What's Happening to Hollywood? Profit is trying to push art out of the theater. The movie business has become so brisk that even a box-office bomb can turn a profit. And why risk a huge artistic success when you can have a modest financial one?m

"No, no. We're for real. Believe me, this is not an illusion." Sid Ganis laughed at a visitor's suggestion that other members of his industry consider the "Egg Company" an exception, a temporary aberration. The interior of his office tends to confirm his lighthearted denial: A tasteful and expensive combination of high tech and plush, it overlooks the huge, skylight-covered courtyard that the Egg Company seems to grow out of. Lots of brick, lots of wood (oak), and plants everywhere.

The bearded Mr. Ganis is senior vice-president at Lucasfilm -- a.k.a. the Egg Company -- the offspring of George Lucas. In an industry where a 25 percent success rate is considered good, George Lucas and company have scored four out of four, including the biggest moneymaking picture of all time, "Star Wars," and "The Empire Strikes Back," which has sold over $180 million owrth of tickets to date. (The other two are "American Graffiti," another hit, and "More American Graffiti," which merely did all right.)

Wedged comfortably into the corner of a wonderfully overstuffed couch, feet on the coffee table, Mr. Ganis has the distinct and seldom long-lived privilege of looking out on the motion picture industry from the top. His building bears the name Egg Company only to keep away the thousands of tourists that drive by it every day as they turn into the "lot" across the street, Universal Studios, for the daily tours. This unassuming brick office building, however, is where the action is.

A number of studio executives in Hollywood prefer to regard George Lucas as "the exception" or an "aberration," since most of them are having a hard time even approaching his success. And in the sense that blockbusting pictures such as "Star Wars" and "The Empire Strikes Back" have always come few and far between, George Lucas is an exception. According to Mr. Ganis and a few other rising powers in the industry, though, the fact that "The Empire Strikes Back" was a critical success, that it offered moviegoers something original and imaginative, that it was made skillfully, makes the film's commercial success no fluke. They also consider it no accident that, by contrast, much of the rest of the industry chalked up dismal box office and critical performances last summer, a period that normally produces the lion's share of annual business.

Most of the motion picture industry shows every sign of being stuck in neutral with its engine racing at full throttle.

There are some vague rumblings coming from deep in the Hollywood machine. The financial picture -- the way the motion picture industry does business -- is changing rapidly, and the creative picture -- how the industry makes movies -- is being challenged by a small but powerful group of filmmakers.

The most significant change of direction for Hollywood is its reliance on independent production companies, what some are calling the "New Hollywood," for films. The big studios, increasingly, are settling back into the role of financer and distributor, instead of initiating film projects themselves. In 1979, independents came up with 60 to 70 percent of the films that fed the major studios' distribution networks.

In most cases, the independents' way of making movies turns up as a paler, smaller version of the way the studios make them. However, a small but powerful group of independents is more willing to take risks, an element they feel is crucial to quality filmmaking, and an element they feel the big studios have lost. Mr. Lucas is one of this small group, as is Francis Ford Coppola ("Apocalypse Now," "The Godfather," "The Godfather, Part Two"), and Alan Ladd Jr., president and co-founder of the Ladd Company.

"The state of the industry is abysmal," Mr. Ladd said during an interview in his office on the Warner Bros. lot in Burbank.

"I think too many people are caring about the deals and not the content. The effect is escalating costs and a lack of interesting movies. There are exceptions, but any time you get an infusion of people into the business that are strictly business people and aren't people who really have a true love for the movies, you're not going to get pictures that are good and of substance."

Mr. Ladd was formerly the president of 20th Century-Fox and is credited with bringing that company a dazzling string of successful films, ranging topically from "Julia" to "Alien." Not the least of his accomplishments was agreeing to finance George Lucas and his "Star Wars," a script every other major studio in town had turned down.

What the studios do is called "shooting the deal instead of the script," putting the emphasis on securing big-name stars and directors for a movie in hopes of a big box office. "They [The major studios] are going to go for a formula-type situation, which is to say, 'Let's buy Burt Reynolds at any cost and put him in a car, and we'll make money,'" says Mr. Ladd. "They are setting their sights on the profits rather than on making a good movie."

One reason studios are opting for profits over artistry is that movies are getting more and expensive to make these days, and studios want to ensure that they can cover production costs. The feeling that "you have to spend money to make money" adds more spring to the inflationary spiral. The average cost of a movie last year was $8.6 million, up from 1.9 million in 1972. Shooting on location costs $160,000 to $200,000 per day. Studios frequently spend a minimum of $6 million to promote a film. Big stars and well-known directors are production executives' insurance policies. If a movie will cost $9 million to shoot, they want sure-fire box office draws such as Reynolds, or clint Eastwood, or Jane Fonda, or Dustin Hoffman, to play a part, and they are willing to pay an extra $1 million or so to get them.

Since television networks are also attracted to big stars, a lucrative network sale can turn a tidy profit for a box office loser. Television has come full circle in its effects on the movie industry, from luring people away from the theaters in the 1950s to the present, when movies are often made with an eye on the TV market.

"You better believe it," says Milton Goldstein, president of the independent Melvin Simon Productions ("Love at First Bite," "My Bodyguard," "The Stunt Man") in Beverly Hills. "It's absolutely true. . . . You gotta understand that TV to the motion picture producer is almost 100 percent dollar. You have no production cost, no real distribution cost, and you don't have to market it. . . . One effect is seeing that pictures that have sex or horror get enough cover so that they can be made suitable for television. '10' had sex in it, but it had enough cover to make it work for TV.

"But yes, every company that makes movies today will very seriously consider, when they're casting it or when they're making it, 'How do we get a network play on this movie?' It is not unusual to take back 25 percent of a film's [filming] costs from a network sale."

The scramble for big names does not include just anym big names. Bud Yorkin, a man who helped to write "All in the Family" and other Norman Lear productions, and who has been in and out of the movie business for 20 years, tells of a script he sold to Columbia. It is a black comedy called "LEthal Gas," about prison life.

"There was a prime example of a script that both the studio and I liked but where I had a star which they didn't want. Here I am doing a picture that takes a consummate actor and I had Roy scheider ["Jaws," "All that Jazz"], but they want a guy like John Belushi doing it. . . .

"I think that if Barbara Streisand came in and wanted to film the telephone book, they'd say, 'Fine. Who do you want for a producer? Fine. Who do you want for a director? Fine. . . .

"The main thrust in the industry now is 'Get me Jack Nicholson!' not, 'Who's best for the role?'" But if you want Nicholson or Dustin Hoffman or Richard Dreyfuss, you have to chase them for five months just to get their reader to look at the script. You get into a problem when your motivation for working on a motion picture is how well it will do commercially. Obviously, everybody wants a picture that makes money -- but to make it the main thrust of your efforts?" He shakes his head. "There are guys in the studios making decisions about pictures who have been in the business 10 minutes. You have to have a passion for making movies. You have to believe in the movie."

Mr. Yorkin's difference of opinion with Columbia about the star for "Lethal Gas" proved irreconcilable, and the studio eventually paid him for not using the script (a "play or pay" deal).Avco-Embassy has since purchased it, and Mr. Yorkin hopes to re-sign Scheider for the leading role.

"The thing now is not wanting to do the best you can on a movie but this insidious hustle for the deal," says Paula Weinstein, vice-president of production for the Ladd Company and formerly an agent at Warner Bros. "People say, 'Oh Boy, I've got X's next movie, and we'll go and we'll negotiate, and we'll bring him to the studio,' and then they leave without paying attention to the movie itself. It has totally affected all of us. The hustle syndrome has replaced the actual process of making movies. It has become the state of the art, as opposed to work. . . .

"The trouble is that there are so many buyers now, we're all killing each other, stepping all over each other to get X's next movie."

Nor does having a major star always pay off. Last summer, "Rough Cut" with Burt Reynolds did poorly at the box office, as did "Bronco Billy" with clint Eastwood, and "Tom horn" and "The Hunter" with the late Steve McQueen. Moreover , some of the biggest-grossing pictures of the last few years -- "Star Wars," "The Empire Strikes Back," "Alien," "Rocky," "The Black Stallion," "Animal House" -- have not featured big names on the marquee. One of the biggest moneymakers (because it only cost $4 million to make) moveis of the summer, "Airplane," came no closer than Kareem Abdul Jabbar for big james on the biling.

Does this mean that the star system is on the wane but the big studios haven't caught on? Is talent becoming more important than a big name?

"People are always saying that the star system in finally breaking up, and it never does," comments James Bridges, director of "Urban cowboy," one of the summer's few hits. "They tend to forget that a lot of the stars got to where they are because they are good."

The message from "Bronco Billy" and "Rough Cut" may not be that stars don't bring'em in, but the people want to see certain stars in their character roles. "Bronco Billy" received good reviews, most of them calling it Eastwood's best work, but it did not play Eastwood in his stereotypical toughguy role. Although "Rough Cut" failed, Universal put Burt Reynolds in a fast car for "Smokey and the Bandit II," and the money rolled in.

The star system has been part of the motion picture industry for over seven decades. Before 1909, movie actors and actresses were anonymous. People would send fan mail to the production company, addressing it to characters such as the Lone Indian. In 1909, in New York, Carl Laemmle, who eventually built Universal City Studio in Los Angeles, changed that practice when he hired Florence Lawrence (known until then to fans only as the Biograph Girl) away from the Biograph company and gave her a huge salary and star billing. In 1910 he hired Mary Pickford from Biograph, doubling her salary, and found unheard-of success by promoting the stars over pictures.

The star system, in fact, proved to be the vehicle for the independents such as Laemmle, William Fox, and Adolph Zukor (who eventually formed Paramount) to grab the industry away from the Motion Picture Patents, the nine-company trust that had monopolized the industry.

Seventy years later the new independents are challenging the industry, and the question is: How does George Lucas succeed, where so many big companies fail?

"You know what the difference is [between Lucasfilm and the major studios]? It's so simple," says Mr. Ganis. "People at big studios are seldom focused. The other studios I worked at, it was much easier not to think because I was much too busy. The majors are too big. They have to sustain a product lineup just to clear overhead and make money. A major will make some money on a picture whether or not it is successful. They get distribution fees on every picture they sell. If a company released 20 pictures, assuming they're not all disasters, they almost can't lose. They get a distribution fee off every one of those 20 pictures.

"But keeping those 20 pictures going through the pipeline makes it impossible for a studio executive to focus on one movie, to make sure it's good, to work with the director.

"AT Lucasfilm, we have the luxury of working on one film, more or less, at a time. All of our energies go into that one film so that when it is released, it represents the best of the talent Lucasfilm has."

Paula Weinstein tells a similar sucess story: "I think you have to ask yourself why you are making a movie, for a number of reasons, not just why you are making it financially. One of the reasons we were so successful at Fox was that we made movies we loved. We loved 'Julia,' and we made the movie, and it make money. It didn't make 90 million, but it made money.

"We also made movies that we were not so passionate about, but we made them well. There's no question that 'Alien' was an exploitation film, but it was the best of its genre. It was really well made, and that was one of the things that made it exciting to people who were not teen-agers.

"We do not allow our creative people to get any better. Francois Truffaut made 15 movies and the work got better and better all the time. Here, though, you get somebody like Jon Landis with one hit and the studio throws him $30 million for his next movie." Mr. Landis made "Animal House" -- his first picture -- for a fraction of the budget he got for "The Blues Brothers."

"It does not force the filmmaker to make creative choices. Billy Friedkin did it in "The French Connection,' which had the best car scene of all time with only two cars. Yet LAndis, because he doesn't face the creative choice of having enough money for only two cars, goes and wrecks an entire fleet. The final result is not nearly as good."

"You have to be able to work with your filmmakers one on one," adds Mr. Ladd. "You have to have a relationship with them, nurture the talent." In a sense, the movie industry is still regrouping from the double whammy it received during the late 1940s and early '50s.A 1949 federal court case, the United States v. Paramount Pictures Inc., ruled that ownership of theater chains by the big studios constituted an illegal monopoly. The studios were forced to unload their movie houses, depriving them of the automatic outlet for the some 500 features they were churning out every year.

The other blow came from the box that people began watching in their living rooms night after night, when, as the movie moguls saw it, they should have been plunking down their quarters at the local Bijou. TV grabbed a big chunk of the moviegoing audience, and it has never let go.

The two blows, especially the first, started a breakup of the studio system which been going on ever since.

Sales went into a 25-year decline that did not begin to reverse until 1971, notes Art Murphy, who covers the industry for Daily Variety. He sees the industry moving in 25-year cycles, and 1971, with 820 million tickets sold, marked the beginning of a new upswing. Ticket sales have climbed since tate development, Century City. MGM and Fox both auctioned off their costume and prop departments in the early '70s, and the MGM backlot -- as much a symbol of the old Hollywood as anything -- has been scraped clean, leveled, and turned into one of the plushest residential real estate developments in Los Angeles. True to form, condos now bloom where Atlanta once burned for the filming of "Gone to 1.12 billion in 1979. The record high came in 1946 with 4.67 billion tickets sold.

In the 1960s, United Artists found itself unable to produce movies in-house, so the company hired independent producers who went out and hired all the necessary talent for a project the studio had decided to finance and distribute. Other studios followed suit.

As early as the 1950s, 20th Century-Fox had turned much of its studio property into a spectacular commercial real es-With the Wind."

The independent producers have become independent production companies, such as Orion ("The Great Santini," "10," "Time After Time," the upcoming "Hammett," "A Little Romance," and others). Now they generate their own projects, with the studios exerting less and less creative control. The independents make the movie, either by long-term contract or on a picture-by-picture basis, and the studios distribute it.

Film distribution is of prime importance to the Big Hollywood studios. The movie mill must keep churning even when it churns out a slew of bad pictures. "The majors have huge distribution networks and they have to keep feeding them with movies," says Mr. Ganis; "otherwise there is just this huge drain of the company."

a "distribution network" means advertising offices, publicity offices, accountants, sales offices, etc. WArner Bros., which is frequently credited with having the best distribution networkds dowes down the chutle.

"It's never the case that you just sit back and gloat over a successful picture and thing, 'gee, we sure did well on that one. What's next?' or 'that film was really a dog, let's hold off until a really good script comes our way.' You have to keep making movies," one studio agent comments.

Motion pictures have always walked the thin line between art and busines. The medium itself is so expensive -- the cost of film, cameras, labor, costumes, sets, etc. -- that mov ies have to be commercial or else they stay in script form. Painters can keep painting, musicians can continue composing, even if nobody ever pays a dime to hear of see their work. Not so with movies.

The situation brings a built-in conflict, aesthetics vs. economics. The studio executives tell the creative people, "ART, baloney. You can't make good movies without money." The creative people tell the executives: "You can't make money unless I make good movies. The profits aren't there unless I make a good movie first."

Along the way, members of the creative community have been as passionate about making money as they have about making films. An exception is George Lucas, who divvied up much of the profit from "STar Wars" among all members of the production company -- right down to the "gofers" -- and using much of his share to set up a sort of filmmakers' think tank in the San Francisco area, where he lives.

Likewise, the moguls of old, as well as some today, had a passion for filmmaking as well as profit taking. In today's Hollywood, however, the profit mentality seems to have gained the edge.

Businessmen make the decisions now. According to Richard Jewell, a cinema professor at the University of Southern California, it used to be that "the studios were run by people who had done a lot of the jobs involved in movie production. They were moviemakers, and they had a passion for that part of the business as well as the business side."

Movies are being looked on as business properties, hot ones, not only businessmen within the industry but by outside investors, who, 10 years ago, would have shuddered at the notion of putting money into Hollywood for any reason other than a tax write-off. The IRS has sliced away much of the tax advantage from motion picture investment, but investors have lately been looking on Hollywood as a place to make money.

he [financial] opportunity is as great as it's ever been in the industry. It's fantastic, because there are so many bites of the apple, so many ways of earning money from movies: theatrical, TV, cable, syndication, home video, overseas sales," says Mr. Goldstein enthusiastically.

These ancillary markets have taken much of the boom-or-bust prospect out of the business, giving movies a solid chance of turning a profit, whether or not business goes boffo at the box office. This has brought on a significant change in the way movies are financed.

"Until several years ago, the studios did most of the financing for both the independent producers and production companies," comments Gordon Stulberg, president of the newly formed independent Casablanca Records/Polygram Pictures Inc. and former president of 20th Century-Fox. "More and more, though, we arem seeing outside investors coming into the market, investors who know nothing about moviemaking but think they see a very good investment opportunity in this industry."

James Stewart, one of three Walt Disney Production executives who broke away to form their own independent production company, Aurora, says: "It is getting harder and harder to drill a dry hole. . . . The industry has a far more secure investment base, particularly for the independent filmmaker."

Aurora recently released the movie "Why Would I Lie?" and the financing -- $5 million -- came from a Midwest banking group. HE has also persuaded investors from Chicago and Houston to put money into a revolving fund for script development -- a remarkable achievement in what has always been a very volatile industry.

Such interest has given independents such as Aurora an enormous boost, but the possibility of passing off some of the financial risk has not gone unnoticed by the big guys, not by a long shot. A Texas-size chunk of Paramount Pictures' "Urban Cowboy" belongs to some honest-to-goodness good ole boys down Dallas and Houston way. In the last three years, Paramount, in fact, has co-financed 25 of its movies with outside investors. Columbia, United Artists, Fox, and Warner Bros., as well as some of the larger independents such as Ladd, Orion, and Lorimar, have done the same. Fox recently announced plans to raise $19.2 million by selling limited partnerships at $150,000 a crack.

Even the major studios themselves are owned by outside intersts, huge conglomerates. Paramount is owned by Gulf & Western, United ARtists by Transamerica, MGM by a hotel syndicate, Universal by MCA, and Warner Bros. by Warner communications corporation.

The swank offices of Melvin Simon Productions in Beverley Hills say as much about the industry as anything else. MR. Goldstein has been around the motion picture industry for years, but his boss, the man who puts up the millions, knows next to nothing about feature film production. Melvin Simon is the undisputed shopping mall king of the world, having built more shopping centers than anyone else. "What he knows," Mr. Goldstein says, "is a good thing when he sees it."

The industry is in better shape financially than it has been for perhaps 25 years, but there is considerable debate over whether that security translates into better films. On the one hand, the independents are not bound to the majors for financing, and the result is more films from a wider variety of sources, a move that should infuse new talent into the industry.

But on the other hand, "When you're fooling around with some else's money, you have to offer them some kind of assurance that you're not going to be foolish with it," a Paramount executive says. "You want to offer an investment that is as safe as it can be," but making "safe" movies often conflicts with making "good" movies, say Mr. Ladd and others, and it makes production executives less willing to take risks on new talent.

"I seriously doubt that George Lucas or Steven Spielberg ["Jaws"] could break into the industry given the current climate," Mr. Ladd speculates. Lucas and Spielberg both broke into the industry fairly soon after they graduated from the cinema schools at USC and UCLA, respectively.

There is considerable feeling that the increased financial security on the business side carries with it a dilution of the art, i.e., mediocre films.

One result has been bundle of movies whose box office performance ranges from marginal to disastrous. "The Blues Brothers," "Xanadu," "can't Stop the Music," "Star Trek -- The Motion Picture" have all failed, to date, to recoup costs, according to current figures on picture grosses, and they were all very expensive films. "Star Trek -- The Motion Picture," on record as the second most expensive film to date at $44 million, was a box-office disaster. ("Cleopatra," made in 1962 for 44 million pre-inflation dollars, is the most expensive. It bombed, too.)

Parts of the industry are scrambling for something that can add some life to the corporate ledger. One trend the studio executives have latched onto is putting comic book characters on the big screen, such as in "Superman: The Movie ," "Flash Gordon," and "Popeye." Tarzan and Jane, The Lone Ranger, Terry and the Pirates, and even Alley Oop are scheduled for stardom. "Superman II" is scheduled for release next summer. IN the '60s, some of the majors almost went broke trying to match the success of "The Sound of Music" with their own expensive musicals.

In true American style, the industry seems to be throwing money at the problem, the problem being not making enough of it. "Superman II" cost $22 million; "Popeye" (starring Robin Williams of TV's "Mork and Mindy,") $18 million; "Flash Gordon," $30 million; and "The Lone Ranger," $18 million. United Artists recently told the trade publication Variety that in view of the poor box office returns from 1980, the studio would be increasing the average cost per picture by several million dollars in 1981.

"The major studios are tending to go for broke," comments Charles Champlin Sr., the highly respected movie critic of the Los Angeles Times. "If you are spending a $60 to 90 million production budget and spreading it out over only five films, then at least one of those films had better be very big. The prevailing idea seems to be that if you spend more you will make more, but they are substituting that for a sense of daring."

A major casualty of this policy is Michael Cimino's "Heaven's Gate." The film began with an $8 million budget that grew to an estimated $40 million. Another days before the studio pulled it following disastrous reviews. As of this writing United Artists stands to recoup only a fraction of its original investment after re-editing and re-release.

(Budget overruns are certainly nothing new. The first big financial fiasco was D. W. Griffith's 1916 release "Intolerance." He spent an estimated $4 million to produce it and built a Babylonian city a mile wide and 300 feet high as his set. The movie was about the fall of Babylon, the life of Jesus, and the 16th-century massacre of French Huguenots, and originally ran eight hours. He edited it down to three hours, and although the film was a masterpiece of film technique, it left audiences confused. The movie failed, helping to sink Griffith's employer, Triangle Productions, and leaving Griffith strapped for finances over much of the rest of his career.

Buy the same token, the history of the industry is littered with meaningful movies that were commercial flops.

The move toward bigger-budget pictures brings with it a certain amount of desperation, as well. Some of the five major studios could be hard put to survive two major flops.

There are some very definite brights spots. "I think the acting in movies today is much better than it has ever been," movie critic Champlin comments. "IT is unusual these days to see a ludicrously badly acted film. I also think that the cinematography, the look of pictures, is really striking, and sound is beginning to come into its own as an art."

Cinematographers play an increasingly vital role in films now, frequently acting almost as directors, and are responsible for the stunning appearance of films as "Apocalypse Now," "The Black Stallion," "Close Encounters of the Third Kind," and "The Deer Hunter."

"There is room for new things, but you have to be very careful," says Mike Medavoy, executive vice-president of Orion Pictures Inc. "This is not even remotely an exact science.There are no formulas. Nobody knows what makes people go to a movie. There are a lot of people in this industry who know a lot about movies, but if you went to any one of them and said, 'Let's make a movie about a not-too-bright, minor-league boxer,' every one of them would turn you down. Yet , look at 'Rocky.' . . . Who can say 'Friday the 13th' is going to be a blockbuster? Who would look at the credits for '1941' and say it would be a dog?"

The magic in a movie, the one thing that people consistently seem attracted to, is the story, "something that reaches people, that touches them, makes them laugh," one production executive says. What Mr. Champlin calls "the expression of individual passion."

The film industry has never been reluctant to change direction when revenues indicated something amiss. Studios have only a short-lived capacity to sustain losses, and the history of Hollywood is littered with studios that went under on the coattails of expensive disasters. Audiences have become fairly sophisticated over the years, and they know good movies and go to see them. "There is no movie habit," says Mr. Goldstein. "People go to see a movie, they don't go to the movies."