Days of Reckoning at Paramount : Investors Are Looking to Jaffe and Davis to Produce Results. A Hot Slate of Summer Films May Be a Good Start

On a good night, Paramount Communications President Stanley R. Jaffe has one of the most coveted jobs in America. From a courtside seat at Paramount-owned Madison Square Garden, he watches the Paramount-owned Knicks win a suspenseful NBA playoff game. Briefly, his attention is diverted by the arrival of Sharon Stone, star of Paramount’s erotic thriller “Sliver,” as the actress throws her arms around his neck in greeting.

Jaffe, a former movie producer, usually eschews the spotlight, though he holds the No. 2 job at the New York-based company.

But a period of reckoning is upon the 52-year-old executive and Paramount itself. After two years of effort, Jaffe and Paramount Chairman Martin S. Davis say they’ve assembled their dream team of managers at the Hollywood studio, publishing division and Madison Square Garden.

Now they’ve got to produce results, particularly in movie production, where Paramount has fallen badly behind industry leaders Walt Disney Co. and Time Warner Inc. Over the last four-year fiscal period, Disney and Time Warner each garnered almost $1.5 billion in cash flow from movies and television, dwarfing Paramount’s $1 billion from its entire entertainment business (which includes TV stations, Madison Square Garden and theme parks).

“This company still really hasn’t gotten off the dime. It’s got great assets, but it hasn’t exploited them yet,” complained one longtime investor, who didn’t want to be identified. “There’s no momentum in the earnings; they keep doing write-offs every year.”

In truth, write-offs occur every other year ($140 million in 1989; $52 million in 1991 and $35 million in 1993), but to some analysts’ thinking, Paramount keeps clearing the deck and promising a better future--to no avail. Still, Paramount’s stock continues to trade at a higher multiple of earnings than most entertainment companies, because it is the only major studio that hasn’t changed hands in recent years, or completed a transforming deal.

And Paramount has an upcoming slate of films--”The Firm,” “Coneheads,” “Addams Family Values,” “Wayne’s World 2”--that has studio watchers excited.

“Goodby cold spell, hello hot streak,” declared Morgan Stanley analyst Alan Kassan earlier this month, predicting that Paramount’s film market share will jump to 14% by year’s end, from 10% in 1992.

Some investors, meanwhile, wonder whether Jaffe will help propel Paramount into a long-anticipated merger or big acquisition. That is what Davis, 66, has vowed--but not achieved--since a bid for Time Inc. failed in 1989.

In an interview last month, Davis hinted that Paramount could have some tempting choices this fall, when the Federal Communications Commission is expected to set limits on the amount of cable TV programming that can be controlled by cable system operators. A company such as Tele-Communications Inc., which holds stakes in Turner Broadcasting System and the Discovery Channel, could spin off some holdings.

Davis insisted that Jaffe is deeply involved in plotting the company’s direction, along with chief financial officer Ronald L. Nelson.

“If you take a meeting with Paramount, you’re likely to see all three men involved,” confirmed Stanley Shuman, a managing director of Allen & Co., the investment banking firm. “I’m very confident that (Jaffe will) have a significant impact as the chief operating officer in that company.”

Jaffe has immediate challenges: After losing “Cheers,” the company needs to nurture a new batch of long-running network TV series and put out more successful movies, while finding ways to take advantage of new technologies in both entertainment and publishing. In sports, the challenge is to remain cost-minded while still building winning teams.

Acquaintances describe Jaffe as a capable executive with a quick intellectual grasp of the businesses he now oversees. The son of retired Columbia Pictures Chairman Leo Jaffe, he made his own reputation at age 29 with the box-office success of “Goodbye, Columbus,” his producing debut.

Subsequent films made Jaffe rich. In 1991, Paramount paid more than $2 million for his work as a producer; as president, he works for a salary of $760,000.

Clearly, Jaffe could walk away from his corporate post with ego and wallet intact. For that reason, some analysts say he could urge bold moves for Paramount without the usual regard for job security. At the very least, they agree that he makes a good partner for Davis, who has a reputation for being prickly and indecisive.

Jaffe, who has rebuffed nearly all interview requests for two years, relented last month to speak at length in his office overlooking Central Park. Always blunt, occasionally profane, Jaffe displayed none of the temper that made some studio employees quake during his first 18 months on the job.

“I have three loves--other than my family--and that’s sports, books and movies. That pretty well covers this company,” Jaffe said. “It’s a good job, and I love it.”

With his former partner Sherry Lansing now running the movie studio, Jaffe seems to think his management team is finally in place. Although “Sliver” proved to be a box-office disappointment, the Lansing-produced “Indecent Proposal” has grossed $100 million.

“This company is looking for what it can do with its resources, both financial and intellectual, and we expect to exploit those big time in the next however-many months,” Jaffe said.

And he was quick to defend Davis.

“I think he’s singularly the most misunderstood person I’ve ever met in my entire life,” Jaffe said. “He’s one of the most consistent people I’ve ever met. He sets a course, and he holds to it. If he makes promises, he keeps them.”

Jaffe should know about unflattering perceptions, since he unnerved a number of studio employees when he first took over. “I don’t suffer fools well,” he said last month. “I’ve been known to raise my voice. . . . I’m trying to work on it.”

“He will say humiliating things and make it a very personal attack,” said one departed Paramount executive, recalling scenes he witnessed. He said Jaffe would listen calmly, then interrupt an employee with his color rising and a loud, clipped voice: “Let me tell you something. You don’t know anything about the movie business; you never will know anything about the movie business!”

Jaffe and Davis have known each other nearly 25 years, since the acquisition of Paramount Pictures by Gulf & Western Industries. Davis, who had joined Paramount in 1958 as a sales and marketing director, played a role in the 1966 takeover and was soon named chief operating officer. When Davis was promoted to a corporate job at Gulf & Western in 1969, his successor was Jaffe, fresh from his “Goodbye, Columbus” success.

During that era, Jaffe slashed the studio’s overhead by 25%. Paramount produced its share of box-office duds but also set a studio record with “Love Story,” the 1970 hit.

But in 1971, Jaffe concluded he had too much success, too soon. At 30, he felt he was speaking like someone twice his age. “Emotionally, I really wasn’t ready for it . . . so I left,” he explained.

Jaffe worked briefly at Columbia Pictures in the mid-’70s, then returned to independent production. He developed the 1979 Oscar-winning hit, “Kramer vs. Kramer,” which introduced him to Lansing, then a Columbia production executive. In 1983, after Lansing completed a stint as president of 20th Century Fox Productions, she and Jaffe formed a bi-coastal partnership.

Meanwhile, at Gulf & Western, the unexpected death of company founder Charles Bluhdorn catapulted Davis into the chief executive’s seat in 1983.

Davis began selling unrelated businesses such as Consolidated Cigar Co. and titanium and zinc holdings. And Wall Street rewarded Davis’ moves, keeping the stock price high enough to discourage unwelcome raiders.

In 1984, Davis lost his high-profile management team at the Hollywood studio, with Barry Diller moving to Fox, and Michael Eisner and Jeffrey Katzenberg leaving for Disney. But under studio Chairman Frank Mancuso, Paramount was the top-ranking studio from 1985 to 1989, averaging 16% of Hollywood’s box-office revenue.

Davis nurtured the publishing unit, which is headed by veteran Simon & Schuster executive Richard Snyder. Paramount spent nearly $900 million to plunge into educational publishing in 1984 with the dual acquisitions of Esquire Inc. and Prentice-Hall Inc. The company has emerged as a leading publisher in education, which generates better profit margins (14% to 16% of sales) than the smaller, if more glamorous, consumer business (3% to 5%).

In 1989, Davis and the board decided to sell the Associates finance company for a $1.2-billion gain. Gulf & Western was re-christened Paramount Communications Inc., and the cash-rich company made its unsuccessful bid for Time. But Time spurned Paramount and acquired Warner Communications instead. Paramount paid $80 million in fees and subsequently suffered a two-year slide in entertainment earnings.

Wall Street waited for Davis to make another bold move. But no merger materialized, despite reported talks with Turner, Viacom International, Capital Cities/ABC and General Electric’s NBC.

Instead, Davis picked up smaller properties, such as TVX Broadcast Group, owner of six TV stations, and Computer Curriculum Corp., an educational software publisher.

Critics began asking whether Davis had lost his nerve. Others concluded that Davis, at heart, was never a risk taker.

For seven years, Davis had operated without a chief operating officer or president. In mid-1990, he told an interviewer that he needed no “coordinator” but admits now that he had quietly begun a search for a No. 2.

Cynics suggested that Davis sought to distance himself from the troubled movie studio while placating Wall Street with his choice of a Wharton-educated, seasoned filmmaker. But the two men genuinely seem to have an accord.

Hiring Jaffe was “one of the best decisions I’ve ever made, and I’m delighted,” Davis said. Although he is vigorously fit and prides himself on having a smaller girth than Jaffe, Davis admits there is some relief in having a No. 2: “I don’t worry about traveling.”

Davis said he wanted a tough-minded executive who cared more about Paramount than his own self-aggrandizement. “I want to be challenged. And I want somebody that I can challenge that’s not going to go out and sulk,” Davis said. “Jaffe and I can do that.”

Still, Davis says he’s on the phone early Sunday morning to learn the weekend box-office grosses and still communicates directly with division heads. But he grew visibly angry when asked to respond to a rumor that Jaffe has been told to stay away from the publishing division.

“It’s a lie,” Davis declared. Snyder, for his part, said he has every intention of spending the rest of his career with the publishing division.

Known among filmmakers as a supportive producer, Jaffe sees himself as a motivator, even in technology and publishing, where he is a newcomer.

Last month, for example, he pounced on the news that Blockbuster Entertainment was contemplating a deal with IBM to use digital technology to duplicate audio compact disks. If the technology would work for music, Jaffe reasoned, why not publishing, where returned books diminish profits? “I called (Blockbuster Chief Executive) Wayne Huizenga . . . and said, ‘How would you feel about us sending our people down to spend some time with yours?’ ”

Likewise, Jaffe has pulled division heads together to speed the development of amusement park rides based on the Paramount movie “Days of Thunder.” Both a licensing and a technology group have been established to cut across division lines.

In sports, Jaffe made changes in the Garden’s management and lured former Lakers coach Pat Riley out of retirement. This year, the Knicks responded with their best season in 20 years, winning the Eastern Conference semifinals.

But the biggest shake-up occurred at the Hollywood studio, with a series of events not entirely in Jaffe’s control. Mancuso, the longtime studio chief, left immediately after Jaffe was hired, asserting breach of contract since he’d been reporting directly to Davis.

Jaffe commuted to Los Angeles until he recruited former NBC Entertainment Chairman Brandon Tartikoff to head the operation in July, 1991. There were layoffs at both the corporate and studio levels. Gone was the studio’s much-guarded autonomy from headquarters in New York.

Despite the success of “Wayne’s World” and other films, relations between Tartikoff and Jaffe were strained last year when the studio ran into problems assembling the requisite scripts and talent for the 1993 slate. In October, Tartikoff resigned to spend more time with his family in New Orleans, where his daughter was recuperating from an auto accident.

“I have pretty decent, fond feelings for Stanley,” Tartikoff said. “I’m just sorry that the situation was the way it was, that neither Davis or Jaffe saw me operate at 100%.”

Jaffe turned to Lansing and persuaded her to become chairman of the motion pictures unit. Though she now reports to Jaffe, Lansing said there’s been no change in their relationship. “There should be, but there isn’t. I give him no respect,” she said, laughing. Her contract allows Lansing to “greenlight” movies, but she actively seeks his counsel on upcoming projects.

With Lansing’s appointment, Paramount abandoned its tradition of having a studio chairman oversee both movies and television. Kerry McCluggage--recruited by Tartikoff to run television--now has a chairman’s title as well, and he reports directly to Jaffe.

Some analysts think the split makes sense, and they praise Paramount’s leadership in first-run syndication, with such shows as “Entertainment Tonight,” “Hard Copy” and a new hit in “Star Trek: Deep Space Nine.” Although the company has no network series that will qualify for sale in the lucrative rerun market for the next three years, Paramount sold six of seven series developed for the networks next season.

“The best is yet to come,” declared Davis last month, before the company announced that it was taking write-offs in publishing and changing its fiscal year to begin May 1. With the deck clear, Paramount will be under increased scrutiny to deliver better earnings this time.

“If there’s some continuity, and you’ve got some first-rate people . . . then that’s to Jaffe and Davis’ credit,” said one investor. “If Paramount delivers in the rest of 1993, then I’d say yeah, they’ve turned the corner here. . . .

“The jury’s still out.”

A Thwarted Giant?

Investors and the media communities in New York and Hollywood have been predicting a big move by Paramount Communications for years. But Paramount has seemed to tread water since losing its bid for Time Inc. in 1989.

Paramount’s Media Mix

Publishing (1992 Revenue: $1.623 billion, 38%)

Publishing profits undoubtedly got a boost from talk-show host Rush Limbaugh’s book, “The Way Things Ought To Be,” which recently spent 21 weeks atop the bestseller’s list.

Movies (1992 Revenue: $1,259.4 billion, 29.5%)

Paramount should reap big rewards from “The Firm,” starring Tom Cruise, which opens June 30.

TV Programming: (1992 Revenue: $655.0 million, 15.4%)

The company faces the loss of the massive revenues generated by “Cheers,” which it produced.

Sports/Theaters/Theme Parks/TV Stations: (1992 Revenue: $721.6 million, 16.9%)

Paramount reinvigorated basketball’s New York Knicks by bringing in Pat Riley as head coach.

Falling Behind the Competition

In 1989, three studios were neck-and-neck in the filmed entertainment business. But since then, Time Warner Inc. and Walt Disney Co. have pulled ahead of Paramount in operating cash flow (operating income plus depreciation and amortization), a key measure of performance.

Source: Paramount Communications, company reports