Both are more comfortable in the creative community than Karmazin ever was and will likely manage Viacom's entertainment properties in more financially open-ended ways.

As for selecting the movies, that continues to be the province of studio Chairwoman Sherry Lansing, a Hollywood institution who has already shown an interest in going after bigger-budget projects.

"In the movie business, creativity is what differentiates you." said David Miller, an analyst with Los Angeles-based Sanders Morris Harris. "Distribution is a non-differentiated asset. Distribution in any business always becomes dumb pipe. It's all commoditized. You're going to see Viacom focusing on (creativity) a whole lot more."

Paramount has had a checkered history, on the creative and financial front. Started in 1914 as Hollywood was just getting started, the studio was home to many of the industry's greats: from Cecil B. DeMille and Ernst Lubitsch near the beginning of the century to Francis Ford Coppola, Steven Spielberg and Jerry Bruckheimer toward the end. Its great movies range from "Animal Crackers" to "The Godfather" to "Raiders of the Lost Ark." Its former executives are a Who's Who of the entertainment business: Barry Diller, Michael Eisner, Robert Evans.

But there have been plenty of fallow periods, and at several points, most notably in the early 1970s, the studio was on the verge of going under.

Years later, under Dolgen's tight-fisted control--later bolstered when Viacom took over the studio as part of its 2000 purchase of CBS Inc.--Paramount's cost structure made movie financing less of a gamble than it often had been.

Paramount helped pioneer co-financing agreements for films, under which the studio would establish partnerships with competing studios to limit losses from a flop.

In one of Dolgen's shrewdest arrangements, Paramount became partners with Twentieth Century Fox in its financing of the blockbuster "Titanic." In that deal, Paramount agreed to give up domestic distribution rights but placed a cap on what it would spend to make the movie.

When the production budget ballooned from $135 million to $200 million, Paramount was protected. Then, when the movie went on to generate $1.8 billion at the box office, the studio reaped much of the upside.

"They had a very clear set paradigm for the kind of movies they make," said Robert Stein, head of Paradigm's motion picture, talent and literature practice. "They opted for pictures in which their budgets were contained. They stayed away from first-time directors. And they tried as often as possible to bring in co-financing. So they limited their exposure, but also limited their upside."

Last year, Paramount placed eighth out of the Top 10 motion picture distribution firms, with box office receipts of $650 million. The top distributor on the list, Walt Disney Co., had $1.5 billion.

"The problem was the movies we were making against the environment we were releasing them in." Dolgen said in an interview. "Some of them were movies that were good ideas for the wrong time. Some were just choices that were made--I'm not criticizing Sherry (Lansing). In some respects, it was what was being served up from the development process that was problematic. Not serving up enough big-bone films for us."

This spring, the studio scored an unexpected hit with "Mean Girls" but its important summer lineup especially the much-anticipated remake of "The Stepford Wives"--remains a question mark.

Enter Moonves and Freston.

Freston has been a well-respected executive in television, helping diversify the MTV brand and establish such successful cable entrants as Nickelodeon and Comedy Central. Just as successful has been CBS's Les Moonves, keeping his network the top-rated.

"Les has proven to be a spectacular executive--not only with the way be manages his business--but in his interaction within the business and the creative community," said Stein. "There are not many people in this town who feel Les Moonves has done bad."

With Redstone planning to relinquish his role as chief executive in three years--presumably to one of these men--it's unclear how much time they will spend with Viacom's entertainment division, which includes Paramount Pictures and Simon & Schuster. Together, the unit only generated $271.4 million in 2003 operating income out of $3.6 billion for Viacom as a whole.

"Clearly in any organization where there are two leaders and one leader of the organization articulates the mission differently than the next one, it's going to be difficult," said one executive recruiter familiar with the studio operations. "I'd hate to see a situation where Moonves and Freston are each trying to bring in their own distinct culture."

Robert Friedman, chief operating officer for Paramount Pictures, declined to offer further details about potential changes at the studio.

"It's too early to tell," said Friedman.

Viacom didn't return calls for comment.

Viacom Entertainment

Revenues in 2003: $3.9 billion

Contribution to Viacom Revenues in 2003: 15 percent

Businesses: Paramount Pictures, Simon & Schuster, Paramount Parks, Famous Players Paramount Pictures Library: 1,100 movies

Recent Releases: "How to Lose A Guy in Ten Days," "The Italian Job," "School of Rock," "Rugrats Go Wild"