HEY, LET'S PUT ON A SHOW!

By RICHARD CORLISS

IT IS HOLLYWOOD'S LATEST CATCHPHRASE, successor to "Let's do lunch," "My fax will talk to your fax," and "I'm gonna kill and eat your children." Now, when a mogul wants to give you the long view, he gazes ceilingward and intones, "But at the end of the day ... "

This old Britishism, a long-winded way to say "finally," is the mot du jour for Jeffrey Katzenberg and others in the burgeoning world of DreamWorks SKG, the company he created with director Steven Spielberg and pop-music potentate David Geffen. For their infant company, though, it is the beginning of the day--a gold sunrise of high finance and unprecedentedly high expectations.

Consider that DreamWorks, which plans to make movies, TV shows, records, toys and computer software, has no film studio or recording studio, no products--indeed, no pedigree but its owners' resumes. No problem either, for Spielberg is the director of Jaws, E.T. and Jurassic Park; Katzenberg supervised the glorious revival of animated features while at the Walt Disney Co.; and Geffen has made stars of the Eagles, Guns N' Roses and Nirvana on records, Tom Cruise in movies and some singing cats on Broadway. So the brand name SKG had a certain allure for investors. Come on in, the Dream team said, and give us $2 billion. Right now. And the money men said yes.

Hundreds of rich suitors have wooed SKG. As Spielberg says, "It's like stacking hour over Kennedy Airport." There was, for example, the Middle Eastern businessman who wanted to fly to meet the moguls with a zillion-dollar check in hand, only to be told by his father that he was forbidden to travel because it was the Muslim holy month of Ramadan. He may yet make the trip.

Why are the investors lining up? Because of the team's past. Because of the future it might hold: that DreamWorks will be the prototype plugged-in multimedia company of the new millennium. And because the exuberance of Spielberg, Katzenberg and Geffen is infectious. It suggests that there is still some Hollywood romance in the youthful determination of three middle-aged men to act like Mickey Rooney and Judy Garland in the old MGM musicals, shouting, "Hey, guys, let's put the show on right here!"

Instead of raising a tent, they are raising money, and their success has been impressive. Never mind that the beaches of Malibu colony glitter with the shards of the grandest dreams. "Starting a studio is not an easy thing to do," says Warner Bros. chairman Robert Daly, who may see some talent from his animation unit sign with SKG. "No one's done it, and sustained it, in 50 years. But DreamWorks has a very good chance of being successful. Every move it's made has been well thought-out. Every day its chances look better."

In the past three months, the DreamWorkers have journeyed to the end of the rainbow, to Seattle and Silicon Valley, Wall Street and Europe, and have found several pots of gold. They are securing a $1 billion line of credit from Chemical Bank. More stash will come through advances in such fields as pay TV (HBO), music distribution (MCA could win there), worldwide pay- and free-TV rights. The team is negotiating with the California Public Employee Retirement System (CalPERS) to invest almost $300 million; that deal, which both sides had hoped to present to the CalPERS board last week, is delayed but not dormant.

Then, at week's end--or, as Katzenberg might say, at the end of the week--Paul Allen agreed to kick in $500 million. Allen, co-founder of Microsoft, will receive a 20% equity stake in DreamWorks for the promise to put his money in the company and see no return for six years. To Allen, it seems a neat fit. "I'm awfully excited about this opportunity," the $4 billion man says of his biggest investment. "DreamWorks' capital structure and debt structure give it a lot of flexibility, help it weather adversity when there is adversity and capitalize success when there is success." Allen, who has a home movie theater and a personal recording studio, is unlikely to sign a talent contract with DreamWorks, but, he says, "I hope to bring my expertise in computer technology to help them in new ventures."

Katzenberg is glad to have the help. "In all the complicated ways to achieve our goal as a digital studio," he says, "Paul has been much smarter than any of us." On Friday night Spielberg and Katzenberg celebrated the Allen deal by taking their wives to the film Bye, Bye Love (directed by new DreamWorks TV employee Gary David Goldberg), then noshing at Dive!, the submarine-themed sandwich restaurant S and K own in Century City.

S, K and G have their own stake in the company: $33.3 million each. That's bus fare to Spielberg and Geffen but a big wad to working stiff Katzenberg, who has mortgaged all he owns to prove he's serious. "I have not just figuratively bet the ranch," he says. "I have literally bet the ranch. My entire net worth is riding on the success of this company." His partners have other reasons for hitching a ride on Jeffrey's dream boat. "Steven and I have tremendous amounts of money," Geffen says, almost shrugging. "You can't spend or even use most of it; it's just on some financial statement, and other people are playing with it. So I'm not in this because I need or want to make another billion; that would have no value. It's all in the doing, all in the journey."

DreamWorks has some bold ideas: to split equity with all employees, including secretaries, and to give shares of gross movie revenue to those chronically unsung artists, the writers and animators. The company also plans to distribute its films in the U.S.-Canada market, rather than handing that task (and a hefty slice of any profits) to one of the major studios. But the company will soon sign with a Hollywood-studio alliance to handle overseas distribution and worldwide video.

There will be a strategic alliance with computer firms (leaning toward Silicon Graphics and IBM) to provide digital systems and another alliance with a software manufacturer (almost certainly Microsoft) to develop games, educational tools, simulations and other PC fodder. "Right now the world of interactive media is pretty dry," says Spielberg, fingering diskettes on his desk next to a computer fitted with flight-simulator cockpit gear. "Whoever we partner with in that world, we're going to make the stuff real wet."

Geffen, who is sprung next month from his Geffen Records contract with MCA, will run DreamWorks' music company, perhaps with longtime Warner music execs Mo Ostin and Lenny Waronker at his side. Spielberg, who is folding his Amblin Films into DreamWorks, will run a live-action film unit with Amblin lieutenants Walter Parkes and Laurie MacDonald; the company will invest about $800 million to produce 24 features by the year 2000. The plan is to make no more than 10 pictures a year. "And if we can't find 10 good movies a year," Spielberg says, "we won't make five good ones and five bad ones. We want quality over volume." Katzenberg will run the animation unit, financed at $200 million. Already in preparation for a Christmas 1998 release is The Prince of Egypt, a Ten Commandments story with songs by Stephen Schwartz (Pocahontas) and orchestrations by Hans Zimmer (The Lion King). That film will be followed by El Dorado: Cortez and the City of Gold.

Katzenberg also heads the TV division, which in November announced a unique venture with Robert Iger, head of ABC, in which DreamWorks will produce original live-action programming in return for a share of advertising and syndication revenues. Other powerful producers renegotiate the fee networks pay for their successful shows, but DreamWorks will be the first company that gets to look at ABC 's books. For Spielberg, the toon tycoon who produced Who Framed Roger Rabbit? and the successful Tiny Toons TV series, there's another option: "A dream I have is to produce ABC's Saturday-morning schedule, because I think I can lift it up."

The three DreamWorkers are stars with different temperaments. "David does business in an ephemeral, gossamer way," says Tom Hanks, the Oscar-winning actor who knows all three men. "Jeffrey is Mr. Bottom Line, Mr. Brass Tacks. He operates every meeting with a strict agenda; No. 1 on that agenda is that the meeting lasts 22 minutes. Steven has almost a cartoonist's point of view. He can draw anything on paper and make it come to life." Hanks conjures up a typical DreamWorks negotiation: "David would say, 'We think you're great, and if you want to work with us, fabulous; if not, we still think you're great.' Jeffrey would say, 'You're great, and here are 17 reasons why you need to be with us.' And Steven would say, 'I love that thing you did in that movie five years ago where you had the platypus dancing on the edge of the table, and if you could do that, you can do anything.' That's the way the meeting would go. And it would be over in 22 minutes."

Spielberg, the eternal child, wishes most of his financial meetings would be over in two minutes. He says he has attended few of the financial meetings, showing up to press the flesh after his partners have spoken. Indeed, Spielberg can't recall meeting the CalPERS crew, but Katzenberg says Spielberg has met twice with them and just doesn't remember.

But movies are about characters, and Spielberg sounds almost starstruck when describing the big boys of business. You'd never guess this was one billionaire talking about others; he's like a kid thrilled to be invited to his first grownup party. Of John Malone, Tele-Communications Inc. CEO, Spielberg says, "He'd be a pretty good leading man in a movie. I'd put him in a film, if he did a decent reading."

Of Microsoft's Bill Gates, the director of Jaws says, "We were a little reluctant to meet him and get into business with him because his reputation preceded him. People warned me about the jaws of the shark. But when he walked in the room, I saw someone my mother would like. He's a haimisher guy. What he said sometimes flew over my head, but his enthusiasm was pretty kinetic." Of Paul Allen: "I hugely related to him the second I met him. And he knows how to take a vacation. I'd just taken a year off, so the first thing we began talking about when we met was boating."

The truism that Hollywood is "a relationship business" is almost a joke. But to an artist-industrialist like Spielberg, the meeting of eyes, minds and enthusiasms is crucial. Iger had tried unsuccessfully to persuade Katzenberg last year to help him run the network, and he was one of the first to call when SKG was announced. Karma came into it too. It happened that at a White House dinner in October, when the three moguls sealed their agreement to become the Dream team, Iger was sitting on one side of Spielberg, Boris Yeltsin on the other (Yeltsin is one of the few international players who has not been rumored as a potential DreamWorks partner). It was then that Iger, who had quarreled with Spielberg over an Amblin TV project on the Civil War, patched things up.

And when that heart-and-mind contact is lacking, the best-laid plans can be upset. Also the best-laid tables. A February business dinner at Spielberg's estate in Pacific Palisades was supposed to cinch the deal with Samsung, whose proposed stake in DreamWorks had grown from $500 million to $900 million as the talks progressed. That night the guest list swelled too, to more than a dozen, and Kate Capshaw, Spielberg's actress wife, had to scurry to a local store for extra table linen. The elegant meal of Chilean sea bass and white wine (except for Katzenberg, who sipped his usual Diet Coke) at the home of the most successful filmmaker in history had to impress Samsung's reclusive chairman Lee Kun Hee, an ardent movie fan with a private library of some 6,000 titles.

Film may be the universal language, but business can be Babel. When the Koreans, through an interpreter, explained their goals, Spielberg got a twinge in his belly--and it wasn't the bass. "The word semiconductor must have been used about 20 times during that 2-1/2-hr. encounter," Spielberg recalls. "I thought to myself, 'How are they going to know anything about the film business when they're so obsessed with semiconductors?' It was another one of those evenings that turned out to be a complete waste of time."

The Samsung side also apparently agreed the timing was not right, though Lee's niece Miky may still be an investor in DreamWorks. Geffen puts the discussion in bolder relief: "They wanted more than we were willing to give them. We didn't want one group to have too much control. We prefer having three 3,000-lb. gorillas in the room with us to one 9,000-lb. gorilla." And Spielberg did in fact learn something from the evening: "I realized that whoever became our equity partners, we needed to communicate in the same language."

Communication problems were at the core of frustrations that MCA chairman Sidney J. Sheinberg was suffering under MCA's owner, the Japanese giant Matsushita. Spielberg had dispatched Wall Street dealmeister Herb Allen to tell the Matsushita bosses that if they held onto Sheinberg, they would have a big piece of the DreamWorks action. Matsushita has yet to respond.

The MCA-Matsushita deal had been brokered by Michael Ovitz, the Creative Artists Agency chief who, since the DreamWorks deal, is no longer routinely described in the press as the most powerful man in Hollywood. As Spielberg's agent, Ovitz had dreams of his own: to trailblaze into the new millennium of show business, digitally delivered over the lines of three powerful telcos with whom CAA had forged an alliance.

With the DreamWorks announcement, Spielberg showed he didn't need Ovitz to get on the fast track into the 21st century. Spielberg would be riding that bullet train with Katzenberg and Geffen, and the exclusion had to rankle Ovitz. Says Capshaw: "It was like going to the sandbox with your buddy, and suddenly a new person comes in to play with him. In business or politics or global affairs, you can usually reduce things to simple human relationships: envy, jealousy, feeling excluded. It's like Mike was saying, 'Why are you planning a party with so-and-so instead of me? I thought you were my best friend! I thought this is what we did together!' "

It took more than three meetings--not just a single schmoozy dinner--to resolve the differences. "There were strained feelings between Ovitz and the three of us that have recently been resolved," Spielberg says, hinting that there was an ultimatum delivered and that Ovitz knuckled under. "It was important I resolve it, because I needed to determine if Mike was going to continue to represent me as a director. I resolved my feelings about Mike, and I think he resolved his feelings about not being part of the DreamWorks inception."

Another formidable ally is Microsoft's Gates, whose tactical pitches include the hardball and the spitball. "Microsoft doesn't take no for an answer," Katzenberg says. "If they can't come in through the front door, they'll come in through the back door. Or the cellar or the attic. That's what they do. Well, so do we. So I respect that." Yet Gates' prodding of Katzenberg during a January meeting in Las Vegas nearly scuttled the software deal. As Spielberg recalls, "When Jeffrey said it took 400 animators to do The Lion King, Bill asked, 'Can't you cut that down to 40 people and do the rest on computers?' Jeffrey misunderstood Bill. He wasn't turning up his nose at creativity; he was putting us to the test, asking very tough questions because he wanted to hear how we would answer them. Bill was manipulating that meeting."

Many questions dog a DreamWorks-Microsoft alliance. "They think we have something to offer to the world they helped create," Spielberg says, "but I'm not sure they'll know that until we actually create something that makes a fortune for them. They're very good at reading the bottom line. But the ethers aren't so accessible to their world. In our world, we trust those ethers." Can the bean counters of Microsoft and the ether sniffers of DreamWorks speak the same language, even if it's English? Will Gates put up money as well as Microsoft manpower and stock? Most of all, who gets to control what?

The CalPERS alliance also needs a massage. The pension fund's board of directors was to vote last week on DreamWorks' proposal; that didn't happen. "We did not go on the agenda of CalPERS," Katzenberg explains, "because we were not able to agree on a term sheet by the deadline. CalPERS is continuing to pursue this with us, as we are with them. But it's not set yet."

There may be a reason for this. Dale Hanson, head of the venture firm American Partners Capital Group and, until last year, ceo of CalPERS, offers a couple of caveats: "You have to ask yourself who will monitor the investment. The motion-picture industry has its own unique system of accounting. And it has big ideas on how to work with 'other people's money.'" Hanson mentions the experience of Massachusetts' state-employees pension fund: it lost money investing in Weintraub Entertainment, the short-lived studio that produced such epics as My Stepmother Is an Alien.

The notion of studio is at the heart of Spielberg's dream for DreamWorks. Since he sneaked onto the Universal lot 27 years ago, Spielberg has rented studio space. Now he wants to own. While Geffen and Katzenberg attended to the salesmanship, Spielberg designed his dream movie studio. It looks more like a campus than the mass of Brobdingnagian barracks that is the typical film-production center, and it would cost about $200 million. Spielberg's partners would rather wait to build a studio after some movie and TV revenue has come in, but they have deferred to the director. They know he needs his ideal home of the future.

The company means to be forward-looking in every respect, from the fantastic toys Spielberg plans to create ("I want them to drive parents crazy") to the method of getting its movies to the public. "DreamWorks has the opportunity to create a whole new distribution system that may be a vast improvement over the old one," says George Lucas, who might be persuaded to allow the new company to distribute his next Star Wars adventure, due out in 1998. "But it's still a high-risk game. If you want to head off in this new direction, you have to be light enough on your feet so you can make faster moves. Aligning yourself with companies like Microsoft may help, but if Microsoft can't jump fast enough, you may have just tied an anchor around your feet." . "On a lot of fronts, especially delivery systems, it's going to be a big, intense and probably very bloody battle over the next six years."

Today's media industry--which produces movies, music and TV shows, delivered in stores and theaters, over the air and cable and via cassettes--is basically the same as a decade ago, when Spielberg's mentors, Sheinberg and Steve Ross, ran their empires at Universal and Warner and when Michael Eisner was leaving Paramount for Disney and taking the faithful Katzenberg along with him. But a decade from now, who knows what the formats and delivery systems will be? Crystal-ball companies like DreamWorks and Microsoft have to bet billions on guesswork, have to figure out how to divide the territory in a land yet to be charted.

Today, and tomorrow, any ambitious entertainment outfit must be an all-purpose, universal-joint conglomerate--for two big reasons. First, the media are converging, one on top of the other, even as the computer, phone line and TV screen are converging into the brave new integrated system of tomorrow. Second, the globalization of the U.S. entertainment industry is roaring forward unabated, making Hollywood an exhilarating, sky's-the-limit export factory.

If you want to control your creative product, you have to also control all its downstream commerce--as Disney does, building The Lion King into a $300 million North American box-office hit, then topping that with $450 million in only two weeks of Lion King video sales. And the hit album and toys and theme-park tie-ins. S, K and G don't have their own theme park in mind just now (for which Disney and Universal must be grateful), but they have big entrepreneurial eyes, and peripheral vision for all those ancillary markets.

To seize these opportunities, DreamWorks and its competitors will need both the vision thing and the chutzpah thing. "Because the costs of manufacture and marketing continue to rise," says Peter Rawley, executive vice president of the International Creative Management agency, "the audience has to be expanded very rapidly. So we have to squeeze the Chinese, get them to sign on. Add India, Southeast Asia, Latin America. And if you are going to spend the money to develop those markets, you'd better go with a full caravan. You can't be like Marco Polo and say, 'Oh, you like silk, do you? Well, we left that behind. We'll go back and get some and see you in a couple years.' No, you've got to be an all-encompassing media company. And, for that, you need management and creative talent, in about that order."

Spielberg alone among his media musketeers expresses some apprehension about the DreamWorks plan to do it all right now: "We could have built this up over a 15-year period. Instead, we're trying to do it in a couple of years. After our first planning sessions, I thought about how much easier it would be to start with a single film, make it, see how it does, and if it does well, do a second picture. That's the conservative, play-it-safe side that haunts me before I fall asleep at night.''

In the real world, every silver lining has a cloud, and DreamWorks faces a few. The world entertainment market could go limp, from a recession or from software exhaustion. Or the company could make flop movies and records. The HBO deal, which was touted as a billion-dollar windfall for DreamWorks, is tied to box-office performance; if the films are dogs, HBO will pay considerably less. And what if all goes poorly? The team's investors could demand that their money be returned before S, K and G get paid for their two-thirds equity stake.

And the DreamWorkers could break up."These people have professionally married each other, and I wish them the best,'' says Sheinberg. "I share the view of the world that they'll have great children. I also know that the reality is that 50% of all marriages in America end in divorce. So, we'll all wait and see." This happens all the time in show business--when Metro-Goldwyn-Mayer was formed in 1924, Samuel Goldwyn had already been forced out of the company. At DreamWorks, Katzenberg is a man with a mission; the other two are in it for the fun, which could wear thin quickly. Spielberg's plans to move to New York City may be on hold. But even in California, he can't give 24 hours a day to this job; Capshaw won't let him. Says Katzenberg: "I perfectly understand the ground rules: 8:30 to 5:30, Monday to Friday, is mine. Everything else is Kate's." Even during business hours, the genial wrangling over, say, building a studio could fester into ugly rifts over long-term strategy. As the old proverb goes, "Same bed, different dreams."

Geffen is the fellow most likely to ankle. He could get the been-there, done-that blues. "I'm the laziest of the three of us," he admits. "I made a staggering amount of money, and I enjoy being an investor. Before this came up, I was thinking very seriously of spending my time doing that." In a year or two, he could think again.

Could one of the three get sandbox envy? That seems unlikely, since they revel in one another's company--kids finally in control of a $2 billion game. For decades they have played, potently, under other men's aegises. Spielberg had Sheinberg and Ross, Geffen had Ross, Katzenberg worked under Eisner for 19 years, until their rancorous divorce last summer after Eisner refused to name Katzenberg his second in command. Now the lads must come of age--be ready to play daddy, not dutiful son, and do their own mentoring. The bet here is yes. Katzenberg was a paternal nudge to the Disney animators. Spielberg has nurtured the careers of director Robert Zemeckis and Amblin exec Kathleen Kennedy, now an independent producer.

In Hollywood, of course, "everybody is rooting for their failure,'' says Hanks impishly. Geffen, one of the few gay executives who doesn't hide his sexuality, lets the torrent of grudge and innuendo wash over him. "I hear these things," he says. "I also hear that I'm supposed to be married to Keanu Reeves, a person I've never met or laid eyes on. There was a story I bought him $15,000 worth of clothes at Barneys. I've never been in Barneys. So I hear all kinds of idiotic things. But people believe them, and there's nothing you can do about it."

Hanks could be a parodist or a prophet when he says, "I guarantee that, when their first film premieres, everyone will say, 'This is it? This is what these three geniuses have come up with?' Unless it immediately enters the pantheon as one of the three highest-grossing films of all time, everybody will ask what's the big deal."

And if they make the big deal, what then? It is one achievement, and a conspicuous one, to create a $2 billion corporation in a few months. It is another to sustain it. The carcasses of Orion, Zoetrope, the Ladd Co. and a dozen more litter the off-ramps of the Hollywood Freeway. In the next decade or so, plenty more virtual studios will get lost in cyberspace.

"Show business has not changed dramatically since Edison first put holes in the sides of celluloid," says Hanks. "Yet in one big factor things will be different: everybody decries the fact that the lawyers and accountants took over the studios, and here's a studio that at its very core will not be run that way." The DreamWorkers are aware that for all their finesse as financiers, it's an embracing vision that makes the engine run. Sure, a mogul like Katzenberg can put in 16 hours making deals at the office. But at the end of the day, he's got to dream.

--Reported by Jordan Bonfante, Adam Cohen and Jeffrey Ressner/Los Angeles and David S. Jackson/Bellevue

With reporting by JORDAN BONFANTE, ADAM COHEN AND JEFFREY RESSNER/LOS ANGELES AND DAVID S. JACKSON/BELLEVUE