1. The Golden Age of Hollywood Verticalization in the MovieIndustry Marianna Malaspina, SS09 MBA MTPapers

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The golden age of Hollywood took place during a period of complete control by the studios over all aspects of financing, producing and distributing of motion pictures in the United States, [and throughout the world], perhaps indicative of the strength, versatility and genius of the Hollywood studio system, the executives who ran these endeavorsand the policies and procedures they created

3. It is hard toexpress an opinionabout the above statement without trying to qualifywhat The golden age of Hollywood means. We assume it refers to the period from the mid 20s, after the US movie industry surpassed French and Italian production due in part tothe limitationstothe distribution of foreign moviesin the US imposed by the war,up until 1948, a year of great changes for theUS movie industry; a year which, with the return of the troops from WWIIjust a few years before and no other visual entertainment media available yet to compete with the movie theaters, was a sort ofgran finale to thecommercial fireworksand intense expansion that the US movie industry had been enjoying up until then ( to substantiate this statement: in the three years 45 48, Hollywood had an annualproduction ofmore then 400 hundred movies).In reality however, at least from a qualitative and innovative point of view, the Golden age of Hollywoodcan probably be circumscribed toless then 2 dozens masterpieces includingKing Kong (1933),Snow white (1937), Gone with the Wind (1939), The Wizard of Oz (1939) ,Bambi (1942),Its a wonderful Life (1947), Miracle on 34 thStreet (1947) andCitizen Kane (1941) by Orson Welles, the latter considered by many one of the best movies of all times.Just as Viscontis Ossessione orRossellinisRoma, Open City or Paisanin Italys case,these movies quickly becameintegral part of Americas DNA and core culture,and, like good wine, they only seem to be getting better withyears .All in all however, only 17 among those considered by the AFI the top 100 movies of American history (as of 2007) were made prior to 1948; so, we basically have17 best movies done in 25 years (1923-1948), against83 donein thefollowing 59 (1949-2007). It would seem that rather than of agolden age, we should be talking more about an age of silver albeit an extremely polished kind 4. Besides, these unique classics coexisted with a much more ordinary butvery lucrative production. As mentioned earlier, the US movie industry entered its true development phase in the 20s. At that time, the studio system featured big production companies that signed actors to exclusive multiyear contracts.But employment was not only guaranteed for the stars: working life was a pretty stable processfor everyone who worked in the industry prior to 1948,. The system was run couldbe run really, because of its young age by high energy, no nonsense, highly involved , tough butquite paternalistic bosses. The men who created Hollywood were immigrants. They came from the American poor and dispossessed. They did not have to imagine what their audience wanted; they were at one with it in their desires, dreams, fantasies and ideals. Ruthless, bawdy, and magnificently original, their torrid lives often overshadowed the exotic epics they created -Sam Spiegels real life was probably more adventurousthen most of today fiction plots -Hollywood first generation producers were joined at the hipwith their audience and this almost symbiotic relationship was probably theirbest marketing tool. But most importantly, the industry was new:regulations were few and nobody had yet raised and issue aboutthe creation ofde facto industry cartels,where strong verticalization and complete control of the distribution channels were the norm.This structure of the industry, which in some aspects- at athe target outputof 52 movies a year - resembled more a factory chain then an artistic environment, had pros and cons: on one side, the production began to have a standard look (e.g., having large chorus lines in musicals) or formula (e.g., ending a western with a shootout where the good guy always won). Although there would be slight differences from movie to movie, they would still be just variations on proven formats. Because studios found that audiences kept coming back to see familiar products, new and unique products were more risky investments. 5. On the other side, verticalizationsaved the industry during the Great Depression, a time whenmovie audiences began to dwindle as economic difficulties caused them to tighten their budgets. Between 1930 and 1932 audiences dropped from weekly totals of ninety million to sixty million.The industry responded with the first color film, Walt Disneys animated short filmFlowers and Trees(1932), as well as with new genres such as feature documentaries, gangster movies, horror films, and musicals. Precisely because the major studios controlled all of the production, distribution, and exhibition aspects of the business, they were guaranteed an audience for their films regardless of quality, and this contributed to the survival of the industry, mostly intact, through the Depression and World War II.But as the movie industry developed after WWII , the rules established by the first generations of producerssuddenlybecame no longer valid.At the end of the 40s, reeling from depression, war, problems of the return to peacetime, and the ominous arrival of the atomic bomb, the world was a more cynical, chaotic, economically-unsure and film-noirish place. Studios were also forced to re-evaluate their roles and approaches, with lawsuits that stripped the studios of their lucrative practices. By the late 1940s, the motion picture industry surely faced its period of greatest crisis and challenge, with the depressing bleakness of the Cold War on the horizon.Hollywood suddenly found itself with many threatening forces : - the coming of television forcing potential moviegoers to remain at home- blacklisting which meant prison and up to $ 1,000 fines for those who refused to cooperate and caused hundreds of actors to lose their job or flee to Europe - and McCarthyism, which put a lid on any kind of liberal theme.- a 1945 studio labor union strike that raised salaries 25% for studio employees- a short-lived 75% import duty, from 1947-1948, that restricted the import of all US films into the UKthe gradual decline of theatre-attending audiences , in part because soldiers who came back from the War hadsettled down and were no longer interested in going to the movies as before.- inflation that raised film production costs- anti-trust rulings by the US government against the studios - the psychological shock of the post holocaust in an environment where Jewish population was extremely high, 6. Block-booking of films was declared illegal and studios were forced to divestthemselves of their studio-owned theatre chains by the Paramount Decrees (an action of the US Justice Department and an anti-monopoly decision of the US Supreme Court in 1948 against the Big Five major film studios and three minor studios). The court's anti-trust decision in U.S. vs. Paramount mandated that the production and exhibition functions of the film industry had to be separated.Now that the studios would have to achieve box-office success based not on their marketplace strength but on the quality of their films - now sold by a film-by-film and theater-by-theater basis - the stability of the studio system of marketing was severely threatened and began to crumble. Studios would be gradually reduced to production and distribution organizations, forced to give up or divest themselves of their vast theater holdings, and prohibited from 'block booking', fixing admission prices, and forcing their lesser products onto independent exhibitors. They were pressured to usher in an era of competition, free agent stars andauteurdirectors, and many of them were forced to begin selling film rights to pre-1948 films to television to bolster profits.The managerial strategy of the first generation ofHollywood bosses,healthily unsophisticated, focused on personal relationshipsand a clanfeeling,was necessarilyunprepared- with a few exceptions such as Lew Wasserman - togovernsuch a changed , complicated and threatening environment.One of the reasons why Hollywoods best times arelinked in somepeoples mind with the 20s, 30s and40s may have more to dowith the nostalgia for a time when life was undoubtedly simpler and more stable in the studios for just about everyone, producers and characters included, then with the actual results. There was undoubtedly less noise,and today relentless visualbombardment on all fronts did not exist,imagesand characters could actually stay with the audience longer and stories had time to sediment. Indeed,while working for studios which owned their distribution channels, in absence ofTV syndicated and private channels, Internet, home theaters and all the myriads of visual gadgetsandentertainment sources competing today for the audiences attention, still untouched bythe mixed blessing of globalization which brought to the forefront countries which had been for decades pure importers of American culture, it must have been truly enjoyable to justsit back, relax and produce the show. Andthat was truly golden . 7. Today largest motion picture companies want to be vertically integrated and active in all parts of the globe. To achieve this, many CEOs believe you must be bigger than your opponents. In addition, you must have substantive holdings in content and distribution in most of the media and entertainment formats; and this means, ultimately, ownership of a major Hollywood studio. 8. The motion picture industry started and enjoyed some of its most successful times as a very integrated industry. In a way, probably more integrated then today, for the times. Prior to 1948 , integration originated with the studios, run by MBA-less dictators with an uncanny sense of business and particularly of what movies were supposed to be like and how people were supposed to be handled. Studios proceeded to integrate themselves all the way south of the chain to include distribution (marketing) and exhibition (the actual movie theater chains), which the studios owned and which provided very stable and relatively riskless outlets for their wares. Not having to worry aboutalternative and competitive entertainment vehicles and being able to count on seamless distribution to the public, producers and studios were able to concentrate on content (the king of the industry back then as in recent days), and concentrate they did, at a pace of one movie per week. 40years later, this patrimony would prove to be a very strong asset which some of the most productive studios such as Columbia were able to sold at a good price 3.4 billion dollars, to be exact (a price, in spite of Mr. Moritaseagerness,which may have been negatively skewed because ofthe weak position Columbia was in 1989 and that paled 5 years laterwhen Viacom purchased Paramount, the last independent studio in Hollywood, for 9.9B ). As known, this type of total integration became impossible prohibited in fact after 1948 and for the first few decades after that the industry was busy trying to restructure itself and creating newbusiness models not that the wordsbusiness models had everprobably been actually spelled in the industry before.After 1948, the studios started becoming more and more like cartels, a de facto oligopoly, owned by a few powerful ones:Columbia/Sony,MGM/United Artists, Disney (the only brand to have remained in the hands the original family) , Paramount, 20 thCentury Fox, Universal/ GE, Warner Bros/Time Warners/Aol. Lions Gate Entertainment Corp. 9. We can think of several reasons why this became the structure of the industry (useful and possible or so thought synergies, desire to put more weightbehind the negotiations with exhibition, desire to expand the market, etc.), but they all can be traced back to the very nature of the industry, so based on creativity and emotions.The entertainment industry is very different then most others, fashion being maybe the most similar to it. For the movie business in particular, the risks are even higher because the cost of producing a movie can be extremely high, much more then a concert or a theater event.The products success depends on highly volatile, uncontrollable variables (very low-tech word of mouth being a powerful one). A movie may have all the right ingredients (big studio support, huge budget, extensive PR, popularactors, commercial script) and result in a disaster (Town and Country, K.CostnersThe Postman,Ishtar, Last Action Hero to name a few)while other minor productions can turn out to be extremely profitable (among the many, My Big Fat Greek Wedding, Life is Beautiful and of course 20098 Oscars winner Slumdog Millionaire). Every movie is a new product with a relatively short shelf life. This characteristic renders pretty much anytraditional marketing strategy and spreadsheet model ineffective .Every movie, today much more then in the past, has to compete with so much bothnationally and increasingly across the globe to make itthat only 10% of released movies end up being profitable and a whooping 70% loses ,often big, money. So what is a producer to do to bring the odds of financialsuccess a bit more in her favor? Control of as many distribution channels as possible probably helps, be theydomestic, international, Video DVD (although this section of the business, which had come to represent a large part of the industry revenues, is now in quick and steep decline), Pay Per View,cable, Network TV, Independent TV, etc.. 10.

Owing these channels allows producers to extract the most possible value both from successful movies and from not so good ones, simply by exposing them to a wider audience for a longer time. Besides, for companies such as CBSs Viacom which in the mid 80s were aggressively expanding, becoming a part of the distribution monopolies was essential in order to realize the full payoffs of their acquisitions without seeing their value extracted by the existence or creationofdistribution bottlenecks and gates

More reasons to support integration was the strong increase in TV advertising until the mid-eighties(6% more then US GNP) as well as a strong development in cable TV and consequently strong growth for cable programming services such as MTV.

Another reason for the oligopolistic structure of the studios is that in order to obtain an overall financiallysuccessful operation, more then southern integration towards distribution what is holding real strategic importance both for producers as well as for companies not originally directly involved in the movie industry(e.g.: Sony) is the acquisition of content, which means the ownership of a studio, its reputation and clout, its know-how anditslibraries of thousands of movies and programs which are key inany negotiation with or for distribution itself. Besides, access to this not easily replicable and universally appreciatedresource enabled companies such as Sony to reposition themselves and strengthen their status on the international scene by showing off a Hollywood look. US movies benefitted from the universality of the English language, allowing studios not to dub the dialogues in order to sell them. When necessary, subtitles were an easily accepted imposition for the foreign public, whereas the reverse was not true: consequently US movies had widespread distribution worldwide, while the US public was weary of any foreign language production. In other words: US movies were and are an easy product to handle internationally and this is a benefit the studios owner is able to reap.

Sony was not the only one to get these points: Murdoch had already thought aboutand acted upon them with the purchase of Twenty Century Fox and several followed in quick succession after Sony purchase Columbia, includingTed Turner famous purchase of MGM studios

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In spite of the fact that probably some of these purchases, including Columbias in 1989, were done at the

peak of the market andlost much of their appeal and rationale in the following years, the long-term view,

we do not know if by a prescient powerfulvisionor by sheer luck(and some purchases were admittedly

opportunistic), was correct. Not so much because most of these purchases eventually proved highly

profitable, but because on the long run that was the way to stay in business.In today environment, and

we want for one moment ignore the current global recessionwhich clearlyaffects all industry players, it is

hard to imagine how a large motion picture company could survive without being vertically integrated and

having as much control as possible both north and south of the supply chain, as well as east and west

geographically. Producing and distributing theatrical films and TV programs is hit driven elegant words

for is a gamble and very capital intensive: after riskingmillions and here also size helps, as

financing is easier for larger corporations -companies would have to compete against just too many

alternative entertainment media and fight for space in too many different arenas to make a profit from a

product whose life span is simplytoo short to waste time.