Is this the last generation of true movie stars?

In a recent biography of Jimmy Stewart, it emerged that, when he was starting out, Metro Goldwyn Mayer deemed it necessary to scotch any rumours the young actor might be gay. He was packed off to the private, studio-owned brothel located just off the MGM lot, with the following words ringing in his ears: "Get your ass over there and get those rocks off with at least two of those broads."

Ah, the golden age of Hollywood.

What would the old heads make of Tom Cruise jumping up and down on Oprah's couch? What advice would they give Lindsay Lohan as she is drunkenly scraped off the sidewalk, offering indecent photo opportunities to the paparazzi?

And you can be sure they would have an uncompromising view on Mel Gibson after his drunken, anti-Semitic and sexist remarks to police officers.

But also, what are we . . . the people who pay their wages . . . to make of it? Hollywood has always been a strange place, but increasingly it seems to be outand-out dysfunctional.

The isolated incidents hint at a much larger truth: the business of movie-making is undergoing a major shift. Box-office figures are down. DVD sales, so lucrative during the past few years, have flattened.

Piracy is rampant: illegal copying now accounts for $1.3bn annually in lost revenue in the US alone. All the while, the stars want more money. In 1995, the average cost of making and marketing a movie was $54.1m; by last year, it was $96.2m.

The figures do not add up. The boom years of the 1990s . . . when Bruce Willis earned more than $100m for The Sixth Sense . . . are over. The studios are looking to cut costs, and an obvious place to start is the overblown salaries of the performers. Meanwhile, our culture is changing: once, we viewed actors like Jimmy Stewart as role models; now we live in a society defined by gossip rags such as Heat, determined to show celebrities have zits and beer bellies like the rest of us.

If you need proof of how the situation has changed, look no further than Cruise. In August, Paramount terminated his 14-year deal due to frustration over his "erratic" conduct and, more specifically, a 15% "loss of anticipation" for Mission: Impossible III. The more pertinent question is: can there be a sequel for any of this generation's heroes?

A rundown of the most successful films of all time makes surprising reading. Titanic heads the list with $1.8bn, but the top 10 also includes a couple from the Lord of the Rings, two Harry Potters, one Star Wars and a Pirates of the Caribbean. The one thing these movies share is they are all driven by the story, rather than a name. No one goes to see a film because Hayden Christensen is in it and this is good news for the studios. Why waste your budget on expensive talent, when you can save your pennies for the things that really matter?

There is evidence this is starting to hit home, and the wrangling over fees has started to get nasty.

Russell Crowe recently dropped out of negotiations to star in a new movie directed by Baz Luhrmann and made no secret that he blamed 20th Century Fox. "I do charity work, " he said. "But I don't do charity work for major studios."

When it comes to falls from grace, you have to go a long way to beat M Night Shyamalan. Aged 29, he wrote and directed The Sixth Sense, and its astonishing success rocked the film industry. Made for $40m, it grossed more than $600m and saw Shyamalan held up as the heir to Steven Spielberg.

The following year, he told US Esquire that he had discovered "the secret to making hit movies" and Hollywood believed him . . . for his follow-up film, Unbreakable, Disney paid him a record $5m for writing and another $5m to direct.

He was allowed almost unprecedented creative freedom.

Shyamalan has made four films since The Sixth Sense and none has come close to repeating its success. His 'Oprah's sofa' moment was his bizarre, convoluted pet project Lady in the Water, originally bankrolled by Disney.

Shyamalan fell out with what he saw as overpowering studio influence . . . he claimed they "no longer valued individualism".

Another way of seeing it was that Disney realised they were throwing their money at an ego out of control, and backed out.

When the film finally came out, produced by Warner Bros, most critics sided with Disney's verdict.

The public stayed away in droves.

The lesson here? Raw talent still needs structure. Hollywood, like nowhere else, loves a system.

Everyone is in search of the perfect plot, of the golden rules to guarantee a box-office hit like Shyamalan claimed to have unearthed. Star Wars director George Lucas has spoken of the need to create "60 two-minute scenes" with which to sustain the public's excitement. He is also a famous proponent of the theories of Joseph Campbell, whose book The Hero With a Thousand Faces posited the concept of the "monomyth", an archetypal heroic plot that is supposedly common to all mythologies and religions. But it wasn't just Lucas's biblical sci-fi fantasy that benefited from Campbell's vision. A seven-page memo created for Disney by producer Christopher Vogler reignited interest in the monomyth in the 1990s . . . inspiring The Lion King and The Matrix.

And a recurring thread running throughout many of these epic stories is that the hero is often an unknown actor. Mark Hamill was a nobody before Lucas cast him as the ultimate hero. As long as the plot is in place, the rest will follow.

Recently, Hollywood has been all abuzz over a new golden formula.

Epagogix is a system for determining the commercial potential of screenplays, being hawked by three entrepreneurs and two scientists. The team concentrates on how to break the $50m barrier that is seen to mark the divide between a hit and a flop.

The Epagogix approach is elaborate, but its strength, say its inventors, is that it is ruthlessly impartial: it is purely interested in what makes money. One of the main findings was that neither the identity of the star nor the director was a major factor in success . . . plot development, locale and character are far more important.

You can see the appeal to the studios: a supposedly foolproof system for delivering box-office returns . . . without the need for Alist tantrums or fees. As clinical as it sounds, Epagogix provides the message all the studios want to hear: the script is everything. We can survive without prima donnas.

So, what does this mean for the stars? Film magazine Premiere recently claimed we are witnessing the demise of "the last unironic movie-star generation".

Certainly, they had better get used to considerably deflated salaries.

This is partly to do with a loss of mystique. Movies are escapism, and it's easier to escape when you can commit your imagination fully to the film's conceit rather than concentrating on the people you saw in the gossip rags.

Uncertain times are ahead for Hollywood. Many in the industry are beginning to question the economic feasibility of films that cost upwards of $50m to produce.

At the same time, some studios will always be willing to put their money behind a big name . . . Reese Witherspoon was recently paid a record $29m for the upcoming horror film Our Family Trouble. It may be that the public will never tire of fame per se . . . just of particular egomaniacal individuals. In the short term, we can expect more heroic fantasy epics with a cast of unknowns: the comic-book adaptation 300; even Peter Jackson's The Hobbit.

But, in true Hollywood style, the hero may yet win the day. What do you do if you can't beat the system? You join it. Or, to be more precise, you buy your own. Earlier this month, MGM announced Tom Cruise and his producing partner Paula Wagner had taken control of United Artists. The move neatly reflects the company's founding in 1919, when Charlie Chaplin, Mary Pickford, DW Griffin and Douglas Fairbanks formed their own solution to studio control, with a name reflecting their ambition.

And with Cruise finally bringing the United Artists story full circle, who would deny him one last throw of the dice? Let's just hope he doesn't forget an on-set brothel.