DOUGLASGOMERY University of Maryland

Anytime one sees a movie blockbuster—from George Lucas’ expected reg- ular mega-creations to the unexpected small hit such as The Full Monty—one implicitly understands the continuing economic power of the Hollywood major studios. George Lucas alone can not distribute his films;

he needs a Twentieth Century Fox. His only other choices, the sole corpora- tions that cover the world, are Disney, Paramount, Sony, Universal, and Warner Bros. Whether in a movie theater, a reshowing on cable, satellite, or broadcast television, or viewing on home video or DVD, the “Big Six” oligopoly— Hollywood—defines a movie hit.

As the 21st century begins, the Hollywood film industry remained a closed oligopoly of the Big Six—(in alphabetical order) Disney (owned by The Walt Disney Corporation), Paramount Pictures (owned by Viacom), Sony Pictures (owned by Sony), Twentieth Century Fox (owned by News Corporation), Universal Pictures (owned by Vivendi), and Warner Bros. (owned by AOL/Time Warner). All competed to produce and release the top hits, but all cooperated to make sure the game remained only among each other. Who was on top which year varied, but only the Big Six pre- miered possible blockbuster hits in multiplex theaters during the 1990s— and surely will well into the future. (Compaine & Gomery, 2000).

With all the new sources of revenues, Hollywood’s Big Six has kept growing despite all the ways one can see a film. Indeed, there long have been doomsayers predicting that Hollywood films in theaters will dis- appear, yet as seen in Fig. 9.1 the box office take in theaters continues to grow. Table 9.1 shows that even the absolute number of fans to pay now close to $10 increased through the 1990s. Hollywood is booming (www.mpaa.org).

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FIG. 9.1. U.S. gross box office reached an all-time high of $8.4 billion—a 9.8% increase over last year.

TABLE 9.1

U.S. Theatrical Admissions

Year Admissions (mil) Yearly Change 2001 Versus 2001

30.4% Note. Total admissions have increased by 5% since last year and reflect a 30% increase

(+346 million) since the beginning of the decade. Source. 1989 to present, based on NATO average ticket price.

Why does Hollywood prosper? Here is classic price discrimination—re- leasing a film so as to maximize the revenues from each separate “window.” Basically, this means that the Big Six release films in the following

9. THE ECONOMICS OF HOLLYWOOD

order: theaters, home video and DVD, pay-per-view, pay cable, and finally, broadcast and basic cable television. Each window in this sequence is an ex- clusive. A new window opens only when all value of the previous window had been captured. Customers know that if they wait, the cost they pay at that window would be lower than the prior one. Home video and DVD also allowed the customer to view the film whenever she or he desire. If one waits long enough, she or he could purchase a blank tape and copy it from free over-the-air broadcast television. No wonder by the close of the 20th century, while theatrical premieres drew the most publicity, most of the monies paid came from home video purchase or rental.

But with all this additional money pouring into the system, still only six major studios gathered the bulk of it. Whatever the venue—theatrical, cable TV, or home video—the focus of the production and distribution of most of the films most people saw as the 20th century ended continued to

be Hollywood in general, six major studios in particular. In a profile of a for- mer powerful Hollywood agent, Michael Ovitz, Lynn Hirschberg (1999) of The New York Times put it best: “Hollywood is a small community—there are only six big movie studios, four big TV networks, and three big talent agencies. [The people who own and run these organizations] talk to one an- other every day. They confide, they feud., they forgive, they do business together, they vacation together.”

Audiences of film fans in the United States seemed to love the system. The past 25 years surely ranked as a “Golden Age” of interest in movie watching—benefitting the Big Six studios. The majors typically take in well in excess from their divisions that handle movies. High revenues—surging into the billions if one properly counted all the multiple sources of revenues—and the costs of producing that precious first negative also grew. In the late-1990s, the average motion picture cost neared $60 million and in- flated to more than $80 million—if one properly added in marketing and publicity costs, primarily television advertising.

Because of this long-term inevitable profitability, the Big Six studios re- tained a growing appetite for hot new talents. By the late-1990s newcomers Gwyneth Paltrow and Ben Affleck, as well as proven box-office winners like Jim Carrey and Tom Cruise, could command $20 million a picture. Here is where the role of the agent came in; they negotiated on behalf of their clients with the Big Six. An agent’s job was to try to maximize salary and participa- tion in profits. The star system had ever been thus, certainly since it was de- veloped as a cornerstone of the Hollywood film industry by Charlie Chaplin and Mary Pickford more than 75 years earlier. Agents came in during the 1950s as manipulating tax laws offered advantages to freelancing by actors and actresses no longer under sole contract to one studio (Rose, 1995).

Yet with new stars, the basic structure of the industry has changed little. These six Hollywood operations—Warner Bros., Paramount, Twentieth Century Fox, Sony, Disney, and Universal—still define the world’s motion

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picture dominant makers and distributors. Although many fans look back to the 1930s and 1940s as the Golden Age of the movie business, in fact the end of the 20th century was the era when the Big Six in Hollywood achieved its greatest power and profitability. Pretenders, as analyzed later, try to en- ter, but none have succeeded, although the DreamWorks SKG experiment continues. Dozens have tried and failed; so the odds against DreamWorks SKG are long indeed. Through the 1980s and 1990s, MGM virtually had dropped out, unable to match the power of the Big Six (Albarran & Dimmick, 1996).

By the beginning of the 21st century each of the Big Six studios effected a different business strategy, reflecting the personality of the studio chief as well as the financial condition and strategic objectives of the parent company.

• Disney is part of the vast Walt Disney Corporation. One of the world’s largest media companies, led by CEO Michael Eisner for early two decades, Disney is best understood as a well-oiled machine, fashion- ing films in an almost paramilitary manner, but succeeding less as the 1990s ended. Whether under the brand of mainstream Hollywood Pic- tures, Touchstone Pictures, or specialized “independent” fare from division Miramax, during the 1990s Disney led the way as a major Hollywood power. Eisner tried to continue his amazing streak of making Disney’s profits grow quarter after quarter.

• Paramount, a division if the Viacom Corporation, reflected an over- all policy pursuing less risky films as deemed by CEO and owner Sum- ner Redstone. Unlike Disney—where no one shareholder controlled the company, even Michael Eisner—Sumner Redstone did effectively control National Amusements, Inc. He was a classic executive owner who did not like to take risks, even purchasing dominant home-video renter, Blockbuster, to guarantee access to that important market segment.

• Sony, one of the largest electronics manufactures in the world, was still seeking to make consistently profitable its grand experiment of mar- rying a movie studio and an electronics maker. That experiment has not worked. Through the 1990s it seemed despite Sony’s vast success as an innovator and seller of Walkmen and Trinitron TV sets, it was unable to make the movie synergy work. Yet by hiring new executives, the Sony movie making and distribution subsidiary remained profitable.

• Twentieth Century Fox, like Paramount, in the end, is under the control of one man, Rupert Murdoch. It is the core part of Murdoch’s in- ternational media empire, News Corporation, and because Murdoch alone, like Sumner Redstone, controlled enough stock, he was both owner and CEO. The difference is, Murdoch was and is a greater risk taker. No better example can be highlighted than his massive bet on Ti- tanic, the greatest financial success in Hollywood history.

9. THE ECONOMICS OF HOLLYWOOD

• Universal, owned since 2000 by France’s Vivendi, evidenced a cer- tain skittishness as new management constantly tinkered to invent a new diversified media conglomerate. Lew Wasserman controlled the company and offered stability through the 1960s, 1970s, and 1980s. Then

he sold to Matsushita, which in turn sold to Seagrams, which in turn sold to Vivendi. As 2002 progresses, Vivendi is having its problems, and no one is sure what the state of the studio will be 5 years down the pike.

• Warner Bros. was a studio seemingly caught in the greatest case of media synergy ever attempted as its 2000 merger with AOL floundered. Warner Bros., part of the Time Warner media colossus, was part of a 1990s experiment that commenced with the Time plus Warner merger in 1990. That worked. As the world’s largest media company, Warner has had a long, profitable record, but as the 1990s ended, like Universal, its short-term prospects were uncertain. Then in 2000 came the merger of all mergers—with AOL. The Internet would unite with the movies, but as of the middle of 2002, this experiment has proven an utter failure.

DOUGLASGOMERY University of Maryland