CIAO DATE: 4/99

The Competitive Advantage of Hollywood Industry

Luc Véron

School of International Relations
University of Southern California
March 1999

Center for International Studies, University of Southern California

The author is very grateful for the support, both material and intellectual, which he received during his stay at the University of Southern California. He is particularly appreciative of the many conversations he had with colleagues at the School of International Relations, the Center for International Studies, the Marshall School of Business and the Department of Economics of USC as well as at UCLA’s School of Public Policy and Social Research which greatly helped him to formulate the ideas presented here. Although the author is currently employed by the European Commission, the ideas expressed in this paper are purely personal and do not reflect the views of any institution.

“You can take Hollywood for granted like I did, or you can dismiss it with the contempt we reserve for what we don’t understand” F. Scott Fitzgerald, The Love of the Last Tycoon (1941)

“The provision of entertainment has never been a subject of great interest either to economists or economic historians-at least in their working hours.”Asa Briggs Fisher Memorial Lecture (1960)

This paper is an attempt to examine the role of Hollywood as an industry. It has often been noted that economists tend to use the terms ‘industry’ and ‘market’ interchangeably. The two terms refer, however, to different types of economic institutions. A ‘market’ is generally defined as the locus of purchase by buyers and sale by suppliers. An ‘industry’ is a firm or a group of firms.

There is a market for ‘filmed entertainment’ or ‘audio-visual services’. Conventional wisdom is to consider that market as ‘global’ on the ground that these services are traded internationally. It is a fact that Hollywood is dominant in supplying the world market of audio-visual services. Hollywood would therefore simply be a global player on a global market.

This type of analysis leads, however, to limited conclusions not so much in terms of industrial economics but more fundamentally in political economy. One of the facts that the ‘globalisation’ analysts overlook is that Hollywood is located in the United States, and specifically in Southern California, and nowhere else. The United States Government interacts with Hollywood. Foreign Governments advance ‘cultural’ counterarguments. Multilateral trade negotiations, either in the GATS (General Agreement on Trade in Services) or the MAI (Multilateral Agreement on Investment), reserve special treatment for, or special attention to, audio-visual services. The market for ‘filmed entertainment’ or ‘audio-visual services’ is not a classic widget market.

The specificities of Hollywood as an industry have consequences in international relations. It is therefore important to try and understand why Hollywood is Hollywood by resorting to the tools of industrial economics. It is especially important for Europeans who generally simply consider Hollywood as a myth and miscalculate policy responses on those grounds.

The present paper attempts to depict Hollywood economic reality. It briefly reviews what economists have to say on culture production and shows the need for a ‘cultural industry’ paradigm. It draws a lot from Michael E. Porter’s theory on the competitive advantage and applies it to Hollywood.

 

The cultural industry paradigm

Adam Smith had already recognised that:

“The State, by encouraging, that is by giving entire liberty to all those who (...) would attempt, without scandal and indecency, to amuse and divert the people (...) would easily dissipate, in the greater part of them, that melancholy and gloomy humour which is almost always the nurse of popular superstition and enthusiasm.” ₁

But what about Hollywood? Let us assume, for a moment, that a motion picture is some kind of art, i.e. “the conscious use of skill and creative imagination in the production of aesthetic objects”. ₂ Let us assume that making movies requires this “personal, unanalyzable creative power” ₃ that constitutes art versus “the faculty of executing well what one has devised” ₄ which is craft. After all, the basis for filming is the creative and lonely work of a writer. This work is in essence not so different from that, say, of a novelist. The analogy between writing and filming was made by the theorists of the Cahiers du Cinema prior to the French “Nouvelle Vague”. Filming, lightening, scoring music require savoirs-faire which are rather similar to that of a painter or a sculptor. Acting in a film is not totally different from a live performance, for example, in a theatre play. The artistic assumption can stand for a while.

What does economic theory have to say about art? It is untrue that economists, preoccupied since the origins of their art by the theory of value, have been indifferent, in their works, to the value of artistic goods. As Mossetto rightly reminds us,

“The Classical economists realised the importance of the arts as theoretical exceptions to their analytical schemes (...) these exceptions are of considerable importance in interpreting the Theory of Value of Smith, Ricardo and Mill”. ₅

And, one should add, Marx. It derived from a philosophical conception of the aesthetic judgement “a finality without aim” (Kant), “a regularity without law” (Smith), a pure judgement. Later, the Marginalists (Menger, Walras), with their utility theory, rejected all difference between goods based on aesthetics or morality. As Walras put it

“necessary, useful, agreeable, and superfluous all that for us means only more or less useful (...) Others can bother very much about the reason why a substance is required, by a physician to heal a patient or by a murderer to poison a family. We, on the contrary are indifferent.” ₆

The Neo-Marginalists (Pareto, Marshall) reintroduced the importance of ethical and aesthetic qualities by substituting, however, the “Classical economists’ objective differences between goods with the subjective differences of motivation and sensibility between individuals”. ₇

Let us continue by, first, noting that motion pictures, while being some kind of art, have also some obvious characteristics of an industry, i.e. a human activity that employs a large personnel and capital and involves productive and profit-making enterprises. Size and the combination of efficiency and/or profit purposes are distinct attributes of what is sometimes referred to as “the Industry”, the movie business. Secondly, let us suggest a rapprochement between art and culture as invited by a basic definition of culture such as “a) enlightenment (...) acquired by intellectual and aesthetic training and b) acquaintance with and taste in fine arts, humanities (...)” ₈ The economist would argue, in a first approximation, that this enlightenment and acquaintance have something to do with consumption patterns. In other words, culture is what results from the consumption of cultural products. Incidentally, this appraoach reveals a specificity of cultural consumption: cultural goods are addictive; the more one consumes cultural products the more one is inclined to do so in the future; cultural products are exceptions to the law of decreasing utility as demonstrated in the Becker-Stigler model. ₉

However, the suggested rapprochement between culture and industry is not straightforward. It is probably not by chance that the emerging “cultural economics” has long ignored the cultural industries. Heilbrun (1993), for example, excludes from the onset cinema and publishing from the scope of his analysis. Indeed, the juxtaposition of culture and industry (’culture industry’) by Adorno and the Frankfurt School was meant as an oxymoron. ₁₀ As Marxists, they viewed the industrial mass production conflicting with their bourgeois conception of culture as transcendence. They also perceived the standardised manufacture and marketing of cultural goods as an ideological as well as an industrial process (dominant ideology paradigm). But as ironically noted by Garnham

“Most people’s cultural needs and aspirations are being, for better or worse, supplied by the market as goods and services” ₁₁ . Thus, the necessity of an “analysis of culture structured around of the cultural industries (... which) sees culture, defined as the production and circulation of symbolic meaning, as a material process of production and exchange.”

Garnham gives a definition of the “cultural industries” as

“Those institutions in our society which employ the characteristic modes of production and organisation of industrial corporations to produce and disseminate symbols in the form of cultural goods and services, generally, although not exclusively, as commodities”. ₁₂

For Garnham, the processes through which the industrialisation of culture is said to occur are

“Capital-intensive, technological means of mass production and distribution, highly developed divisions of labour and hierarchical modes of managerial organisation, with the goal, if not of profit maximisation, at least of efficiency.” ₁₃

This definition embraces that of the ‘industries culturelles’ including film, radio and television as used by the French Culture Ministry since the 1970s.

The motion pictures industry can convincingly be classified, for the purpose of economic analysis, among the cultural industries: watching a movie, in a theatre or on a TV set, from a broadcast programme or a pre-recorded videocassette is a cultural consumption; producing and distributing a film is an industrial process. The need of a “cultural industry” paradigm, as an analytical tool of trade in culture, requires more that this classification. It necessitates an integrated model comprising both production and consumption modes, and accurate measurement techniques.

Too frequently economic analysis of the motion pictures industry is imprecise, based on erroneous estimates, and derived from imprecise concepts. A simple economic notion such as the industrial output is problematic. Is it the number of films produced? Their negative cost? The size of the audience? The royalties generated? For example, it has not been often noted that, standard measures of theatre audiences are based, in France, on the number of tickets sold (’nombre d’entrées’) and, in the United States, on gross box office in US dollars. This difference is revealing of the French anti-economic attitude with regard to cinema although it is a strange camouflage since the ticket price remains basically the same whatever the length and the ‘quality’ of (demand for) a specific movie. ₁₄ Measuring an economic output in money terms seems more relevant though the US notion of output implied by gross box office is also a bit misleading because it is actually not the turnover of the distributor.

The film industry is indeed a service industry. Audio-visual services are actually measured by the fees and royalties generated during the lifetime of the product and received by the owner of the intellectual property rights (the distributor). It is striking how easily economists themselves can overlook this simple economics. For example, in a seemingly authoritative article on “international trade in cultural goods” ₁₅ , an author was estimating a trade equation for cinema based the exports of developed cinema films (like for printed books)!

The lack of transparency of the movie business, if not an excuse for bad economics, can work as an explanation. Trade in audio-visual services between the US and the EU offers a revealing illustration. The major impasse is the claim to base a meaningful explanation of the film industry, and political prescription, on erroneous macroeconomics. It is argued here her that the fruitful proposal is just the opposite. The analytical tools for this industry must derive from the microeconomic characteristics of films. Films are like prototypes, original and easily reproducible. The fixed production costs of a master copy are very high while the cost of any additional copy is negligible. For the consumer, films are what economists call ‘public goods’, i.e. goods that can be enjoyed by more than one person without reducing the amount available to any other person. The marginal cost incurred for any additional consumer is almost nil. Although they are public goods, films are mainly privately provided to the end consumer.

The constituent elements of a microeconomic approach of the audio-visual industry are based on media (or video) economics and they are basically two. First, the central economic agent to be considered in the ‘content’ industries is the distributor who holds the property rights of a movie. The distributor’s rationale is to maximise the present value of cash flows generated by the sale of his rights to the owners of different outlets: theatres, pay TV, recorded videocassettes etc. This process named “windowing” is the way by which the distributor exploits the public-good characteristic of a filmed content. This is a careful exercise of sequential releases both on domestic and foreign markets. For the cinema films, the exhibition in theatres remains the primary market while releases on pay-TV and video are second. The domestic box office is regarded as an optimal predictor of the total revenues generated by a movie in its lifetime called the “ultimates”. The distributor may acquire the property rights of a film by producing it or by buying the rights from the original producer (“pick-ups”). The distributor may, in some instances, own different exhibition outlets and the windowing process then involve a transfer-pricing element.

The second key to the industry is to understand the decision to actually make a movie, the “greenlighting”. This decision is the financial commitment (the budgeted costs of the movie) taken on the basis of the predicted revenues generated by the future sales of property rights. Indeed the success of (revenues generated by) a specific film is hardly predictable. It is a highly risky business. Contrary to a popular opinion, a large investment in manufacturing and marketing a film is no guarantee of financial return. The relation between big budgets and financial hits is far from being established. Indeed, the distribution of successes and failures does not seem to be significantly influenced by the level of the negative costs of the movies although the financial risks obviously are. Titanic (1997) is no more representative of the big-budget movies than the major Hollywood “flops”. Cleopatra (1963) by Mankiewicz cost some $40 million and grossed domestically about $26 million. It almost destroyed 20th Century Fox. Heaven’s Gate (1980) by Cimino lost more than $34 million and marked the end of UA. Estimates of Hudson Hawk (1991) financial disaster amount to some $75 million. More recently Cutthroat Island (1995) and The Postman (1997) both with a $100-million budget generated only $10 and $18 million respectively on the domestic market. ₁₆ The way of mitigating the financial risk of a movie is basically twofold: the reputation of the ‘talents’ (director and main actors) involved in the movie and/or of the product itself (sequel or ‘prequel’ phenomenon) and risk distribution (the financing of different projects, different genres for a different potential audience segment at the same time).

One of the confusing aspects of this cultural industry paradigm is that the economic concept of production is actually a combination of two functions (often integrated in the same firm): producing and distributing. The frequent analogy between a distributor and a wholesaler is misleading. Distribution is an integral and central part of the industrial production process.

The central element that allow formulate a political economy model based of these microeconomic concepts is the concept of intellectual property right. Cultural products, e.g. films, are indeed commodities. And, as Garnham accurately noted copyrighting is an “attempt to commoditize information.” ₁₇ But it is also interesting to note that economic agents in the audio-visual industry are poised to interact with Government in order to secure intellectual property rights. Garnham also adds some other elements that characterise the cultural production: the control of access to consumption through box office, for example; built-in obsolescence creating the constant need to re-consume; the sale of audiences to advertisers by broadcaster; and, State patronage following the tradition of the Aristocracy and the Church.

The demand side of the audio-visual industry also requires some kind of economic modelling. Cultural studies through exclusively analysing the content (the text) and solely focusing on cultural consumption neglect the mode of production. In doing so they fail to explain the dynamics of the audio-visual industry, which is how production determines consumption, and vice versa. This does not imply that content analysis is irrelevant in a political economy context. As Kellner pointed out:

"the encoding of media artifacts is deeply influenced by systems of production" ₁₈ ; economic factors explain, for example,"why Hollywood film is dominated by major film genres and subgenres, explain the sequelmania in the film industry, crossovers of popular films into television series and a certain homogeneity in products constituted with systems of production with rigid generic codes, formulaic conventions and well-defined ideological boundaries". ₁₉

An opposite and rarely noted theoretical risk is inherent to the naïve version of globalisation and the theme of "convergence" between telecommunications and content industries, through Internet, satellite TV, video-on-demand etc. Because this conception is entirely centred on the production side (indeed the production of telecommunication means) its implicit assumption is that cultural consumption is entirely technology-driven. Basically as soon as the technology becomes available (and affordable), consumers rush to them and the content industry follows. Many steps are omitted in this debate. One is particularly relevant for the audio-visual industry. The basic version of this media globalisation theory, in predicting a boom in content demand, seems to ignore the financing of audio-visual production, i.e. the sale of audiences.

Audio-visual consumption seems indeed to be fairly simply but adequately addressed through the economy of time, as a "feature of the productive and consuming processes", ₂₀ i.e. how the economic agents spend their time between producing and consuming, labour and leisure. Time appears to be an integrating factor of both the mode of consumption and the mode of production. Globalisation effectively implies an accelerated speed of information circulation. In other words, the consumer becomes more "productive" ₂₁ in consuming motion pictures thanks to satellite-TV and video-on-demand.

To sum up, the audio-visual industry paradigm proposed here derives from the microeconomics of the motion pictures business, which ultimately reside in intellectual property rights; i.e. the control and sale thereof. Media economics and the introduction of the time factor satisfactorily explain production and consumption in the audio-visual services. This paradigm allows us to treat Hollywood as an industry and will be tested with regard to Hollywood’s competitive advantage in international trade.

 

Competitive advantage of the Hollywood system

As MPAA’s Jack Valenti modestly put it:

"American movies and television programs have no peers on this planet. In whatever country they are shown, they win the admiration and the patronage of the viewing public, in the family living room and in the cinema. What we do creatively, we seemingly do better, with larger zest and more elan, than anyone else" ₂₂

For economists, firms, not nations, compete. Productivity, not competitiveness, matters for a nations’ wealth. Krugman, for example, wrote:

"The bottom line for a corporation is literally its bottom line. If a corporation cannot afford to pay its workers, suppliers... it will go out of business. So when we say that a corporation is uncompetitive, we mean that its market position is unsustainable (...). Countries, on the other hand, do not go out of business. They may be happy or unhappy with their economic performance, but they have no well-defined bottom line. As a result, the concept of national competitiveness is elusive." ₂₃

The analysis of the reasons why some firms are successful here, and not there, is, however, since the origin of that art the raison d’être of economics. The examination of the determinants of the comparative advantage, or the broader notion of competitive advantage as referred to by current economic research, is probably the most exciting domain of intellectual investigation. The protocol was clearly set up by Porter.

"The determinants, individually and as a system, create the context in which (the) firms are born and compete: the availability of resources and skills necessary for competitive advantage in an industry; the information that shapes what opportunities are perceived and the directions in which resources and skills are deployed; the goals of the owners, managers and employees that are involved in or carry out competition; and most importantly, the pressures on firms to invest and innovate. Firms gain competitive advantage where their home base allows and supports the most rapid accumulation of specialized assets and skills (...) Firms gain competitive advantage in industries when their home base affords better ongoing information and insight into product and process needs. Firms gain competitive advantage when the goals of owners, managers, and employees support intense commitment and sustained investment. Ultimately, (regions) succeed in particular industries because their home environment is the most dynamic and the most challenging, and stimulates and prods firms to upgrade and widen their advantages over time." ₂₄

Let us see how Porter’s protocol may explain something about Hollywood. Why is the film industry geographically concentrated in Southern California? What is the structure of the industry like? How are Hollywood firms positioning themselves? Is the movie industry a global industry and what does it imply? What are the determinants of Hollywood’s competitive advantage and its dynamics?

 

What is the industry?

First of all, what is the definition of the industry that we refer to as Hollywood? A certain confusion seems to reign, probably generated, in part, by the concept of a cultural industry itself. An interesting example of that is the ruling by the U.S. 9th Circuit Court of Appeal on April 23, 1998. The case involved the movie studio DreamWorks founded in 1994, as the defendant, and, the Florida-based firm, Dreamwerks, founded ten years earlier to organise conventions for fans of "Star Trek", as the plaintiff. The latter argued that his customers are confused and, on appeal, the Court ruled in favour of the plaintiff. The judges wrote:

"Twenty years ago, DreamWorks may have had an argument that making movies and promoting sci-fi merchandise are different businesses. But movies and sci-fi merchandise are now as complementary as baseball and hot dogs." ₂₅

For the sake of economic analysis, it is however convenient to consider baseball and hot dogs as distinct industries, without neglecting the important role of concessions in professional sports. Similarly, it is argued that the industry, at the appropriate level of analysis, is the group of competitors producing goods or services that compete directly with each other. Hollywood may appropriately be defined as the industry of filmed entertainment. With regard to Hollywood’s competitive advantage, one can even be more specific and consider only the internationally most traded items. These are, in the last thirty years, feature movies, animation movies and action TV. The hard core of Hollywood trade lies with the high cost feature fiction not with the news, talk shows, soap operas, short movies or documentaries. Hollywood industry may be defined as the producing, financing and marketing ₂₆ of the higher end of filmed fiction entertainment.

 

Industry structure

If the definition of Hollywood as an industry applies today as in the early twentieth century, the structure of the industry has considerably changed over time. These changes are reflected in the history of the Hollywood system.

The ‘studio system’ ran from 1928, the advent of sound, to 1948, the Paramount Decree. It was both a pure example of a Fordist mode of production and a classic oligopoly. By 1930, 95 percent of All-American production was concentrated in the hands of only eight studios—five vertically integrated major companies, which controlled production, distribution, and exhibition, and three horizontally integrated minor ones that controlled production and distribution. During that period, more than 400 films on average were coming out of Hollywood production lines each year between 1930 and 1950. The number of films produced reached 504 in 1941, i.e. about one film per week for each studio. The entire range of filmmaking activities was integrated in one large factory, the Studio. A management-oriented model strictly separated conception from execution. The vehicle for this production process was the ‘continuity script’, which fragmented the story of a motion picture and reordered it so that each bloc of scenes in a set or location could be filmed at the same time, or alternatively, so that a set of actors could film all the scenes in which they were to be involved in a continuous work session. The continuity script also gave complete control over film content to the producer. Scripts could be ordered from writers according to a desired formula. The production process established in this period consisted of pre-production (selection and preparation of the script and shooting location); production (construction of sets and filming) and post-production (film processing, editing, sound track). The major studios had a permanent staff of writers and production planners. Production crews and stars were assembled in teams charged with making as many as thirty films per year. ₂₇ Direct studio employment in Hollywood reached its peak in 1944 at 33.000. An important aspect of the studio system was the Production Code, which was implemented in 1934 in response to pressure from the Legion of Decency and public protest against the graphic violence and sexual suggestiveness of some sound films. The Code provisions dictated the content of American motion pictures, without exception, for 20 years. Without the Production Code Seal no film could be distributed in the United States. The studio era also coincided with the formation of powerful unions of skilled craftsmen, talent guilds, and other institutions that still play an important role in the economics of filmmaking. ₂₈ The studio system was an oligopoly: a small number of producers controlling distribution and exhibition. In 1944, the five major studios had a 73% market share in domestic theatrical rentals and had interests in 70% of the first-run cinemas accounting for more than 50% of US total box office.

The industry was, however, severely weakened in 1948, when a federal antitrust suit against the five major and three minor studios ended in the "Paramount decrees," which forced the studios to divest themselves of their theatre chains and mandated competition in the exhibition sector for the first time in 30 years. Moreover, the advent of network television broadcasting in the 1940s provided Hollywood with its first real competition for American leisure time. Anti-Communist "witch-hunts" began in Hollywood in 1947 when the House Un-American Activities Committee (HUAAC) decided to investigate Communist influence in motion pictures. The resulting creative stagnation, generated by the practice of blacklisting between 1952 and 1965, further contributed to the demise of the studio system.

The destruction of the assured market outlets generated by the 1948 Paramount Decision and the advent of television actually spelled the end of the studio system. The size of the box office declined by 50% between 1946 and 1956, revenues and profit of the studios fell drastically. The studios responded to the crisis with two strategies designed to increase their flexibility. They reduced the number of films produced (-28% between 1946 and 1956). They also undertook to differentiate their products through constant innovation. The innovations of the 1950s—cinerama, technicolor and 3D—aimed at constituting the film as an event—a spectacle—rather than an everyday experience, making image in motion pictures superior to that of television. This strategy increased the need for specialised inputs and the studios began to turn to independent producers to develop these differentiated film products. This meant the end of the ‘term contract’. By the end of the 1950s writers, actors, producers and directors were all put under project contracts, usually for just one film. The craftworkers unions, on the other hand, replaced the old internal markets of the studios by an external, collectivised system. In the old studio system the corporate entities were able to confiscate the rent of the star system. The studio system had functioned as a star creation machine, placing individuals under long-term contracts at favourable prices and making some of them into valuable commodities. Since the maturation of stardom necessitated long-term investment in specific human capital, the system encouraged vertical integration. With the end of the studio system stars shifted the rent in their favour, with profit-sharing contracts. This unexpected consequence of vertical disintegration, by raising the production costs, promoted further vertical disintegration in order to cut further the overheads of the studios.

During the 1960s the studios attempted to restabilise markets by increasing distribution revenues abroad, in particular in Europe. Foreign markets accounted for 50% of total revenues at this time. The studios also attempted—unsuccessfully—to capture the television market. Location shooting also started, on the part of independents, as a consequence of vertical disintegration and as a product differentiation strategy. Technical innovations such as the panaflex camera or the cinemobile made it possible and local autorities encouraged it through subsidies. Location shooting also enables producers to avoid union work rules. ₂₉

In the 1980s and the 1990s, a wave of acquisitions and mergers somewhat troubled a clear vision of the underlying economics of filmed entertainment. The fact of the matter is that the ‘majors’ with low profitability and huge assets, comprising real estate and film libraries became vulnerable to take-overs. In 1981 Denver oil tycoon Marvin Davis acquired 20th Century-Fox and the Coca-Cola Company purchased Columbia in 1982. That same year, Columbia helped launch a new motion-picture studio, Tri-Star Pictures, which was merged with Columbia in 1987 to form Columbia Pictures Entertainment, Inc. United Artists merged with MGM in 1981 to form MGM/UA. In the late 1980s media groups/entertainment conglomerates took over the ‘Majors’. In 1986 Turner Broadcasting System, Inc. acquired MGM/UA. In 1989 Warner Communications Inc. merged with Time Inc. to form Time Warner Inc. It acquired the Turner Broadcasting System, Inc. (TBS) in 1996. Gulf and Western, which controlled the Paramount Pictures Corporation since 1966, changed its name to Paramount Communications Inc. in 1989. It was acquired by the media conglomerate Viacom Inc. in 1994 and then merged with the video and music retailer Blockbuster. Marvin Davis and his family sold 20th Century-Fox to the international publisher Rupert Murdoch in 1985. Murdoch (News Corporation) consolidated his American film and television companies under a holding company, Fox, Inc. Incidentally, two Japanese consumer electronics giants betted on the hardware/software synergy by buying two studios and encountered only relative success: Columbia was acquired by the Sony Corporation in 1989 and MCA Universal was acquired by Matsushita Corporation in 1990. Later, in 1995, Matsushita sold the majority of MCA Universal to the Seagram Corporation. Finally, in 1994 Spielberg, Katzenberg (formerly Disney) and David Geffen, the record impresario (formerly Geffen Records acquired by MCA in 1990), founded DreamWorks SKG with a capital of 2 billions dollars. By the late-1990s, subsequent to many mergers and restructuring, there were six major film distributors: Warner Bros. (Time Warner Inc.), The Walt Disney Company (Buena Vista, Touchstone and Hollywood Pictures), Twentieth Century Fox (News Corp.), Sony Pictures (formerly Columbia Picture Entertainment, wholly owned by Sony and distributor of Columbia and Tristar films), Paramount (Viacom Inc.), and Universal (80%-owned Seagram Co. and formerly MCA, Inc.). Some of these majors have cross-participation with telecommunication companies, notably News Corp. and MCI, Disney and AT&T.

The dust has not settled yet. But simple interpretations of these financial consolidations have flourished around the notions of ‘convergence’ or ‘digital revolution’. In a "connected world" ₃₀ the frontiers between television and Internet, commerce and entertainment, public and private spheres vanish. The basic notion of ‘information’ serves as an explanation for the wave of mergers and acquisition in Hollywood. The rapprochement between the media conglomerates, telecommunication companies and the studios would be the attempt to exploit the synergies of the ‘content’ and the telecommunication means. The underlying theory is based on a strong ‘faith in machinery’ ideology and on the more troublesome assumption that these mergers and acquisitions reflect i) a purely rational behaviour by the firms ii) an industrial rationality as far as filmed entertainment is concerned. There are good reasons to question these assumptions. Even financial analysts have raised doubts about the rationale of the media mergers, such as Time-Warner as reflected in the stock-value of these firms. The merger theory essentially validates fusion of firms when it results in net value-creation. This does not seem to have necessarily been the case with Hollywood mergers. The main problem, however, with the convergence theory is that it gives no clue on why Hollywood enjoys, and today more than ever, a competitive advantage in the trade of filmed entertainment.

Everyone agrees that today the industry of filmed entertainment generates low profits and the question really is: what in the structure of the industry might help explain it? Borrowing from Porter’s categories, there are five competitive forces that determine the industry structure and its profitability.

First, the threat of new entrants seems to be weak in Hollywood because the entry barriers, especially in financing and marketing are high. The case of DreamWorks can serve as a blueprint: a coalition of successful and experienced creative talents backed by a capital of 2 billion faces a tough challenge. The main reason seems to be that the new studio has no film library to generate cash flows. Second, the bargaining power of the suppliers is high. Talent is scarce and no longer controlled by the studios. This is arguably the most important source of rising costs of production. Third, the bargaining power of the buyers is low at the level of theatrical distribution and irrelevant in the video distribution since it is basically controlled by the media groups who own the studios. Fourth, the threat of a substitute for the basic product of filmed entertainment is arguably rather low. Fifth, the rivalry among between existing domestic competitors is very high. The major determinants are the fierce domestic competition and the rising production costs that determine, in large part, the global low profitability of Hollywood in the post-’studio’, post Fordist, era.

 

Positioning of Hollywood firms

A major source of explanation for Hollywood competitive advantage is the positioning of its firms. As Porter rationalises, the positioning is affected by the possibilities for new ways of competing and usually grows out of some discontinuity or change in industry structure. As far as filmed entertainment is concerned, these changes pertained to new technologies (the advent of television in the 1950s), shifting buyer needs (theatrical audience disaffection), shifting input costs (with regard to talents: the end of ‘term’ contracts and the appearance of the profit-sharing contracts) or the changes in government regulations (Paramount Decrees or "Finsyn" regulations).

Since the structure of the industry after the end of the studio era forbade the lowering of the costs, Hollywood has actively pursued a strategy of product differentiation. During the 1950s the film industry underwent a considerable transformation induced by the availability of new technologies such as Cinerama, the Technicolor and the three-dimension. Later came the development of video and computerisation of the pictures ₃₁ , the special effects of virtual reality ₃₂ . However, contrary to a naïve, belief technical innovation has not primarily led to gains in productivity and reducing production costs. It has been used to make bigger films, event movies, spectacle rather than an everyday experience. Hollywood has aimed at making images in motion pictures superior to that of television. This strategy in turn has increased the need for specialised inputs and the studios began to turn to independent producers to develop these differentiated film products.

Hollywood has also positioned itself by enlarging its competitive scope, i.e. its range of products by budgets, genre etc. It does not mean that Hollywood covers all themes. It remains strategically positioned on the ‘ideology of consensus.’ ₃₃ It resembles however a saturation strategy, i.e. to saturate domestic demand by an excessive supply of different, but not so different, movies. Strangely enough both the majors and their foreign competitors complain about this strategy. The studio executives privately fuss that the market is ‘crazy’ and that they produce and distribute too many films. But the risks of marketing such an expensive product imply that one does not put all the eggs in the same basket, i.e. this business allows huge economies of scope. On the other hand, the foreign competitors argue that saturated domestic theatrical and video markets work as non-tariff trade barriers for the US movie industry.

 

Hollywood early mover

The advantage of moving early to exploit structural change is especially great in industries where economies of scale are significant and customers are conservative. Both characteristics are present in the movie industry. The conservatism of the consumer is patent in the mechanics of the sequels to successful movies. It is also served since the early ages of the industry by the star system. ₃₄ As argued by Porter, the first mover is a position to reap economies of scale and pick the distribution channels; both things obvious in the movie industry. Arguably the first mover may reduce his costs through cumulative learning. It is an obviuos development in Hollywood. On the one hand, the movie industry values to the utmost "guts’ feeling". And it seems to have little industrial secrets though they are jealously guarded in the rarely public archives of the studios. Plus, corporate loyalty has drastically decreased since the end of the studio system. Industry executives build their career through mobility between firms. Altogether, the models run by the studios to predict audience do not seem very sophisticated; as one executive put it, it is a bit "study the charts and pray". Talents’ contracts are common knowledge given the role of arbitrageurs played by the agents. Suppliers are common to the entire industry. On the other hand, Hollywood is a learning-by-doing process. Models are constantly rewritten. Information is expensive. Industry analysts and specialised investment bankers have an expertise, which is very much sought after. First movers are securing entrenched positions which are the most difficult to challenge.

 

Hollywood: a global industry geographically concentrated

Porter defines global industries as industries in which a firm’s competitive position in one nation significantly affects its position in other nations. It is commonly accepted that the international success of a film is affected by its domestic success. At least, it is the case for the US filmed entertainment as defined above as comprising feature movies, animation movies and action TV series. Therefore, Porter’s definition of a global industry clearly applies to Hollywood.

Hollywood’s global strategy seems rather easy to define. Hollywood is geographically concentrated. Some functions are decentralised. The major financial institutions of the movie industry have traditionally been located in New York City. Some productions are delocated: for example, Titanic was made on location in Baja California (Mexico), some TV-series are produced in Vancouver, Canada or Florida, Fox has an animation studio in Phoenix (Arizona) where Anastasia was made. However, the core business of filmed entertainment remains in Southern California. The rationale for Hollywood being a "home base" of the industry are the presence of economies of scale, steep learning curve and a better co-ordination. Conversely, the intangible nature of the product (ultimately copyrights) gives no obvious reasons for dispersing production. Transportation, communication, storage costs of the products are low. Tariff or non-tariff barriers could lead to produce locally as it did in the past. In the 1920s, film quotas in Britain induced Hollywood to make locally second rate movies to fill the quotas, appropriately named "quickies." Other reasons might comprise the strategy to enhance local marketing of the films. Paramount built a huge studio near Paris, in Joinville, in 1930 to mass-produce multilingual films. The other major American studios quickly followed suit, making the region a factory for the round-the-clock production of movies in as many as 15 separate languages. By the end of 1931, however, the technique of dubbing had been sufficiently perfected to replace multilingual production, and Joinville was converted into a dubbing centre for all of Europe. In the future, Hollywood studios or their subsidiaries might also produce in some European countries and claim subsidies.

 

Determinants of Hollywood advantage

Why Hollywood has become home for the filmed entertainment industry is explained by several factors.

Factor conditions

Factor conditions explain, in the first place, the movie industry was established in this District lying north-west of downtown Los Angeles, which is today synonymous with the motion-picture industry. At a time where most films were still shot outdoors Los Angeles presented many advantages. Southern California enjoys 320 sunny and/or clear days per year and allowed for year-round production. It has a wide range of topography within a 50-mile radius of Hollywood, including mountains, valleys, forests, lakes, islands, seacoast and desert. In the early 20th century, Los Angeles was a professional theatrical centre. Southern California was, and remains for the movie industry, a tax-friendly environment as well as a reservoir of cheap labour.

In 1908, one of the first storytelling movies, The Count of Monte Cristo, was completed in Hollywood after its filming had begun in Chicago. In 1911 a site on Sunset Boulevard was turned into Hollywood’s first studio, and soon about 20 companies were producing films in the area. Already by 1915, Hollywood employed 15,000 workers and accounted for 60 percent of American production. And it had become the centre of the United States motion-picture industry with the Famous Players-Lasky Corporation (later Paramount Pictures, c. 1927), which was formed by a merger of Adolph Zukor’s Famous Players Company, Jesse L. Lasky’s Feature Play Company, and the Paramount distribution exchange in 1916; Universal Pictures, founded by Carl Laemmle in 1912 by merging IMP with Powers, Rex, Nestor, Champion, and Bison; Goldwyn Picture Corporation, founded in 1916 by Samuel Goldfish and Edgar Selwyn; Metro Picture Corporation and Louis B. Mayer Pictures, founded by Louis B. Mayer in 1915 and 1917, respectively; and the Fox Film Corporation (later 20th Century-Fox, 1935), founded by William Fox in 1915.

Demand conditions

Domestic demand is a major explanatory factor of competitive advantage. With regard to filmed entertainment the size of demand, the role of language as a natural market and the qualitative aspects of demand are the essential components.

Size of domestic demand

The US domestic film market is large and saturated by Hollywood production. The number of theatrical admissions on the US domestic market was about 1.4 billion in 1997. ₃₅ The market share of Hollywood ₃₆ in the combined 1995-1996 domestic Top-100 box office amounted to 98.7% (cf. Annex I). The Top 100 accounted for more than 80 % of total box office in 1995-96. However, of the 882 films released in 1995-96 only 474 (i.e. 54%) were distributed by Hollywood. The market share of Hollywood films was therefore slightly lower in total box office: 80% in 1995-96. In other words, 46% of films distributed by independents on the US generated only 20% of total box office. The same is true in television. The estimated penetration of non-US production in audio-visual services amounts to 1% to 2% only.

Role of language

It has often been noted that the coming of sound in 1927 marks the beginning of American supremacy in the movie industry. Common languages constitute natural markets for "talky" filmed entertainment. Annex II gives the number of speakers of the languages spoken by the most people in the world. English ranks only fourth, after Mandarin, Hindi and Spanish. However as pointed out by Wildman and Siwek ₃₇ , the potential for filmed entertainment demand is determined by both the demographic and economic factors. Annex III analyses the language natural market determined by the number of speakers, both native and total, weighted by the GNP per capita. English ranks first far above Japanese, German and French and represents about 40% of the filmed entertainment natural market. Interestingly, the costs of production seem correlated to the natural market. Annex IV shows a comparison of the average negative costs of US and French movies. It is not surprising that US movies cost more to make since they are expected to generate more revenues thanks to the size of the English natural market. It is striking to note that the relative average negative cost of a French movie (0.17 that of a US movie) almost equals the relative market share of the French language vis-à-vis English as shown in Annex III (about 0.22-0.25).

Qualitative aspects of domestic demand

Not only is the US domestic demand for filmed entertainment large but also the ethnic and cultural diversity of the United States is to a certain extent a good proxy of world demand. The needs of the domestic buyer anticipate those of other nations. The only exogenous variable of the studios’ models is the domestic box office from which everything derives: the video rentals, the TV rights, the foreign box office...Some marginal adjustments are required. For example, Sylvester Stalone is a rather devalued asset on the domestic market and does slightly better on export markets.

Related and supporting industries

Another determinant of Hollywood competitive advantage lies with the presence, in the Los Angeles region, of supplier’s industries (studio rentals, editing, lighting, sound recording, film effects, market research, talent agencies, lawyers, writers...) and related industries (television, defence industries...) that are internationally competitive. More than a collection of a few large conglomerates, Hollywood indeed appears to be a network of independent and specialised suppliers, as put forward by Storper and Christopherson ₃₈ who argue in terms of a clear discontinuity between the mode of production in the film industry during the ‘Golden era’ of the studio and the vertical disintegration of film production in today’s Hollywood. Drawing from the history of Hollywood, they demonstrate the disappearance of oligopolistic control over film production following the Paramount Decree and the advent of television. They show, in particular, a proliferation of independent production firms between the late 1960s and early 1980s in a period of stagnant output. They note that the "recomposition of the entertainment industries into an entertainment industrial complex is an attempt to reallocate and collectivise risk in the production process" (Storper 1989, p.290) and that "both the studios and specialised production firms have spread the risk that comes from unstable markets" (p. 289). "The interindustrial redivision of social labour stems as much from endogenous innovation dynamic ‘from below’ as it does from corporate planning ‘from above’"(p. 290). The "flexible specialisation" as argued by Storper and Christopherson is a post-Fordist model of endogenous dynamics of division of labour that generates increasing returns based on the existence of external economies of scale.

More recent data suggest a ‘re-consolidation’ in the industry, which slightly alter Storper and Christopherson’s story. For example, members of the American Film Marketing Association (AFMA) created in 1980 by a group of 13 independent distributors, such as New Line and Miramax are now subsidiaries of majors, Warner and Disney respectively. The case of Miramax, known as a distributor of provocative art-house classics, is especially interesting because its acquisition by Disney has somewhat reduced its independence. In 1994, Miramax had to ‘turn over’ ₃₉ a new movie with comedian Martin Lawrence, "You So Crazy," because the company could no longer release films without MPAA ratings. ₄₀ In 1995, Disney told Miramax that it would not allow Miramax to distribute Kids—a shocking film that is in part about an HIV-positive teenage boy who has sex with teenage girls. ₄₁ However, it does not change the underlying economics of the geographic concentration of the film industry in Hollywood, which draws a lot from the presence of suppliers, and related industries in the region.

Firm strategy, structure and rivalry

Firm strategies are reinforced by the goals of the individuals. Gabler ₄₂ , in an Empire of Their Own, has admirably described the role of the Hollywood founders; all Jewish European immigrants armed with an exacerbated American patriotism ₄₃ and grandiose ambition. They invented this industry as a new frontier with the aim of building their America, somewhat better than the real one. But as noted by Porter, prestige plays a certain role when an industry becomes a notable occupation. It is often said that every restaurant waiter in the Los Angeles is either an actor or writing a screenplay. This joke seems to bear some truth since Hollywood is the place-to-be for one who wants to be in the business ₄₄ . Incidentally, Hollywood has throughout the century attracted a great deal of European creative talent mainly because of Europe’s troubled times, to the point that Hollywood’s reputation has largely been made through European names.

Role of chance

Chance also helped in building Hollywood’s competitive advantage. The two World Wars played an immense role. Prior to World War I, the American cinema lagged behind the film industries of Europe, particularly those of France and Italy, in such matters as feature production which had been invented by the Europeans and the establishment of permanent theatres. In America, pictures were still sold by the foot when, in the early 1910s, Adolph Zukor imported Les Amours de la Reine Elisabeth starring Sarah Bernhardt, and the feature movie became the standard. The French Pathé Frères company, founded in 1896, was a major player and had opened operations in several countries in Spain (1906), in Russia (1907), in Italy (1909), in Britain (1909), and the United States (1910). It acquired permanent exhibition sites, building the world’s first luxury cinema (the Omnia-Pathé) in Paris in 1906. From 1905 to 1914 the Gaumont studios at La Villette, near Paris, were the largest in the world. World War I brought an end to European advance and established the dominance of Hollywood. Between 1925 and 1945, foreign rentals accounted for half of all American feature revenues. During the U.S. involvement in World War II, the Hollywood film industry co-operated closely with the government to support its war-aims information campaign. Following the declaration of war on Japan, the government created a Bureau of Motion Picture Affairs to co-ordinate the production of entertainment features with patriotic, morale-boosting themes and messages about the "American way of life," the nature of the enemy and the allies, civilian responsibility on the home front, and the fighting forces themselves. After, World War II the European cinema was entirely destroyed: the German UFI conglomerate dismantled, Cinecitta annihilated by bombings, and the US could systematically flood Europe with the backlog of the war production.

Role of government

As argued by Porter ₄₅ , "it is tempting to make government the fifth determinant. Yet this is (...) not the most useful way to understand government’s role in international competition. Government’s real role in national competitive advantage is in influencing the four determinants" (factor conditions, demand conditions, firm strategy-structure-rivalry, supporting industries). After noting that "Government policy, in turn, can be influenced by the determinants", Porter mentioned that "successful policies work in those industries where underlying determinants of national advantage are present and where government reinforces them". The case of Hollywood seems in phase with this theory. The Hollywood-Washington link may be envisaged in this context. It makes sense for the US trade policy to actively support an industry whose strength is established by factor and demand conditions, firm strategies and the existence of supporting strategies. Likewise, in domestic policy. The 1948 Paramount Decree, by forcing them to divest from exhibition at a time when theatrical audience was on the verge to slump, appears retrospectively as a relief for the studios. Another interesting example is the "Fin-Syn" battle that the MPAA deadly fought between 1983 and 1993. The broadcasting regulator, the Federal Communications Commission (FCC), taking into consideration the dominant position of the three television networks (ABC, CBS, NBC) in the 1960s and in order to protect the ‘content’ producers (i.e. Hollywood) had promulgated, with effect from 1972 and 1973 respectively, the financial interest rule (’fin’), which prohibited the networks from acquiring equity and profit rights in programmes produced by others and the syndication rule (’syn’), which kept the networks from selling programs to television stations. Withe the passing of time and the position of the networks being no longer dominant, the ‘fin-syn’ rules became less and less relevant. Naturally, starting with the 1983 review, and in the general context of deregulation, the networks demanded their repeal. The MPAA and Valenti, with the help of the independent producers, fought a ten-year lobbying war on Capitol Hill, in the White House, at the FCC ₄₆ . The ‘Fin-Syn’ rules were relaxed in 1991 then removed in 1993. Ironically, the wave of mergers that followed the repeal of the ‘Fin-Syn’ rules (Disney-ABC and Warner-Turner, in 1995) have made the MPAA the representative of the television interests. According to Porter, Government, like chance, is not stricto sensu a determinant but it can influence the other determinants.

 

The dynamics of Hollywood competitive advantage

As Porter put it, "in the most successful industries, it is often hard to know where to start in explaining competitive advantage." ₄₇ The difficulty is to specify how individual determinants combine into a dynamic system. It is interesting to observe discontinuities in the history of the film industry. Clearly the mode of regulation has changed over time. Cinema started as a craft and became an industry as it relocated in the Los Angeles area. Hollywood has stretched the logic of industrialisation during the Fordist period of the studio. Since the end of the Studio system it has arguably evolved toward "flexible specialisation." Some factor conditions have lost in importance. Would, for example, the sunny climate ₄₈ suffice if the industry would be created from scratch tomorrow?

It is claimed here that Hollywood has survived changes in modes of production and retained its competitive advantage. More important than the individual factors are the institutions, which determine those factors and define the Hollywood system, the industrial cultural complex.

Another permanence in the history of Hollywood is the control over distribution channels or the attempts to control them. What theory can account for this constant theme? It is certainly tempting to follow Askoy and Robins ₄₉ in their analysis in terms of corporate dynamics. It points to possible explanations of the mergers in the late 1980s and early 1990s, when entertainment conglomerates or media groups, combining film distribution, video, television and publishing were created: Time-Warner, Disney-ABC, Fox-News Corp. The strategy put forward by these conglomerates is the control of the access to the different outlets for filmed entertainment. This corresponds to the definition of "windowing" given by Owen and Wildman ₅₀ : "the way in which the industry exploits the public good characteristics of programs (film entertainment). Because production costs are fixed, cost per viewer declines with audience size. In a competitive market, the benefits of spreading fixed costs over large audiences favour program delivery services that are able to reach large audiences. Such a goal may focus attention on the geographic expanse of a distribution system (...) but there is also a temporal dimension to the construction of audiences" (release in theatres, video, pay-per-view cable TV, pay cable, broadcast TV). One could also add the ancillary markets of filmed entertainment (books, musicals, theme parks). Further research in the direction would certainly be necessary.

 

Hollywood as a cluster of competitive industries

As noted by Porter, national successful industries are usually linked through vertical or horizontal relationships which he names "cluster". He gives several examples of clusters the "wood cluster" in Sweden which includes pulp and paper but also control instrument and paper-making machinery, chemicals used in paper-making; the "agriculture cluster" in Israel ₅₁ embracing fertilisers, irrigation equipment etc. Porter also mentions Silicon Valley and stresses the role of geographic concentration including in the United States where there are no language, trade or currency barriers.

As Hortense Powdermaker put it "there is only one Hollywood in the world". ₅₂ But why indeed is Hollywood where it is? Aksoy and Robins ₅₃ argue that there is a basic continuity in Hollywood. The ‘Majors’ have always sought control of the exhibition outlets for their films. Aksoy and Robins reject the neo-classical approach of the Theory of the Firm (Coase, Williamson) whereby the firms continuously assess whether ther optimum strategy is to internalise or externalise (leave to the market) particular functions. They consider the firm, not as a locus of rational choice and calculation of transaction costs, but as an institution of power. Large firms might ‘downsize’ their core operations and subcontract particular functions but relations of dominance and subordination remain. In the film industry, there has been some reorganisation of activities, like an increasing share of production by independents, they admit, but

"by holding on their power as national and international distribution networks, the majors were able to use their financial muscle to dominate the film business and to squeeze or to use the independent production companies. Independent production was used to feed the global distribution networks that the majors had built." (p.9) "Over many decades, the Hollywood majors have developed a range of strategies to cope with both the enormous costs and risks associated with the film product, and also the unpredictability of consumer demand. These strategies have centered around three major objectives: to cut the costs of production; to expand and extend markets; and to control the critical ‘hubs’ of the film business" (p. 13) "that is distribution and finance" (p.15)

Aksoy and Robins see confirmation of their model in the corporate dynamics of the film industry: the creation of entertainment of entertainment giants, like Time Warner, and they conclude that "Hollywood is now everywhere"(p. 19). And the point of their dispute with Storper and Christopherson is precisely there, in the notion that geography does not matter. The strength of Storper and Christopherson’s demonstration is that it offers a plausible explanation of the fact that Hollywood is, and increasingly so, where film production is taking place. The role of production organisation, i.e. dense transactional relations between firms geographically concentrated with low costs of negotiating, that produces increasing returns, seems to account for Hollywood’s competitive advantage.

Hollywood offers as a good example of geographic concentration as the Italian furniture industry or the German automobile industry ₅₄ . The rationale for geographic density, as argued by Porter, is to be found in the interchange within the cluster, for example, in the goal congruence induced by common ownership or partial equity stakes, as it is clearly the case in filmed entertainment. But institutional factors working as facilitators of information flows play an essential role.

Beside the industrial organisation of film production operate a full set of institutions whose interaction is inseparable from the movie game: labour relations, the Academy, the schools, the trade organisations and also a common jargon.

 

Labour relations in Hollywood

Hollywood is a unionised workplace. Since the Depression years, the unions and guilds have played a major role in filmed entertainment. Successive general wage agreements have been signed. The major employers’ organisation is the Alliance of Motion Picture and Television Producers ₅₅ representing the studios, the independent producers and the television networks. The Alliance negotiates, on the one hand, with the representatives of the "talents" the Screen Actors Guild, the AFTRA (American Federation of Television and Radio Artists), the Writers Guild of America and the Directors Guild of America and, on the other hand, with the technicians and craftspersons represented by IATSE (International Alliance of Theatrical Stage, Moving Picture Technicians, Artists and Allied Crafts of the United States and Canada). Labour relations are organised and contractual but industrial actions are not quite uncommon. The writers have been on strike eight times since 1952; the last strike in 1988 lasted 22 weeks and resulted in an agreement. The two organisations of actors, which have not conducted industrial actions since 1980, are presently negotiating ₅₆ with the producers. The most important point of contention is the splitting of the revenues generated by the reruns of TV programs on cable or abroad, the so-called "residuals" of which the "talents" want a fair share. ₅₇

 

The Academy

Another major institution in Hollywood is the Academy of Motion Picture Arts and Sciences, which is the honorary association of motion-picture industry personnel in the United States. Membership is based on outstanding contribution to the film industry and includes actors, administrators, art directors, cinematographers, directors, executives, film editors, producers, writers, musicians, public relations experts, and sound technicians. Louis B. Mayer, the executive head of the Metro-Goldwyn-Mayer production studio, and a group of leading motion-picture personalities formed the organisation in 1927. Its purpose was to raise standards of the arts and sciences in motion-picture production. It quickly became best-known, however, for its annual presentation of the Academy Awards of Merit, gold-plated statuettes (traditionally called Oscars) symbolising recognition for excellence in acting, directing, and other activities in films released during the previous calendar year. Nominations for all of the awards except that of "best picture" are made by members of the appropriate craft (such as actors, film editors, or directors), while the final balloting is conducted among the entire membership of the academy. The nominations for best picture are made by all of the members as well. The academy also keeps official records of screen credits and maintains a film archive. The Academy Awards Ceremony taking place every year in March is a private party that the public is invited to watch on television. ₅₈ The academy is banned from interference with the economics of the business. The Article 11 of the Bylaws of the Academy, a non-profit organisation incorporated under the Law of California, states that its purposes are "to constitute an organization of established prestige which is expressly prohibited from concerning itself with economic, political or labour issues". The only economic aim of the Academy seems to protect the "Oscar" as "the copyrighted property and registered trademark and service mark of the Academy of Motion Picture Arts and Sciences (A.M.P.A.S.)." In practice, the Academy awards work as major economic benchmarks for Hollywood products and talents ₅₉ . Although their use is severely controlled by the Academy itself the ‘Oscars’ are essential marketing tools for the filmed entertainment, both nationally and to a lesser extent worldwide.

 

The schools

An element, which gives a unique coherence to the cultural industrial complex, is training. Some, and a great deal of it, is provided on-the-job, through apprenticeship or life-long education. This is an essential component of the dense transactional relations between firms that are geographically concentrated that explains Hollywood in the ‘flexible specialisation’ model. The trivial explanation is that "Hollywood is simply the place to be for someone who wants to be in the movie business" and, certainly a place to learn the business. But the traditional higher education institutions certainly play an unrivalled role. The cinema schools of the North American universities are matchless in the world. Two of them, located in Los Angeles, offer this essential combination of creative craftsmanship and business savoir-faire. They alternate as number one in College rankings: the alma mater of George Lucas, the School of Cinema and Television at the University of Southern California (USC) and, that of Francis Ford Coppola, the School of Theater, Film and Television at the University of California Los Angeles (UCLA). ₆₀ The strengths of these schools located in Los Angeles are a professional university-type education, a critical mass of investment in up-to-date equipment, the film community involvement in teaching and advising ₆₁ and, above all, the network of alumni for graduate placement.

 

The trade organisations

The Motion Pictures Association of America (MPAA) is the trade association of the major studios: Warner, Paramount, Fox, Sony-Columbia, Universal, MGM/UA and since recently Disney. This powerful organisation has a budget of 60 million dollars _{62 63} and maintains offices in Los Angeles, Washington, Brussels, Rome, New Delhi, Rio de Janeiro, Singapore, Mexico City, Toronto and Jakarta. Jack Valenti, a former adviser to President Lyndon B. Johnson, has headed the MPAA since 1966 and is a top paid lobbyist ₆₄ . The MPAA pamphlet claims that the association "serves as leader and advocate for major producers and distributors of entertainment programming for television, cable, home video and future delivery systems not yet imagined." In 1994, the international arm of the MPAA, the Motion Picture Export Association of America, changes its name to the Motion Picture Association (MPA). In fact, the historical origins of the association are worth remembering. By the early 1920s some 40 million Americans—half of them minors—were attending the movies each week. The rapid spread of the medium and its easy accessibility had already caused mild public concern, especially since films had begun to feature increasingly risqué plots and situations. Then, in September 1921 the popular Fatty Arbuckle was charged with the rape and manslaughter of a young starlet, and the concern turned into anger and rage. Arbuckle was eventually exonerated, but other Hollywood scandals surfaced—the murder of director William Desmond Taylor, the death from drug addiction of matinee idol Wallace Reid—and the tabloid press screamed for blood. In an attempt to stave off probable mass boycotts and government censorship, in March 1922 the studio heads formed a self-regulatory trade organisation, the Motion Picture Producers and Distributors of America (MPPDA), and hired a conservative politician and religious man, Will H. Hays, to head it. The Hays Office, as the MPPDA was known, initiated a moral blacklist in Hollywood, inserted moral clauses in actors’ contracts. The history of the MPAA is all about self-regulation and social control from the 1934 Production Code, via the 1968 movie ratings to today’s debate on TV parental guidelines. By self-regulating the filmed entertainment industry in the US, the MPAA’s objective is to gain or preserve market access and to prevent Government’s interference.

The American Film Marketing Association (AFMA) is today the trade association of the independent consisting of some 130 member companies whose annual international sales exceed $1.6 billion. The association was founded in 1980 by a group of 13 independent distributors who sought to build and protect their businesses through the creation of a world-class motion picture trade show, the American Film Market (AFM). Its membership now includes companies in the U.S., the European Union, Canada, Australia, New Zealand and the Pacific Rim. Their common bond is the production and distribution of independent English language films internationally. The independent film industry, according to AFMA’s definition, consists of "those companies engaged in the production and/or distribution worldwide in all media of all motion pictures and television programs that are not generated by the recognized major studios. It includes those independent productions, even though distributed by a major studio, in which the producer retains a significant ownership interest and is at risk for a significant portion of production costs." AFMA overlaps the MPAA since New Line, a Warner subsidiary, and Miramax, a Disney subsidiary, are members of both associations.

 

Jargon

Institutional factors other than professional associations, trade associations encompassing clusters, personal relationships schooling are, for example, norms of behaviours and jargon that arguably reduce the costs of transacting. The movie industry has developed a jargon, which facilitates communication among insiders. For example, "Pre-production" refers to the stage, after "greenlighting", at which a movie is prepared to go to production whereas "post-production" refers to the stage at which editing, scoring and effects are executed. The trade newspaper Variety has developed a glossary ranging from "sex appeal" or "sitcom" now in common language ₆₅ to more cryptic phrases like "boff" (outstanding), a "clic"(a hit) or even better a "whammo", a "horse opera" (a western), a "suspenser" (a suspense film), a "whodunit" (a mystery film) or "two-hander" (a movie with two characters).

 

Conclusion

The often-quoted Fitzegerald’s sentence ₆₆ about the "whole equation" of Hollywood is somewhat deceptive. Understanding Hollywood requires more than a single equation model. And, confronted with the motion picture industry, the social scientist should often admit like the psychiatrist in The Lady Vanishes67 ₆₇ : "My theory was a perfectly good one but the facts were misleading".

However, it is argued that understanding Hollywood and its relation to the rest of the world requires a "cultural industry paradigm". This paper elaborates on the concepts that could lead to such a paradigm. It then examines the determinants of the competitive advantage enjoyed by the Hollywood system: factor conditions, demand conditions in particular the size of Hollywood’s natural market, the role of the related and supporting industries, the geographical concentration, the first-mover factor... The actual understanding of the US movie industry requires a complex model that embraces multiple economic variables. This paper only represents a first attempt to bring these elements together.

It is important to consider that not only culture but also economics matter to understanding trade in cultural industries. Culture and economics reinforce each other.

 

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And articles from:

• Broadcasting and Cable
• Daily Variety
• Economist (The)
• Financial Times (The)
• Forbes
• Hollywood Reporter (The)
• Los Angeles Times
• Wall Street Journal (The)

Annex I

Market Shares in the Top 100 box office
Us and Canada Theaters
(million dollars and %)

	1995	1996	95+96	market share
BuenaVista	887.0	1111.6	1998.6	21.4%
Warner Bros.	831.0	822.9	1653.9	17.7%
Paramount	495.6	684.3	1179.9	12.6%
Sony	606.0	488.9	1094.9	11.7%
Fox	353.8	697.7	1051.5	11.2%
Universal	606.4	416.2	1022.6	10.9%
NLC 68	301.4	234.3	535.7	5.7%
MGM/UA	273.0	195.7	468.7	5.0%
Miramax 69	92.0	134.5	226.5	2.4%
Gramercy 70	22.9	63.4	86.3	0.9%
Others	38.6		38.6	0.4%
total	4507.6	4849.5	9357.1	100.0%

Source: Daily Variety

Annex II:

Languages spoken by the most people in the world in million speakers

	Native	Total
Mandarin	853	999
Hindi	348	457
Spanish	346	401
English	330	487
Bengali	197	204
Arabic	195	230
Portuguese	173	186
Russian	168	280
Japanese	125	126
German	98	124
French	74	126

Source: the World Almanac and Book of Facts, 1997

Annex III:

Shares of the language ‘natural’ market
Number of speaker weighted by average GNP per capita of the native speakers’ countries

	Native	Total
English (1)	38.0%	42.8%
Japanese (2)	23.3%	17.9%
German (3)	13.1%	12.6%
French (4)	8.5%	11.0%
Spanish (5)	7.2%	6.4%
Portuguese (6)	3.2%	2.7%
Russian (7)	1.8%	2.2%
Mandarin (8)	2.5%	2.2%
Arabic (9)	1.7%	1.5%
Hindi (10)	0.6%	0.6%
Bengali (11)	0.2%	0.2%
Total	100.0%	100.0%

Source: World Bank Atlas, 1997, own calculations

0. Australia, Canada, New Zealand, UK, USA
1. Japan
2. Austria, Germany, Switzerland
3. Belgium, Canada, France, Switzerland
4. Argentina, Bolivia, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Spain, Uruguay, Venezuela
5. Brazil, Portugal
6. Belarus, Russian Federation
7. China
8. Algeria, Egypt, Iraq, Jordan, Lebanon,Mauritania, Morocco, Saudi Arabia, Syria, Tunisia
9. India
10. Bengladesh

These zones have the following:

Average GNP per capita in US $ 1995
Japanese	39709
German	28401
English	24552
French	24395
Spanish	4448
Portuguese	4003
Russian	2229
Arabic	1828
Mandarin	621
Hindi	344
Bengali	238

Annex IV:

Comparison of average negative costs US/France 1986-1995 in $million
	US	FR	FR/US
1986	17.5	2.5	0.14
1987	20.1	2.9	0.14
1988	18.1	3.7	0.20
1989	23.5	4.2	0.18
1990	26.8	4.3	0.16
1991	26.1	4.8	0.18
1992	28.9	5.2	0.18
1993	29.9	4.5	0.15
1994	34.3	5.3	0.15
1995	36.4	5.7	0.16
average:			0.17

Source: MPAA, CNC, exchange rate Dec 1995 US$=4.9565FRF (Federal Reserve of St Louis).

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Endnotes

Note 1: Adam Smith, The Wealth of Nations, New Rochelle, NY: Arlington House, 1966, Vol. 2, p.401: Book V chap I Part III Article 3   Back.

Note 2: Merriam-Webster’s Collegiate® Dictionary   Back.

Note 3: ibid.   Back.

Note 4: ibid.   Back.

Note 5: Mossetto, G (1993) Aesthetics and economics ,Dordrecht ; Boston : Kluwer Academic Publishers p. 55   Back.

Note 6: quoted by Mossetto p 40 from Walras (1874) "Eléments d’économie politique pure" Paris, Pichou, Durand (1952 rep) p 141-142   Back.

Note 7: ibid. p 56   Back.

Note 8: Merriam-Webster’s Collegiate® Dictionary   Back.

Note 9: Becker, G.S. and Stigler G.J., "De gustibus non est disputandum", American Economic Review, 67 (2), March 1977, pp.76-90   Back.

Note 10: Adorno, T and Horkheimer, M, 1977 "The Culture Industry: Enlightenment as Mass Deception" in Mass Communication and Society, ed. Curran and al.   Back.

Note 11: Garnham, N, 1990, Capitalism and Communication, London: Sage p. 155   Back.

Note 12: ibid., pp. 155-156   Back.

Note 13: ibid. pp.156-157   Back.

Note 14: The question is discussed within the industry; Seagram’s Bronfmann, for example, arguing in favour of price differentiation.   Back.

Note 15: Marvasti, A "International trade in Cultural Goods: A cross sectional Analysis", Journal of Cultural Economics 18:135-148, 1994   Back.

Note 16: "Ok, ‘Titanic’ Didn’t Sink. These did", Los Angeles Times Magazine, March 22, 1998   Back.

Note 17: ibid. p. 40   Back.

Note 18: Kellner, D, "Overcoming the Divide: Cultural Studies and Political Economy", in Cultural Studies in Question Ferguson, M and Golding, P eds. (1997) p. 107   Back.

Note 19: ibid. p 107   Back.

Note 20: Garnham, p. 45   Back.

Note 21: Some analogy here with the Becker-Stigler model and its domestic production function.   Back.

Note 22: Jack Valenti, "The New Trade Religion: Culture and Quotas", Speech given before the Georgetown University Center for German and European Studies on October 2, 1991   Back.

Note 23: Krugman, P Pop Internationalism, Cambridge, MA London, England: MIT Press, 1996 p. 6   Back.

Note 24: Porter, M.E. The Competitive Advantage of Nations, New York: Free Press, 1990 p. 71   Back.

Note 25: Los Angeles Times, April 24, 1998, p. D6   Back.

Note 26: The integration of these functions in the definition of the industry does not imply that they are necessarily integrated within the perimeter of the firms.   Back.

Note 27: Actors were, like professional football players today, mere employees of the ‘Majors’. Screenplay writers and composers had to be creative during office hours every day in their cubicles. Directors were shooting from 9.30 to 6. Cf. The movie Barton Fink, directed by Joel Coen (1991)   Back.

Note 28: The Screen Actor’s Guild founded in June 1933, the American Federation of Radio Artists in 1937 (becoming AFTRA adding television to its jurisdiction in 1953), the Writers Guild of America created as a union in 1933 and becoming a collective bargaining agent in 1939, the International Alliance of Theatrical Stage, Moving Picture Technicians, Artists and Allied Crafts of the United States and Canada chartered the National Alliance of Theatrical Stage Employees in 1893 organises art directors, story analysts, animators, set designers and set decorators, scenic artists, graphic artists, set painters, grips, electricians, property persons, set builders, teachers, costumers, make up artists, hair stylists, motion picture and still camerapersons, sound technicians, editors, script supervisors, laboratory technicians, projectionists, utility workers, first aid employees, inspection, shipping, booking and other distribution employees.   Back.

Note 29: West Coast union work rules only prevail within a radius of 300 miles from the corner of Beverly and La Cienega Boulevards in Hollywood.   Back.

Note 30: Title of the Economist supplement of September 13, 1997   Back.

Note 31: Solman shows how precipitous changes in postproduction technology —notably nonlinear editing and graphics, effects, and animation software —have affected the business of producing motion pictures and television series at Sony Pictures, Disney, 20th Century Fox, and Warner Bros. (Solman, G Backlots on the front Lines, Millimeter, Volume 24, Number 2 pp. 40 February 1, 1996).   Back.

Note 32: Hollywood has benefited from technology transfers from other industries, in particular the military industries. See, for example, "From Science to Fiction, Military and Entertainment Swap Expertise", in The New York Times, October 10, 1997, p.1   Back.

Note 33: Cf. Maltby, R Harmless Entertainment, Hollywood and the Ideology of Consensus, Metuchen, NJ and London: Scarecrow Press, 1983   Back.

Note 34: See the seminal article of McDonald, G, Origin of the Star System, Film in Review, 449, November 1953 and subsequent Rosen, S The Economics of Superstars, 71American Economic Review 845 December 1981 and, DeVany, A. Hollywood is an Uncertain Place: Kim Basiger’s Ordeal and Complexity in the Movies, Working Paper, department of Economics, University of California, Irvine, 1997   Back.

Note 35: MPAA 1997 US Economic Review: 1,387.7 million.   Back.

Note 36: films distributed by MPAA members (including New Line Cinema and Miramax owned by Warner and Disney respectively)   Back.

Note 37: Wildman, S and Siwek, S International Trade in films and Television Programs, Cambridge, MA: Ballinger, 1988   Back.

Note 38: The transition to flexible specialisation in the US film industry: external economies, the division of labour, and the crossing of industrial divides, Michael Storper, Cambridge Journal of Economics, 1989, 13, p.273-305; Flexible specialization an regional industrial agglomerations: the case of the US motion picture industry, Michael Storper and Susan Christopherson, Annals of the Association of American Geographers, 77(1), 1987, p.104-117; Flexible specialisation in Hollywood: a response to Aksoy and Robins, Michael Storper, Cambridge Journal of Economics, 1993, 17, p. 479-484   Back.

Note 39: i.e. sell to another distributor as a "pick-up"   Back.

Note 40: Weinraub, Bernard, Miramax turns over film on outspoken comedian, New York Times, Mar 30, 1994   Back.

Note 41: Miramax film heightens clash with Disney, Wall Street Journal (Eastern Edition) (Mar. 30 ‘95) p. B1+   Back.

Note 42: Gabler, N "An Empire of their Own: How the Jews Invented Hollywood", New-York: Crown 1988   Back.

Note 43: Jack Warner, for example, used to celebrate symbolically his birthday on the 4th of July!   Back.

Note 44: The Scottish actor John Hannah (who recited Auden at his lover’s funeral in Four Weddings and a Funeral) put it an facetious way: "There’s a real paradox about LA, everything seems possible, but it’s somehow always elsewhere, just across the street and you can never quite get there. There’s a real confidence, which is sort of intimidating? You meet some guy who’s wearing a nice suit, very comfortable, very together (...) and ultimately this is just some guy who’s breaking himself about the fact that he might get sacked from his job, so he’s trying to b.s. somebody else." Los Angeles Times January 25, 1998, p. F1,F17   Back.

Note 45: Op. Cit p.126-128   Back.

Note 46: See Prindle (1993) for the narration of this battle p 35-46   Back.

Note 47: Op. Cit p. 144   Back.

Note 48: It may be noted however that industries, which do not require raw material, high-tech for example, are generally located in temperate climate.   Back.

Note 49: Hollywood for the 21st century: global competition for critical mass in image markets, Asu Aksoy and Kevin Robins, Cambridge Journal of Economics, 1992, 16, p.1-22   Back.

Note 50: Owen, B.M. and Wildman S.S., Video Economics, Cambridge: Harvard University Press, 1992, p. 26   Back.

Note 51: Op. Cit. p. 149   Back.

Note 52: Powdermaker, H Hollywood, the dream factory,New York : Arno Press, 1979, c1950 p.16   Back.

Note 53: Op. Cit.   Back.

Note 54: examples given by Porter, op. Cit. p. 155-156   Back.

Note 55: The Alliance shares the same address than the MPPA at 15503 Ventura Bld in Encino, CA   Back.

Note 56: Los Angeles Times, April 3, 1998, D4   Back.

Note 57: See Gray, L.S. and Seeber L.S. eds., Under the Stars, Essays on Labor Relations in Arts and Entertainment, Ithaca and London: Cornell University Press, 1996   Back.

Note 58: The audience of the program, broadcast live on ABC, was 87millions persons in the United States (source: Hollywood Reporter) in 1998.   Back.

Note 59: Talents are themselves ‘products’ of the system.   Back.

Note 60: Other institutions mainly focus on the theory and aesthetics of films and are centres of excellence: the Tish School of the Arts at the New York University; the Innis College at the University of Toronto; the Film Studies Department at the University of California Berkeley.   Back.

Note61: The advisory boards in the cinema schools at USC and UCLA both assemble the ‘crème de la crème’ of the film and television community.   Back.

Note 62: Mr. Valenti goes to Washington, by Dyan Machan in Forbes v. 160 (December 1, 1997) p. 66   Back.

Note 63: As a comparison, one of the most powerful lobby on Capitol Hill, the American Israel Public Affairs Committee, has an annual budget of $14.2 million. The New York Times, April 26, 1998 p.6   Back.

Note 64: Who makes what?, Broadcasting, Volume 127, Number 2, pp. 22, January 13, 1997; Valenti’s salary amounts to 1 million dollars per year ranking n°2 among the lobbyists just behind Jason Berman representing the recording industries   Back.

Note 65: Variety founded in 1905 claims authorship for these expressions like the French "Canard Enchaîné" for "Bla Bla Bla".   Back.

Note 66: "not half a dozen men have ever been able to keep the whole equation of pictures in their heads", F. S. Fitzgerald, The Love of the Last Tycoon (1941), edited by Bruccoli, New York: Simon & Schuster Inc 1993, p. 3   Back.

Note 67: Movie by A. Hitchcock in 1938.   Back.

Note 68: Warner subsidiary   Back.

Note 69: Disney subsidiary   Back.

Note 70: Polygram   Back.