Hollywood and the world: the geography of motion … and the world: the geography of motion-picture distribution and marketing1 Allen J. Scott ... 2004 9:18 AM. REVIEW OF INTERNATIONAL

Review of International Political Economy 11:1 February 2004: 33–61

Review of International Political EconomyISSN 0969-2290 print/ISSN 1466-4526 online © 2004 Taylor & Francis Ltd

http://www.tandf.co.ukDOI: 10.1080/0969229042000179758

Hollywood and the world: the geography of motion-picture distribution and marketing1

Allen J. ScottCenter for Globalization and Policy Research, University of California

ABSTRACT

Production and distribution activities in Hollywood are secured by twomain types of firms, majors and independents, complemented by a thirdtype represented by majors’ subsidiaries. The characteristics of these firmsare detailed, first, in terms of their functions within the Hollywood produc-tion agglomeration itself, and second, in terms of their roles in externaldistribution and marketing. The structure of domestic motion-picturemarkets is described, with special reference to the geography of exhibition.A statistical analysis of film releasing activity is presented. It is argued thatthe industry is segmented into three overlapping market tiers, and a hypo-thetical model of this phenomenon is proposed. Export markets forHollywood films are shown to have expanded greatly in recent years, partlyas a result of strategic trade initiatives underwritten by the US government.The paper ends with a brief commentary on the cultural predicaments raisedby the globalization of Hollywood and on the sources of possible futurecompetitive threats to its hegemony.

KEYWORDS

Agglomeration; cultural products; globalization; media distribution;motion-picture industry; regional development.

INTRODUCTION

In one sense, Hollywood is a very specific place in Southern California,and, more to the point, a particular locale-bound nexus of productionrelationships and local labour market activities. In another sense, Holly-wood is everywhere, and in its realization as a disembodied assortmentof images and narratives, its presence is felt across the entire globe. Theselocal and global manifestations of Hollywood are linked together by acomplex machinery of distribution and marketing. In this manner, Holly-wood’s existence as a productive agglomeration is sustained, while the

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images and narratives it creates are dispersed to a far-flung and ever-expanding circle of consumers.

In the present paper, I focus mainly, though not exclusively, on oneprincipal aspect of this problem, namely, first-run distribution of featurefilms to theatre audiences in the US and the rest of the world. There are,to be sure, other important channels of diffusion for Hollywood filmsinvolving broadcast or cable television, VHS (video home system) or DVD(digital videodisc), and more prospectively, the internet. At the same time,the theatrical exhibition of feature films is only one phase in a widersystem of releasing windows and commercial exploitation that eventuallyfans out into extensive product franchises, including books, toys, games,records, clothing, theme park attractions, and so on (Wasko et al., 1993;Wyatt, 1994). These alternative outlets will be alluded to from time to timeas we proceed, but will remain largely in the background. Instead, prioritywill be given to questions of the all-important initial release, marketing,and distribution of films for theatrical exhibition. This emphasis is par-ticularly pertinent given that the success or failure of these activities hassignificant impacts on the subsequent commercial performance of any filmand its spin-off products.

THE US MOTION-PICTURE INDUSTRY: AN OVERVIEW

Majors and independents

At the outset, the US motion-picture industry can be identified in terms ofa core group of companies constituting the so-called ‘majors’, togetherwith a mass of smaller firms or ‘independents’. Later, I shall introduce athird distinctive type of corporate entity, represented by subsidiariesowned by the majors.

The majors are Metro-Goldwyn-Mayer Inc, Paramount Pictures, SonyPictures Entertainment, Twentieth Century Fox, Universal Studios, WaltDisney Co., Warner Brothers, and newcomer Dreamworks SKG, all ofthem headquartered in Hollywood. With the exception of Dreamworks,the majors are allied together in the Motion Picture Association of America(MPAA), a lobbying organization founded in 1922 that represents theirinterests worldwide. The majors all function as integrated production anddistribution operations embedded within wider systems of corporateconglomeration focused on exploiting the multiple synergies runningbetween the entertainment, media, and associated hardware sectors. Theirhallmark product is the blockbuster film, as exemplified by the four topbox-office champions ever, namely, Titanic (1997, $601 million total grossbox-office), Star Wars (1977, $461 million), E.T. (1982, $431 million), andJurassic Park (1993, $357 million). As I shall argue, the ability of the majorsto operate on this particular market register is in large degree a reflection


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of the internal economies of scale that accrue to their distribution activi-ties. All of the majors possess streamlined distribution infrastructures –rather like the early railroad and telegraph companies described byChandler (1990) – through which the variable substantive content flowsover wide territorial expanses. Until the late 1940s, the majors ownedextensive theatre chains in addition to their production and distributionactivities, but they were forced to divest themselves of these chains by the1948 Paramount antitrust decree. The exhibition sector is thus largely inde-pendent today, though some significant reintegration of production,distribution and exhibition has been occurring since the early 1980s.

Although the majors dominate the motion-picture industry, they do notrepresent the totality of production and distribution activities. Independ-ents also constitute an important element of the industry as a whole, andof the Hollywood complex in particular. Independents tend to be highlyspecialized in either production on the one side or distribution on theother, but cases where the two functions are vertically integrated are notuncommon. By and large, the independents deal in relatively small-budget films. Some independent production companies, however, workalongside the majors in various kinds of financing and distribution deals,thus enabling them to tap into the lucrative upper tier of the market. Thistier is otherwise largely inaccessible to independents except for theoccasional cases of small-budget films that unexpectedly become box-office successes.

Sectoral structures

According to the North American Industry Classification System (NAICS)that came into effect in 1997, the sectors making up the motion-pictureindustry can be described under four principal headings. These are:

• NAICS 5121101: Motion picture production, except for television.• NAICS 5121201: Motion picture film exchanges (representing the distri-

bution segment of the industry).• NAICS 51213: Motion picture and video exhibition.• NAICS 51219: Post-production and other motion-picture and video

industries (representing the main providers of service inputs to produc-tion as a whole).

Data on receipts, establishments, and employment for these sectors inthe US and Los Angeles County for the year 1997 are set forth in Table 1.2The data in Table 1 indicate clearly that Los Angeles is the dominant centreof the US motion-picture industry at large, except for exhibition, which,as we would expect, is widely diffused across the country. Los Angelesscores highly on total receipts and employment as a percentage of UStotals, and all the more so because it is the home base of numerous large


Table 1 Receipts and employment in the motion-picture industry, US and Los Angeles County, 1997

Sector Receipts Establishments Employment

US(M$)

LosAngeles(M$)

LA aspercentof US

US LosAngeles

LA aspercent ofUS

US LosAngeles

LA aspercentof US

NAICS 5121101 (motion-pictureproduction, except for television)

10,040 7,478 74.5 4,733 1,249 26.4 49,890 31,828 63.8

NAICS 5121201 (Motion-PictureFilm Exchanges)

9,211 5,366 58.3 477 165 34.6 7,744 3,488 45.0

NAICS 51213 (motion-picture andvideo exhibition)

7,597 685 9.0 6,358 364 5.7 125,041 9,752 7.8

NAICS 51219 (post-production and other motion-picture and video industries)

4,528 2,088 46.1 3,378 983 29.1 33,205 13,232 39.8

Source: US Department of Commerce, Bureau of the Census, Economic Census, 1997.

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firms. However, it scores somewhat less impressively on its percentage ofestablishments, a circumstance that is due to the existence of many smallfirms serving miscellaneous audiovisual markets in other parts of thecountry. All sectors of the motion-picture industry in the US have grownsignificantly over the last decade or so, not only as a function of expandingdomestic demand, but also of continued insistent penetration of foreignmarkets (Scott, 2002). Today, approximately 50 percent of all revenuesearned in the industry come from exports, and since the early 1990s thedomestic box-office has on average not even covered the majors’ basicproduction costs.

In addition to its marked geographic agglomeration in Hollywood, themotion-picture industry shows signs of strong corporate concentration, asrevealed by Table 2. The main production and distribution sectors (NAICS5121101 and NAICS 5121201) are particularly given to this syndrome, withfour-firm concentration ratios of 53.6 percent and 81.9 percent, respec-tively.3 The notably high level of concentration in distribution points tothis sector as the key organizational bottleneck in the industry as a whole.

FROM PRODUCTION TO DISTRIBUTIONAND EXHIBITION

The Hollywood complex

In the aftermath of the Paramount decree of 1948 the motion-pictureindustry of Hollywood entered a long period of crisis and restructuringthat was rendered even more intense because it was accompanied by agreat expansion of television broadcasting and a consequent massivedrain of audiences from motion-picture theatres. This period, which

Table 2 Concentration ratios by largest firms in the US motion-picture industry

Sector Four largestfirms (%)

Eight largestfirms (%)

NAICS 5121101 (motion-pictureproduction, except for television)

53.6 60.6

NAICS 5121201 (motion-picturefilm exchanges)

81.9 91.4

NAICS 51213 (motion-picture andvideo exhibition)

30.7 51.0

NAICS 51219 (post-production and other motion-picture and video industries)

16.4 21.4

Source: US Department of Commerce, Bureau of the Census, Economic Census, 1997.



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extended over much of the 1960s and 1970s, was marked by a transforma-tion of the so-called old Hollywood, centred on the vertically integratedstudio system, to a new Hollywood characterized by much more verticallydisintegrated production processes and significant externalization ofmany of the detailed tasks of film-making (Blackstone and Bowman, 1999;Hozic, 2001; Storper and Christopherson, 1987). The basic motion-pictureproduction complex of Hollywood today can be characterized as a denseconstellation of many interdependent firms and workers, functioningtogether in a project-oriented work environment, along with a variety ofinstitutional arrangements providing different sorts of coordinatingservices. The whole structure of agglomerated activity generates massiveexternal economies of scale and scope providing a constant flow ofcompetitive advantages to each individual firm (Scott, 2002; Storper andChristopherson, 1987).

More specifically, the kernel of the complex is constituted by shiftingnetworks of specialized but complementary firms engaged in manydifferent phases of film-making, with both the majors (dominantly) andindependent production companies (vastly more numerous but withmuch less commercial leverage) as the central organizing agents. Theproduction process itself is project-oriented in the sense that networks offirms and individuals come together around particular joint tasks, only tofall apart as the tasks are completed, and to re-appear in some other shapeas new projects are identified (DeFillippi and Arthur, 1998; Grabher, 2001).This kernel is complemented by an elaborate system of local labourmarkets in which an enormous diversity of skills and aptitudes ismobilized in the daily round of work. In keeping with the project-orientedstructure of production, many of the workers caught up in the industry –even highly skilled and highly remunerated individuals – hold onlytemporary jobs or freelance engagements, and circulate with somefrequency through the entire system. The whole agglomeration is under-pinned by a tightly knit institutional fabric, comprising on the one sidepowerful trade organizations such as the MPAA, the Academy of MotionPicture Arts and Sciences (which organizes the annual Academy Awards),the Alliance of Motion Picture and Television Producers, the AmericanFilm Marketing Association (AFMA), and on the other side representa-tives of both professional and craft labour such as the Director’s Guild, theProducers’ Guild, the Screen Actors’ Guild, the Writers’ Guild, and thenumerous specialized locals of IATSE (the International Alliance of Theat-rical Stage Employees). Within the vortex of activity represented by theagglomeration as a whole, many-sided human interactions and exchangesof information occur at frequent intervals, and these forms of contacttypically represent important sites of creativity and innovation (Scott,2000).

These diverse elements of the Hollywood complex all contribute to its



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strong centripetal or agglomerative locational pull. They hold it togetherin geographic space as a dense and growing production machine basedon endogenously created competitive advantages. Even if there is agrowing trend to the actual shooting of Hollywood films at other locations(Monitor, 1999), the status of Hollywood as a pre-eminent focus of pre-and post-production work in the motion-picture industry remains for thepresent undiminished.

The organization and geography of motion-picture distribution

Just as the production system is organized around majors and independ-ents, so distribution is similarly bifurcated. The majors focus on world-wide distribution of large-budget films, either through their own facilities,or in various kinds of agreements with distributors in other countries.Independent companies more typically take on responsibility for distribu-tion over comparatively limited market territories, so that any one filmmay be distributed by a large number of different firms, both inside andoutside the US. This type of arrangement means that production com-panies regularly face high transactions costs in working out distributiondeals, but it also enables them to tap into multiple sources of finance.Independent distributors often take equity positions in the films theyhandle (Rosen and Hamilton, 1987).

The majors’ stock in trade is the high-budget blockbuster film that callsnot only for an elaborate production capacity, but equally for an extensivedistributional infrastructure. In the case of the majors, these two sides ofthe business are always vertically integrated with one another. Nowadays,the majors’ domestic distributional infrastructure is focussed on satura-tion theatrical openings across the country, and maximization of the box-office returns from the first weekend of exhibition. This strategy differssharply from earlier distribution procedures geared to a staggered systemof openings moving progressively from flagship theatres down the hier-archy of exhibition venues, and depending on word of mouth for publicity.The current strategy is especially well suited to the peculiarities of contem-porary film markets where initial exhibition is the first stage in a chain ofmarket windows for any given film, with strong effects on the film’ssubsequent performance throughout the chain (Litman and Ahn, 1998).There is some probability, too, that saturation openings will become morecommon in international markets in the not-too-distant future, not only asa commercial goal in its own right, but also as a way of pre-empting filmpiracy. With the shift-over in film formats from analog to digital, world-wide saturation openings will be increasingly feasible.

As we observed earlier in the discussion of Table 2, there is a markeddegree of business concentration in the motion-picture distribution sector.However, this concentration is not so much an outcome of the physical



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effort needed to distribute films, for actually moving reels of film frompoint a to point b is a comparatively easy task. Concentration in thedistribution side of the business is rather a function of the need to maintaincontinuous and extensive contact with large numbers of different theatrechains, and to coordinate placement of any one film in theatres across thecountry and the world according to a tight schedule of release dates.Levels of concentration are further boosted by the need to back up distri-bution, as such, with massive marketing campaigns, and, above all, togenerate sufficient publicity nationally and locally for each film so that theopening weekend brings in significant threshold box-office returns. Inorder to secure these objectives, the majors all maintain branch offices incritical regional markets, thereby facilitating close and steady contact withtheatre operators. Figure 1 displays the location of these branch offices inthe US and Canada. All of them coincide with metropolitan areas in statesor provinces where large numbers of theatre screens are to be found.

On the basis of information gathered in face-to-face interviews withrepresentatives of distribution companies, we can characterize the inter-actions between these branch offices and the theatre chains with whichthey deal as a form of relational contracting. This signifies that both partiesto any given transaction have long-term relations built on strong personalfamiliarity, in contradistinction to purely arms’-length dealings.4

Figure 1 Offices of major Hollywood distribution companies in relation to the geographic incidence of theatre screens in the US and Canada

Source: Based on information provided by the National Association of Theatre Owners andMotion Picture Theatre Associations of Canada.



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Relational contracting between distributors and exhibitors is no doubtpartially a substitute for vertical integration, for it permits collaborativeprogramming of their interdependent activities over some fairly extendedtime horizon, without overt contravention of antitrust regulations. Evenso, since the early 1980s, when the Justice Department under the Reaganadministration adopted a more tolerant interpretation of the Paramountdecision, some vertical re-integration between distribution and exhibitionhas been occurring (Blackstone and Bowman, 1999). The most visible caseof this phenomenon involves the Sony Corporation which owns Loew’sCineplex, one of the largest theatre chains in the US, with 264 sites and2,323 screens. The same search for vertical synergy is apparent in themajors’ continuing quest for ownership (both directly and through theircorporate umbrellas) of broadcast and cable television networks, as exem-plified by Warner’s direct interest in the Home Box Office Cable Network.Also, as home-video markets have soared upward over the 1990s, themajors have established specialized divisions to distribute films in bothVHS and DVD formats.

Independent film distributors are mostly small in size and subject toespecially erratic market swings. The largest independent distributor inthe country currently is USA Films, which released 15 films in the year2000 and earned just 1 percent of gross box-office receipts nationwide.Artisan Entertainment, Lion’s Gate Films, Shooting Gallery, and WinstarCinema, are a few of the many other independent distributors operatingin the country today. According to data on motion-picture creditspublished by AMPAS (2001), some of the larger independent distributorsin the US may deal with a dozen to a score of films a year, but the vastmajority of independents handle no more than two or three. Independentdistribution companies focus on films made by their own productionarms or other independent producers, both American and foreign; theyrarely or never deal with films produced by the majors. In a questionnairesurvey of independent film production companies, carried out in LosAngeles over the summer of 2001, it was found that 27.7 percent of thoserespondents who had made a feature film in the previous year relied onthe majors to get their films to market, while fully 72.3 percent relied onindependent distributors.5 It was evident, moreover, from the completedquestionnaires that many respondents were making an unduly broadinterpretation of the meaning of the term ‘major’ in this context. Filmfestivals are nowadays important venues in which independentproducers and distributors come together to make deals with one another.On occasions, independent production companies will seek to distributetheir own films, especially where these are directed to highly specializedaudiences and the production company has an informed sense of thenature of the market, as in the case, say, of films that appeal to gays orcertain ethnic groups. An increasing practice among independent



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producers is to make direct-to-video films and to dispense with theatricalexhibition altogether (Vogel, 1998).

Domestic motion-picture markets

As Table 3 indicates, gross domestic box office returns in the US motion-picture industry as a whole grew from $5,745 million in 1980 to $7,661million in 2000 (in constant dollar terms). By far the greater share of thesereturns is accounted for by films released by the majors. In Table 4, aggre-gate box-office returns are broken down to show the portion earned byeach of the major distributors at five-year intervals from 1980 to 2000.Buena Vista (the distribution arm of Disney) has tended to dominate themarket over the last decade, but never by more than one or two percentagepoints. In fact, the data presented in Table 4 conform to a pattern ofrevolving leadership in which no one major remains at the head of theleague for very long. MGM has clearly been a laggard over the last twodecades, and this circumstance reflects its turbulent recent history ofreorganizations and corporate takeovers. As it happens, the theatrical box-office is no longer the main source of the majors’ revenues, althoughexhibition remains the key initial market window for any film as it movesthrough subsequent windows in video, television, in-flight entertainment,and so on. According to data published by Veronis Suhler (2001), home-video sales and rentals in the US (both VHS and DVD) amounted to$22,453 million in 2000, some three times larger than the total grossdomestic box-office for that same year.

The historical pattern of annual releases of films in the US is presentedin Figure 2. The figure shows the number of films released by the majorssince 1945, and by independents since 1980. Over the crisis years,stretching from the 1950s to the 1970s, releases by the majors declinedcontinually if erratically. These were years in which the majors werestruggling to cope with rapidly shifting organizational and market trends,and to work out a viable new aesthetics and economics of popular cinema,

Table 3 Gross domestic box office, 1980–2000a

Year Current M$ Constant M$ Majors’ share

1980 2,749 5,745 91%1985 3,749 6,000 77%1990 5,022 6,617 80%1995 5,494 6,208 86%2000 7,661 7,661 83%aDomestic box office includes receipts for both the USA and Canada.Sources: Motion-Picture Association of America (http://www.mpaa.org/) and NationalAssociation of Theatre Owners, Encyclopedia of Exhibition, 2001–2002.


Table 4 Domestic theatrical film distribution, market shares of Hollywood majors, 1980–2000

Year Market share (%)

Buena Vista/Disney

Columbia/Sony

Dreamworks MGM Paramount 20th C Fox Universal Warner

1980 4 14 – 7 16 16 20 141985 3 10 – 9 10 11 16 181990 16 5 – 3 15 14 14 131995 19 13 – 6 10 8 13 172000 15 9 10 1 11 10 15 12

Source: National Association of Theatre Owners, Encyclopedia of Exhibition, 2001–2002.

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leading eventually to the successful development of the high-conceptblockbuster film as the industry’s staple product. The data presented inTable 5 reveal a dramatic surge in the costs of producing and marketingfilms released by the majors between 1980 and 2000. In constant dollarterms these costs rose approximately threefold over this two-decadeperiod. Marketing costs have on average run at just below half of produc-tion costs (negative costs), though in the case of specific highly promotedfilms the former can sometimes exceed the latter by a wide margin.

Figure 2 also demonstrates that the 1980s witnessed dramatic growth inthe number of films released by independent distributors, a growth thatoccurred in response to the rise of diverse niche markets and the greatexpansion of ancillary markets in video and deregulated television broad-casting (Prince, 2000). This was a period in which the so-called mini-majors (such as Cannon, Carolco, Miramax, Orion, or New Line) rose toprominence by capitalizing on these developments, though a number ofthe same firms have since vanished. At this time, too, the majors begansignificantly to acquire or to create smaller affiliated production and distri-bution companies in order to exploit and shape some of the same market

Figure 2 Number of new feature films released annually in the US since 1945. Published data on releases by independent distribution companies are available only since 1980. Note that releases by majors include films released by their subsidiaries; also, releases by majors include films produced by majors, their subsidiaries, and independent production companies

Source: Motion-Picture Association of America (http://www.mpaa.org/).



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niches. The rising quantity and diversity of films on offer is reflected inthe fact that whereas the number of theatre sites in the US has declinedsignificantly over the last two decades, multiplex theatres (distinguishedby their flexible arrangements for accommodating films with widelyvariable audience appeal) have increased greatly in number, with aconcomitant expansion of the total number of screens available for exhib-iting films. In 1980, according to NATO (2002), there were 17,675 screensin the country as a whole; in 1990 there were 23,814; and in 2000, therewere 36,264 (at 6,979 sites, thus giving an average of 5.2 screens pertheatre).

MARKET STRUCTURES AND THE DYNAMICS OFFILM RELEASING

Economic systems are shaped by both the production strategies of firmsand the demand patterns of consumers. Out of this tense force-field ofrelations there emerges an architecture of the market, which, in themotion-picture industry, is expressed in a particularly revealing mannerby shifting structures of releasing activity over time, space, and deliveryformat.

Some determinants of releasing behaviour

The majors release films produced in-house as well as films produced withvarying degrees of participation by independents (where for presentpurposes, independents include the majors’ own subsidiaries). A firstquestion, then, revolves around the changing origins of the films that flowthrough the majors’ distribution systems. A data series pertinent to thisquestion was constructed for the period 1980–2000 from listings ofindividual film credits given in the Annual Index to Motion Picture Credits

Table 5 Average negative and marketing costs, Hollywood majors, 1980–2000

Year Millions of current dollars Millions of constant dollars Marketing costs as % of negative costsNegative

costaMarketing costsb

Negativecosta

Marketing costsb

1980 9.4 4.3 19.6 9.0 45.71985 16.8 6.5 26.9 10.4 38.71990 26.8 12.0 35.3 15.8 44.81995 36.4 17.7 41.1 20.0 48.62000 54.8 27.3 54.8 27.3 49.8aProduction costs, studio overhead and capitalized interest.bPrints and advertising.Source: Motion-Picture Association of America (http://www.mpaa.org/).



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published by the Academy of Motion Picture Arts and Sciences. TheAnnual Index provides information on the production and distributioncompanies involved in all films released in Los Angeles every year. Fromthis information we can identify which films released by any major areproduced with independent participation and which are not. Unfortu-nately, our source of information does not provide us with any clues aboutthe precise nature of this participation in any given instance. In somecases, the major distributing the film exerts dominant control over thedecisions of the independent producer(s). In other cases, the control isnominal. In yet other cases, as represented by so-called negative pickups,the distributor does not even know about the film until after it iscompleted. Despite the ambiguities involved, the outcome of this exerciseappears to be fairly robust, and a strong (inverse) statistical association isobservable in the two different types of films distributed by majors. Thedetails are as follows.

Let yt be the number of films made with independent participation anddistributed in year t by any given major; let xt be the correspondingnumber of films made in-house and distributed by the same major. Thesevariables are de-trended by taking first differences (∆yt = yt – yt–1, ∆xt =xt – xt–1), and simple linear regressions of the relationship between themare computed, for all majors individually and collectively, as laid out inTable 6. There is a marked negative relationship between the two variablesacross all regression equations. This suggests that the majors consistentlysubstitute between films of type y and x in their distribution systems, sothat when they distribute more of the latter, they distribute less of theformer, and vice versa. The same finding implies that the majors areconcerned to even out the flow of films through their distribution systemsand to ensure that these systems operate as close to optimal capacity aspossible over time.6 The regressions presented in Table 6 also point to

Table 6 Regression equations showing the relations between ∆yt and ∆xt, 1980–2000 (see text for definitions of variables)

Distributor Constantvalue

Regressioncoefficient

Adjusted R2

Columbia/Sony 0.24 –0.8741** 0.52Disney/Buena Vista 0.56 –0.2448 –0.02MGM –0.12 –0.5250 0.09Paramount –0.18 –1.4172** 0.52Twentieth-Century Fox –0.09 –0.7292** 0.51Universal –0.07 –0.9216** 0.36Warner –0.07 –0.7481** 0.33

All majors 0.58 –0.8813** 0.50

**The double asterisk indicates significance level of 0.01 or better.



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important differences in production-cum-releasing strategies between themajors. Paramount is characterized by a much greater tendency to substi-tute between the two types of films than any other major, suggesting thatit has developed a relatively flexible production-distribution strategy. Inthe case of Disney and its distribution arm, Buena Vista, the relationbetween the two sets of changes is unusually small and statisticallyinsignificant, a circumstance that reveals Disney’s much greater relianceon its own internal resources than the other majors.

A second and related question concerns temporal patterns of releasingin relation to general market conditions. Here, in addition to majors andindependents, a third group of distribution companies is explicitly intro-duced, namely, subsidiaries of majors. The variables of interest in thepresent phase of the analysis are defined below:

It: Number of films released by independent distributors in year t.St: Number of films released by majors’ subsidiaries in year t.Mt: Number of films released by major distributors in year t.At: money spent on admissions to films in year t (in constantdollars).it: the interest rate (federal funds, effective rate) in year t.

A series of regression equations was then computed linking the numberof films distributed by these groups of companies to money spent onadmissions and interest rates for each year from 1980 to 2000 (see Table 7).Notice that At enters these regressions with a time lag of one year. Thesigns on the coefficients of the independent variables in the regressions areall as expected. Thus, the number of films released by each of the threegroups of distributors, and by all three in aggregate, is positively relatedto money spent at the box-office in the previous year, and negatively

Table 7 Regression equations showing the effects of box-office returns and interest rates on temporal variations in films released by independents, majors’ subsidiaries, and majors, 1980–2000 (see text for definitions of variables)

Dependent variable Regression coefficients

Constant value At–1 it Adjusted R2

It –168.05 0.0577** –2.1198 0.49

St –52.16 0.0188 –3.7797 0.23

Mt 125.58 0.0010 –3.0057** 0.40It + St + Mt –94.66 0.0775** –8.9052** 0.74

**The double asterisk indicates significance level of 0.01 or better.Regressions based on data derived from the Academy of Motion Picture Arts and Sciences,Annual Index to Motion Picture Credits, and from the US Department of Commerce, Bureau ofthe Census, Statistical Abstract of the United States.



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related to interest rates in the current year. Independent distributors areparticularly sensitive to the former variable, possibly in part because theyride on the coattails of majors’ successes. Releases by the subsidiaries ofmajors do not appear to be significantly related to either of the inde-pendent variables. The majors themselves (excluding their subsidiaries)are highly sensitive to interest rates in their releasing behaviour, a reflec-tion, presumably, of their tendency also to cut back on production whenrates are high. When we re-run the regression analysis using It + St + Mt asthe dependent variable, both At–1 and it emerge as having extremely sig-nificant effects, with an adjusted R2 of 0.74. The regression coefficients inthe latter model suggest, as we might anticipate, that the compositepattern of releasing is rather more volatile than it is in the case ofindependents, subsidiaries, or majors taken in isolation from one another.

A tripartite model?

Reference has frequently been made in all of the above to an essentiallybipartite pattern of production-consumption relations in the motion-picture industry, revolving around the split between majors and inde-pendents. Only an occasional acknowledgment of a possibly distinctiverole for the majors’ subsidiaries has thus far been offered. In fact, since theearly 1980s, and especially since the early 1990s, there has been a markedtendency for this group of companies to emerge as a peculiar domain ofactivity in its own right.

Today, every major has a larger or smaller stable of these subsidiaries,most of which act as quasi-independent production and distributionentities and possess a high degree of autonomy in their corporate decision-making. In this regard, the majors are coming increasingly to resemble themusic majors that pioneered this form of corporate strategy (Negus, 1998;Scott, 1999). These subsidiaries function within a range of intermediatemarkets lying between those in which the majors proper operate and thosein which the independents are typically ensconced. They also represent asort of advance guard for the majors by reason of their more experimentalapproaches to the motion-picture business and their consequent ability tocapture and shape emerging talent and trends. Among the more importantsubsidiaries with a substantial stake in distribution activity at the presenttime are Disney’s Miramax, Sony Classics, Warner’s New Line, MGM’sOrion Pictures, Twentieth-Century’s Fox Searchlight, Universal Focus andParamount Classics.

Figure 3 provides some empirical details as to how the conjecturedtripartite structure of US motion-picture production and markets isarranged. The figure shows frequency distributions of percentage box-office returns for films distributed by (a) independents, (b) majors’ sub-sidiaries, and (c) majors (less subsidiaries). These percentage figures sum



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to 100 within each of the three types of distribution system. The x-axis ofFigure 3 is drawn on a logarithmic scale in order to facilitate visualcomparison of all the information available. What is immediately strikingabout the figure is the clear separation of each frequency distribution intolower, middle, and upper market segments. These three segments aresharply divided from one another in terms of the average box-officereturns attributable to each. As Table 8 reveals, the average box office forindependents was $3.8 million in the year 2000, for subsidiaries it was$14.3 million, and for majors $55.6 million.7 A t-test indicates that thesevalues are all different from one another at extremely high levels of statis-tical confidence. In the same year, the average number of films distributedby each type of firm was 2.0, 8.6, and 14.3, respectively, though there ismuch variance around these values. From these data it is apparent thatthe majors’ subsidiaries (together with a few selected independents) arecarving out a very definite middle-range market niche for themselves.Concomitantly, whenever any independent begins consistently to contest

Figure 3 Distribution of box-office returns for domestic exhibition, 2000; releasing companies categorized by independents, subsidiaries of majors, and majors

Source: Calculated from data given by National Association of Theatre Owners, Encyclopediaof Exhibition, 2001–2002.



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this same niche, it becomes a prime target for takeover by a major, asillustrated by Disney’s purchase of Miramax in 1993 or Warner’s acquisi-tion of New Line by merger with Turner Broadcasting in 1995. Scrutiny ofFigure 3 suggests that there is a fair degree of competition within each ofthe three niches, and more limited competition between them, but that themajors have a tight oligopolistic hold over the upper reaches of themarket, strengthened by the strategic positioning of their subsidiaries ina sort of intermediate buffer zone. Data limitations mean that we cannotpush this same analysis very far back in time. However, since 1991, thedata show a strongly bifurcated market gradually giving way beforetrifurcation as the majors’ subsidiaries expand in number and enlargetheir lists of releases.

These remarks may be extended with the aid of a speculative model ofhierarchical market relations in the motion-picture industry. The model isbased on two key assumptions. The first is that we can identify differenttypes of films in terms of the different market segments to which theyappeal (e.g. low-budget films for limited audiences, middle-range filmsfor wider but still selective audiences, blockbusters with sweepingpopular appeal, and so on). Wyatt (1991) argues, for example, that high-concept blockbusters are a distinctive product deeply differentiated fromother motion-picture products by their particular substance and pack-aging. The second assumption is that the expected gross box-office returnsfor a film of any given type bear a statistical relationship to the amount ofmoney invested in the production and marketing of that film. Of course,other factors play a role in generating expected returns, such as the cast,the director, press reviews, and so on, but production and marketingbudgets represent a primary element on which many other of these otherfactors themselves depend (cf. Daly, 1980; de Vany and Walls, 1997; Litmanand Ahn, 1998; Robins, 1993). In this context, we need to note that thecommercial performance of any single film is extremely unpredictable. Anindustry rule of thumb is that 7 or 8 out of every 10 films show a net loss,so that overall profitability in the industry is dependent on the other twoor three films out of the 10 that actually earn money above and beyond

Table 8 Breakdown of average box-office returns by types of releasing companies, 2000

Types of releasing companies Number of films released

Average box-office ($000)

Percent of totalbox-office

Independents 221 3,752 10.2Subsidiaries of majors 80 14,264 14.0Majors 111 55,639 75.8

Source: Calculated from data in National Association of Theatre Owners, Encyclopedia ofExhibition, 2001–2002.



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their costs. It should be emphasized therefore that expected returns arerepresented here by expected average returns.

For the sake of simplicity, let us consider the case where just two marketsegments exist, one dominated by films with dense production values (andappealing to mass audiences), the other characterized by a proliferation offilms with more meagre production values (and catering to relativelylimited demands per film). For each type of market segment, i {i = 1, 2},the expected box office for any given film will be an increasing functionof the total amount of money invested in producing and marketing thesame film. More specifically, the function can be identified as a logisticcurve. This proposition follows from the strong likelihood that we willalmost always observe low returns per dollar invested at low and highlevels of investment (due to under- and over-investment, respectively, inproduction values), and relatively high returns at some intermediate point.The curve for any given segment is expected to be distinct from the curvefor any other segment. Define Ci as the total production cost of a filmserving market-segment i, and let its distribution and marketing cost be asimple proportion, αi, of the same amount. Total investment in the film isthus Ii = (1+ αi)Ci and its expected box-office earnings are EBOi = fi(αi, Ci).The problem that the producer-distributor must now face is to identifywhat particular market segment any planned film should be assigned toand then to find values of αi and Ci that maximize EBOi – Ii. A typicalsolution for this problem is shown in Figure 4, where for a film of type 1,a production cost of C*1 yields a profit-maximizing value of EBO*1, andfor a film of type 2, a production cost of C*2 yields an optimal value ofEBO*2. The lower panel of Figure 4 displays hypothetical frequency distri-butions of the occurrence of type 1 and type 2 films.

Depending on the dynamics of market supply and demand, variousempirical expressions of this kind of logic are possible, ranging from asingle, continuous frequency distribution of films relative to productioncosts, to a completely segmented pattern of frequencies. A tendency to theone extreme would be apt to occur if films could not be significantlydifferentiated from one another in terms of appropriate investment levels,i.e. where audience response is statistically unpredictable on the basis ofproduction costs. A tendency to the other extreme would be more likelyto occur where at least the top end of the market can be cornered by a selectgroup of firms with strong internal economies of scale and the ability tomobilize significant resources. In this case, barriers to the entry of newcompetitors will be established, and these barriers will be accentuated asfirms then hone their long-term competitive advantages in relation to thatmarket segment. The market-cornering process, moreover, is reinforced inthe motion-picture industry by the proclivity of the majors continually toraise the stakes as they gamble on ever more ambitious blockbuster films,thus making the entry of new competitors increasingly difficult. The



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remainder of the market may then converge around a single competitivenorm at a lower average cost or price, or yet further cornering or quasi-cornering of selected segments may occur until the possibility of furtherpartitioning is exhausted. Obviously, the number of different marketsegments that appear may vary from time, though it is likely to be smallgiven finite markets, and equally, frequent overlap between the segmentswill tend to occur, as exemplified by cross-over films that start off in onesegment and end up in another.

Figure 4 A model of investment, expected box-office returns, and frequency of occurrence for films of types 1 and 2. Optimal values of variables are indicated by an asterisk. Note that values of EBOi are a function of both αi and Ci. See text for explanation of symbols



53

This analysis proposes a mechanism whereby stable, differentiatedmarket segments in the motion-picture industry might emerge, at least fora certain period of time. The model mirrors the earlier descriptivediscussion of the layered structure of markets in the motion-pictureindustry. However, it represents only a first attempt at an explanatoryschema, and plainly, considerable further refinement combined withrigorous empirical testing are essential before it can be taken to beanything much more than a speculative gesture.

TRADE AND GLOBALIZATION

Export markets

Right from the beginnings of Hollywood a century ago, American motionpictures have found ready markets in other countries. Since World War II,this export flow has expanded dramatically, and today the presence ofHollywood is felt virtually around the world (Hoskins et al., 1997; Milleret al., 2001; Wildman and Siwek, 1988).

Data on US film and tape rental exports to other countries between theyears 1986 and 2001 are laid out in Table 9. The data refer to videotaperentals as well as motion-picture distribution overseas and they cover allUS exports in these services. These rentals have grown with notable vigourover the last 15 years or so, and they now exceed the domestic box-officeby a considerable margin. Whereas the gross domestic box office formotion pictures increased (in constant dollar terms) by 40.9 percent from$5,970 in 1986 to $8,413 million in 2001, exports of film and tape rentalsover the same period increased by 452.8.0 percent from $1,683 million to$9,304 million. Table 9 informs us that by far the main importers of theproducts of Hollywood are the European countries. The UK, Germany,and the Netherlands alone account for 36.7 percent of all rental exportsfrom the US. Japan and Canada, too, are major importers, as are Australia,Brazil and the Republic of Korea.

The majors maintain extensive distribution and marketing networks notonly in North America, but also in other countries. Through their multi-national operations the majors directly control distribution systems in alltheir principal foreign markets, as well as in many more secondarymarkets. United International Pictures, for example, is a joint venture ofUniversal and Paramount, which owns distribution facilities in as manyas 37 different countries including the UK, France, Germany, the Nether-lands, Australia and Japan, as well as in less lucrative territories likeHungary, Chile, Peru, the Philippines, and Thailand. Twentieth-CenturyFox owns 21 foreign distribution facilities in an equally diverse set ofcountries. In countries where the majors do not actually own a distributionnetwork outright they often enter into joint ventures or long-term



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agreements with local companies in order to ensure distribution of theirfilms. As indicated by Table 10, American films garner never less than half,and sometimes more than two-thirds of total box-office receipts in all theirmajor markets. This phenomenon can be ascribed both to the unequalledability of American multinational media corporations to disseminate theproducts of Hollywood across the globe, and their ability to make big-budget films that appeal powerfully to popular taste in many differentcultures. In testimony to the latter remark, films that do well at the boxoffice in the US invariably also do well abroad. Thus, the simple correla-tion between gross domestic box-office earnings and foreign box-office of121 Hollywood films released in the year 2000 is 0.81, which is significantwell beyond the 0.01 level.8

Table 9 US exports in the form of film and tape rentals; percentage values by destination

Destination 1986 1991 1996 2001

France 10.2 8.6 8.6 6.7Germany 7.5 9.6 10.5 12.4Italy 10.0 7.3 4.7 4.9Netherlands 15.2 17.5 17.4 9.0Spain – 5.1 5.9 6.2Sweden – 1.8 1.4 1.2UK 10.6 11.0 9.8 15.3

Europe 60.3 66.5 64.9 62.8

Australia 10.3 3.4 4.8 3.6Japan 8.3 11.5 8.7 8.9Republic of Korea – 0.8 1.8 1.2Taiwan – 0.5 0.7 1.0

Asia and Pacific 22.1 18.3 19.3 17.1

Brazil – 0.8 2.2 2.5Canada 10.4 8.7 6.8 8.0Mexico 1.3 0.9 1.3 2.6

Americas 17.9 12.5 13.0 16.9

South Africa – – 1.1 1.0

Africa – 1.0 1.2 1.0

Middle East – 0.5 0.8 1.1

World ($ millions, current) 1,071 1,962 4,982 9,304World ($ millions, constant) 1,628 2,400 5,290 9,304

Source: US Bureau of Economic Analysis, Survey of Current Business.



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Strategic trade in Hollywood films

Strategic trade involves governmental support for export activities incircumstances where national interests are in some sense at stake (cf.Tyson, 1992). It comprises institutionalized market-opening practiceswhether for reasons of political influence or economic leverage (as incircumstances where extension of the market generates rents based onincreasing returns effects within domestic production complexes).

Exports of motion-pictures from the US have long been a classic instanceof this phenomenon, with federal bureaucracies continually pressing invarious forums of trade negotiation for foreign governments to open theirdoors more widely to Hollywood films. Indeed, Hollywood has alwaysreceived abundant help from the US State Department, the CommerceDepartment, and other agencies of federal government. At least sinceWorld War II, the interests of Hollywood and the aims of Washington haveconsistently coincided on the economic front even when there has beenless accordance on the ideological front (Segrave, 1997). One particularlynotable case of this convergence of interests occurred at the time of theMarshall Plan for Europe (1948–51) whose provisions linked levels of aiddirectly to recipients’ willingness to accept imports of US motion pictures(Guback, 1969). These provisions were at once a boon to Hollywood, and,in theory at least, a means of ensuring that European minds would beappropriately fortified against pernicious left-wing political influences.More recently, as globalization has started to intensify, the US governmenthas been aggressively promoting free-trade in goods and services (andcultural-products in particular) across the world, leading predictably tosignificant direct and indirect gains for Hollywood.

In the never-ending effort to ensure that the interests of Hollywood arepromoted by the federal government in various forums of national and

Table 10 Structure of selected national film markets, 2000

Country Numberof filmsproduced

Total theatre entries (millions)

Total receipts ($ millions)

Domesticfilm industry share (percent)

US film industry share (percent)

Australia 31 82.2 401.0 8.0 87.5France 204 165.5 821.3 28.9 58.3Germany 75 152.5 463.5 9.4 81.9Italy 103 103.4 258.1 17.5 69.5Japan 282 135.4 1585.3 31.8 64.8Spain 98 135.3 297.1 10.1 82.7UK 90 142.5 941.2 19.6 75.3US 460 1420.1 7661.0 96.1 –

Source: CNC Info, No. 283, 2002, Paris: Centre National de la Cinématographie.



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international deliberation, the MPAA plays a critical role as both industrymouthpiece and lobbying organization. Symptomatically, the Associationhas offices in Washington, DC, as well as in Southern California. TheMPAA preaches an aggressive doctrine of free-trade, and it played anotably active role behind the scenes at the GATT negotiations in 1993 inthe confrontation between the US and Europe (led by France) over tradein audiovisual products. Although the European position prevailed at thattime by asserting a ‘cultural exception’ permitting each country to set uptrade restriction according to its own cultural preferences, there is everylikelihood, in the newly constituted WTO that succeeded GATT, that theUS/MPAA position will eventually prevail. The MPAA is also the parentorganization of the MPA (Motion Picture Association), formerly known asthe MPEA (Motion Picture Export Association), established in 1946 as alegal cartel under the provisions of the Webb-Pomerane Export Trade Act.9Outside the US, the MPA has offices in Brussels, Rome, New Delhi, Rio deJaneiro, Singapore, Mexico City, Toronto, and Jakarta, and from thesebases it carries out its basic mission of promoting exports of Hollywoodmotion pictures, protecting intellectual property rights, and advancing thegoals of the industry generally in foreign markets.

Independent motion-picture distributors are represented by AFMA (theAmerican Film Marketing Association), an active and influential organiz-ation founded 1981. AFMA’s membership roster of over 170 firms iscomposed primarily of independent distributors and allied businessesbased in Hollywood, but a large proportion is made up too of firms fromother parts of the country and from abroad. Like the MPAA, AFMA isconcerned to promote the interests of its members in regard to trade andpublic relations, with a special emphasis on issues of arbitration, piracy,marketing and tracking members’ earnings from foreign sources. AFMAalso promotes the American Film market, an annual event in Santa Monicarepresenting the largest motion-picture trade event in the world, attractingover 7,000 people from over 70 different countries.

Globalization and the cultural economy

The steady globalization of Hollywood as an expression of both marketforces and US government action on the international trade front, has, ofcourse, engendered numerous clashes and disputes. Some of these reflectpurely commercial differences of interest; some are focussed on culturalcollisions of one sort or another; and some, perhaps the majority, are acomplex mixture of the two. The official line of the MPAA and the USDepartment of Commerce is that international trade in cultural productsshould proceed in as open and as free a manner as possible, and shouldnot be subject to any special restrictions. This line, however, overlooks thecircumstance that unlike wheat or coal, cultural products are also



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intimately bound up with matters of selfhood, identity and consciousness.More generally, each individual’s consumption of cultural products isreplete with externalities for all other individuals in the same society.Politicized responses to the flow of cultural products from one society toanother are therefore to be expected and need to be dealt with on theirown terms. A rhetoric of market ideology inevitably misses the crucialpoint here. It might be plausibly argued that even within the US itselfdirect governmental engagement with the content of motion pictures hasbeen averted only because of the formal and informal self-regulation ofthe industry, dating from the time of the promulgation of the Hays Codein 1930. In fact, governmental scrutiny of the motion-picture industry inthe US has been frequent and usually intense, in episodes ranging fromthe House UnAmerican Activities Committee hearings in the late 1940sand early 1950s to recent congressional inquiries into the role of violencein films and television programs.

Given the appeal of Hollywood’s entertainment products to massaudiences all over the world, the US will probably continue to maintain astrong lead as an exporter of motion pictures for the foreseeable future.There is evidence, however, that some important shifts may be in theoffing. For one thing there has been a very significant rise in runawayproduction activities from Hollywood to cheaper locations in Canada,Mexico, and further afield. Hitherto, this phenomenon has not posed verymuch of a threat to the basic role of Hollywood as a centre of creativityand deal-making in the motion-picture industry, though there are signsthat the outflow of capital and work may be helping to stimulate the riseof competitor film industries (for example in Toronto and Vancouver). Atthe same time, and independently of runaway activities from Hollywood,dynamic centres of audiovisual production in many different countries arenow also beginning to contest and recontest global markets. Producers inplaces like London, Paris, Rome, Beijing, Hong Kong, Tokyo, Mexico City,Mumbai/Bollywood, Sydney, and so on, are all in various ways makingefforts to improve their market performance and to compete internation-ally. Similarly, American media conglomerates are no longer theunchallenged champions of cultural globalization that they once were.With the rise of large multinational media corporations based in Europeand Japan, the global cultural landscape is becoming considerably morecomplex, and competitive pressures are mounting steadily. Some of thesecorporations are also acquiring significant stakes in American film, tele-vision, music, publishing and other cultural-products industries. For themoment, the Hollywood motion-picture industry remains unmatched inits commercial vigour and market reach. If the history of other formerlytriumphant industrial agglomerations – from Manchester to Detroit – isany guide, however, the continued leadership of Hollywood is by nomeans automatically assured. In spite of Hollywood’s acquired



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competitive advantages, it cannot be ultimately free from economicthreats emanating from elsewhere, especially in view of the oftenunpredictable shifts in the structure of consumer preferences for motion-picture entertainment.

A FORWARD GLANCE

For almost a century, and especially since the World War II, Hollywoodhas dominated national and international motion-picture markets. It hasaccomplished this record of success partly on the basis of the well-lubricated, large-scale production machine of Hollywood itself (with itsunparalleled ability to cater to popular audiences), and partly on the basisof the industry’s early perfection of its capacity to distribute films to massmarkets across the nation and across the world.

With the advent of new electronic distribution technologies, Hollywoodis again facing a major paradigm shift that may well have importantimpacts on the way it and its competitors do business in the future. Thesetechnologies will in all likelihood make it eventually possible to dispatchfilms directly and cheaply to the individual consumer. In this respect, wemay perhaps derive some clues about the future of film markets fromevents in the television industry where deregulation and technologicalchange have allowed programmes and distribution channels to proliferateover the last couple of decades (Brown, 1996; Staiger, 2000). On the onehand, then, consumers’ choices will almost certainly continue to be shapedin significant ways by a limited number of firms with the resources tomount extravagant marketing campaigns, so that even if the audiences forblockbuster films stabilize or shrink (just as ratings for top televisionshows have tended to decline over the 1980s and 1990s) the phenomenonof high-revenue films at the top end of the market is likely to continue. Onthe other hand, the development of new delivery systems will in principleopen up the market to more effective contestation by smaller independentfilm production and distribution companies (cf. Leyshon, 2001). Thus, theeventual attainment of film distribution by means of the internet will nodoubt give rise to a great increase in the amount of cinematic materialavailable to consumers, thereby widening the market and almost certainlymaking inroads on blockbuster audiences. Additionally, there are crediblearguments for suggesting that foreign film industries might be re-enteringthe competitive foray, not only on the basis of revivified local productionclusters, but also of enhanced distributional and marketing capacitiesaided by the rise of home-grown media conglomerates. Hollywood cannever rest on its laurels.



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NOTES

1 This research was supported by the National Science Foundation under grantnumber BCS-0091921, with supplementary funding from the HaynesFoundation.

2 These data are taken from the 1997 Economic Census. Unfortunately, data forthe 2002 Economic Census are not yet available.

3 The n-firm concentration ratio in any given sector is the percentage of totalreceipts earned by the top n firms in that sector.

4 The complicated accounting relations that typically exist between motion-picture distributors and exhibitors are described in Cones (1997).

5 A total of 122 firms responded to the questionnaire. Of these, 55 had made afeature film in the previous year.

6 These remarks offer a somewhat more nuanced view of the relations betweenlarge and small firms than the one identified by Berger and Piore (1980) interms of ‘industrial duality’. In Berger and Piore’s concept, large and smallfirms are functionally distinctive entities occupying distinctive market niches,the former serving a residuum of stable demands, the latter being relegated toa more unstable market spectrum. In the present instance, there is a zone ofoverlap in which large firms appear to use smaller firms as a means of ensuringsynchronic stability of product flow.

7 Observe that the ratio of 14.3 to 3.8 is almost identical to the ratio of 55.6 to 14.3.8 Data for this exercise were obtained from <http://www.worldwideboxoffice.

com/>.9 The same piece of legislation permits block-booking by American motion-

picture distributors on foreign markets. This practice is expressly forbidden ondomestic markets by antitrust legislation.

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