Hollywood in the New Millennium

Tino Balio

• Publisher: British Film Institute
• Year: 2019
• ISBN:
  9781838716202
• Edition: 1
• Topic: Media & Performing Arts
• Subtopic: Film & Video

Hollywood is facing unprecedented challenges – and is changing rapidly and radically as a result. In this major new study of the contemporary film industry, leading film historian Tino Balio explores the impact of the Internet, declining DVD sales and changing consumer spending habits on the way Hollywood conducts its business. Today, the major studios play an insignificant role in the bottom lines of their conglomerate parents and have fled to safety, relying on big-budget tentpoles, franchises and family films to reach their target audiences. Comprehensive, compelling and filled with engaging case studies (TimeWarner, DreamWorks SKG, Spider Man, The Lord of the Rings, IMAX, Netflix, Miramax, Sony Pictures Classics, Lionsgate and Sundance), Hollywood in the New Millennium is a must-read for all students of film studies, cinema studies, media studies, communication studies, and radio and television.

1

Mergers and Acquisitions: The Quest for Synergy

The American film industry is dominated by six studios – Warner Bros., Walt Disney Pictures, Sony Pictures Entertainment, Paramount Pictures, 20th Century-Fox and Universal Pictures. They produce practically all the top box-office hits, they dominate the playing time of the nation’s theatre screens and they account for nearly 80 per cent of the domestic box office every year on average. These studios trace their roots to the silent film era, when the industry became big business, and have remained the major players ever since. But one thing changed; beginning in the 1960s, the majors were either subsumed into burgeoning conglomerates or became conglomerates themselves through diversification. As subsidiaries of giant media concerns, the six major studios account for only a small share of the parent company’s total take, around 10–15 per cent (Bart, 2010b). What this means for Hollywood is the principal focus of this book.

GROWTH OF THE DOMESTIC MARKET

To understand the structure of today’s Hollywood, one has to go back to the 1980s. The motion picture industry entered a new era of prosperity, the result in part of two new distribution technologies: pay television and home video – each of which extended the market and the revenue stream for feature films. Until then only one ancillary market of consequence existed for feature films – network television. Pay TV came into its own in 1976, when Home Box Office (HBO), a Time Inc. company, leased transponders on RCA’s domestic satellite, SATCOM I, and began transmitting uninterrupted, uncut programming to cable systems across the USA. To build its ‘premium’ service, HBO fought the Federal Communications Commission’s (FCC’s) restrictions on the cable industry that protected ‘free’ network television. After winning the right to show recent Hollywood feature films on its service in a timely manner, HBO was joined by other premium services such as Viacom’s Showtime to create a second ancillary market for feature films.

Home video also got its start in the 1970s, when two Japanese consumer electronics giants – Sony and Matsushita – introduced videotape recorders on competing formats – Betamax and VHS, respectively – which enabled consumers to store and retrieve television programming delivered to their homes. Fearing that the new technology would undermine their control over the availability of feature films, Universal and Disney brought a suit against Sony, charging it with copyright infringement. Instituted in 1976, the ‘Betamax case’, as it was called, eventually reached the US Supreme Court in 1984. Although the court ruled against the majors, they nevertheless emerged as winners. By then, the home video market had expanded exponentially. More than six Japanese manufacturers had entered the business, both in their own names and as suppliers of machines to American firms. In the interim, VHS had overtaken Beta as the preferred format for home video. The price of machines dropped and the VCR was fast becoming a ubiquitous home appliance. Although the theatrical box office reached a new high of $5 billion in 1989, the home video market generated twice that. Capitalising on the appeal of their hit pictures and film libraries, the majors devised a way to extract the lion’s share of the revenue from their videocassettes: they instituted a two-tier pricing strategy, charging a higher price initially for sales to video stores and a lower price months later for sales to individual consumers. By 1990, home video was generating extraordinary profits for the majors. And because the window could be serviced before pay TV, home video enabled Hollywood to break HBO’s hold on the pay TV market.

Studio	Parent Company and Reporting Segments
Warner Bros.	Time Warner Inc. Networks Filmed entertainment Publishing
Walt Disney Pictures	Walt Disney Company Media networks Parks and resorts Studio entertainment Consumer products Interactive media
Sony Pictures Entertainment	Sony Corporation Electronics Games Pictures Financial services Music
Paramount Pictures	Viacom Inc. Media networks Filmed entertainment
20th Century-Fox	News Corp. Filmed entertainment Television Cable network programming Direct broadcast satellite television Magazines and inserts Newspapers and information services Book publishing Other
Universal Pictures	Comcast NBC Universal Broadcast networks Film Cable networks Digital media Parks/resorts

Table 1.1 The Hollywood Majors and Their Parent Companies

The public demonstrated its willingness to pay for convenient entertainment in the home. As noted by Warner Communications, ‘For the first time in history, the individual member of the audience is sovereign, no longer a passive receiver. With cable television, videotape players, and other electronic accessories the audience has gained control over what it sees and when it sees it; its already widening options will soon be limitless’ (Warner Communications, 1980). Home video did not kill the movie theatre as some had predicted; in fact, the number of movie screens and the domestic box take increased substantially during the 1980s. The status of exhibition had actually improved. Pay cable and home video needed feature films, especially hits, which established themselves in one place only, the theatre.

GROWTH OF THE INTERNATIONAL MARKET

The growth of the international market for Hollywood films during the 1980s resulted from the upgrading of motion picture theatres, the emancipation of state-controlled television and the growth of home video. Outside the USA, nearly every market was under screened. Western Europe, for example, had about one third of the screens per capita of the USA, with the same population. And most of its theatres were old and tired. To resuscitate moviegoing, the majors partnered with local investors in the principal markets and went on a building spree to expand and renovate exhibition. International demand for Hollywood films expanded as a result, reaching an historic milestone in 1994; for the first time, foreign sales outpaced domestic.

With the emancipation of state-controlled television, in Western Europe in particular, privately owned commercial interests quickly introduced new satellite and cable services. In the UK, where viewers had long been restricted to two BBC and two quasi-independent stations, British Satellite Broadcasting and Sky Television introduced nine new pay TV services. In France, Canal Plus, the country’s first pay TV service, attracted 3 million subscribers within five years. By 1989, Western European television reached 320 million people and 125 million households (vs 250 million people and 90 million households in the USA) and showed enormous potential for Hollywood entertainment.

The third – and largest – source of new revenue came from home video. The spread of VCRs in Western Europe demonstrated that, given a choice, consumers preferred more variety than their state broadcasting monopolies provided. In 1978, 500,000 VCRs were sold; by 1987, VCR sales topped 40 million, or nearly one third of all households. Consumers not only wanted to time-shift programming to suit their schedules, but also to enjoy different kinds of programming, particularly Hollywood movies.

Today, filmed entertainment is America’s second-largest net export. Hollywood’s largest markets are Western Europe, the Pacific Rim and Latin America. During the new millennium, theatre admissions in the USA declined. Not so overseas. In 2004, more than 1 billion tickets were sold in the European Union alone, a record. The international box office rose steadily during the decade, reaching a $20 billion benchmark in 2010. In that year, the Motion Picture Association of America (MPAA) reported that 67 per cent of the total box-office revenue collected by the majors came from overseas, and that the percentage was expected to grow.

Hollywood had entered the age of ‘globalisation’. As described by Time Warner, the world’s largest media and entertainment company, globalisation dictated that the top players in the business develop long-term strategies to build on a strong base of operations at home while achieving ‘a major presence in all of the world’s important markets’ (Time Warner Inc., 1989). Achieving these goals led to a merger movement in Hollywood that has yet to run its course.

The rationale behind the merger movement was a faith in ‘synergy’, that bigger is better. As touted by business leaders, ‘synergy’ was a belief that one plus one could equal three. Described another way,

Synergy is to modern business what alchemy was to the Middle Ages – an arcane process that claims to create riches. Alchemy proposed to turn ordinary metal into gold. Synergy claims to increase profits through corporate collaboration … Alchemy was a pseudoscience so compelling that it retained its appeal to kings and princes for centuries. Synergy has the same hold on the capitalist imagination of our time. It’s a compelling illustration of the truth that words have the power to blind us. (Fulford, 1995) It would take a dot.com bubble burst which wiped put billions of dollars in company assets to convince media industry moguls that bigger is not necessarily better.

THE CASE OF TIME WARNER

Time Warner, the long-time industry leader, was the handiwork of Steven J. Ross, one of the first and most energetic advocates of corporate synergy in the media industry. Ross started out in his father-in-law’s funeral business in Manhattan, which he parlayed into Kinney National Services, a conglomerate that operated funeral homes, a car rental agency, parking lots and garages, and a building maintenance service. Ross ventured into entertainment in 1967 by purchasing the Ashley Famous talent agency, and then, in 1969, Warner Bros.–Seven Arts, a Toronto-based television syndicator that had recently acquired the ailing Warner Bros. studio. In 1972, he renamed his company Warner Communications (WCI), after selling off the old Kinney business.

By the 1980s, Ross had grown his company into a vertically integrated entertainment conglomerate. The Filmed Entertainment brands included Warner Bros., Warner Bros. Television, Warner Bros. Distributing Corporation and Warner Home Video. Its other brands included Atlantic Records, The Movie Channel, DC Comics, Warner Books and Warner Amex Cable. In addition to owning one of Hollywood’s most consistently successful studios, a formidable film and television library, the world’s largest record company, WCI, had acquired the distribution systems associated with each of its product lines. Film industry analyst Harold Vogel described the economic benefits of controlling distribution as follows:

Ownership of entertainment distribution capability is like ownership of a toll road or bridge. No matter how good or bad the software product (i.e., movie, record, book, magazine, TV show, or whatever) is, it must pass over or cross through a distribution pipeline in order to reach the consumer. And like at any toll road or bridge that cannot be circumvented, the distributor is a local monopolist who can extract a relatively high fee for use of his facility. (Vogel, 1989)

In 1988, WCI added considerable muscle to its operations by buying stakes in three important theatre chains that owned 500 screens.

Regarded in the industry as a consummate deal maker, Ross’s greatest coup was orchestrating the merger of his company with Time Inc. in 1989 to create Time Warner, the world’s largest media company. Time’s properties included HBO, the premier pay TV channel, and Time, People, Money and Sports Illustrated mass-market magazines. Ross touted the merger ‘as essential to the competitive survival of American enterprise in the emerging global entertainment communications marketplace’ (Gold, 1989). In some ways this was a defensive manoeuvre, for he had in mind not only the takeover of 20th Century-Fox by Australia’s News Corp., but also the anticipated invasion of Hollywood by Japan’s Sony and Matsushita.

FOREIGN INVADERS

The growing demand for filmed entertainment of all kinds worldwide attracted foreign investment in Hollywood. Rupert Murdoch’s News Corp. started the trend. The owner of newspapers in Australia and the UK, Murdoch moved aggressively into the USA by acquiring a half-interest in 20th Century-Fox from Denver oilman Marvin Davis, the sole owner of the studio, in 1985. Soon after, he set out to create a full-blown fourth TV network, Fox Broadcasting, to challenge the big three networks, ABC, CBS and NBC. The growth of independent stations and the ease of distributing programming by satellite suggested the possibility of a fourth network as a viable enterprise. But not until Rupert Murdoch’s effort in 1986 did the fourth network idea have any currency.

To start, Murdoch bought Metromedia Television, the nation’s largest group of independent television stations, for $2 billion. (In order to comply with FCC regulations governing the ownership of TV stations, Murdoch became a US citizen.) Murdoch then assembled a network of more than one hundred independent stations, capable of reaching over 80 per cent of all TV homes, and invested heavily in counter-programming aimed at young adults. Fox began broadcasting on a limited basis in spring 1987. The network lost hundreds of millions of dollars over the first three years, but Fox finally turned the corner in 1989. Meanwhile, Murdoch launched his Sky Channel satellite television service in Europe. Murdoch’s announced goal was to own every major form of programming – news, sports, films and children’s shows – and then to beam them via satellite or TV stations into homes around the globe.

Sony and Matsushita, the two Japanese consumer electronics giants, made their moves next. Sony first acquired CBS Records for $2 billion in 1987 and then Columbia Pictures Entertainment (CPE) from Coca-Cola for $3.4 billion in 1989. The following year, Matsushita, Sony’s rival, acquired MCA, the parent company of Universal Pictures, for $6.9 billion. Matsushita’s products were sold under the brand names Panasonic, Technics and Quasar, among others. As Andrew Pollack explained, the Japanese companies ‘thought the entertainment “software” business could provide higher profit margins than the intensely competitive, and now largely saturated, consumer electronics appliance business. They also thought there would be synergies between the hardware and the software business’ (Pollack, 1994). Coca-Cola had acquired Columbia Pictures in 1982 and attempted to introduce modern scientific marketing techniques to the motion picture business, techniques that made Coca-Cola the leading soft drink brand in the country. But the studio ‘bumped along on a downhill path’ and experienced frequent management turnovers. Sony executives thought the studio was a better fit with their business. Purchasing CPE, Sony acquired two studios – Columbia Pictures and TriStar Pictures – a home video distributor, a theatre chain and an extensive film and television library. To strengthen CPE as a producer of software, Sony spent lavishly to renovate and refurbish the old MGM studios in Culver City and to hire movie producer Peter Guber to chart a course for the company, which was renamed Sony Pictures Entertainment in 1991. (Signing Peter Guber and his partner Jon Peters cost Sony $700 million and was one of the most expensive management acquisitions ever.)

Rupert Murdoch’s News Corp. media empire

MCA, once the mightiest talent agency in the business, had acquired Universal Pictures in 1962. Under the leadership of Lew Wasserman, generally regarded as the most powerful man in Hollywood, MCA became a force to contend with. Year in and year out, its films led at the box office and its television programmes dominated prime time. Beginning in the 1980s, MCA expanded into the leisure-time field by acquiring toy companies, music labels, a top independent television station and a stake in a giant theatre chain. Of all its investments, the Universal Studios Theme Park in Orlando, Florida, showed the most potential. After the merger with Matsushita, Wasserman and Sidney Sheinberg, his second in command, hoped to tap into Matsushita’s deep pockets and expand even further.

The American press criticised these c...