Moran AM, editor. Film Policy: International, national, and regional perspectives. London (United Kingdom): Routledge; 1996. 1 – Adjusting to the new global economy, Policy in a global industry; p. 38-52.
Adjusting to the New Global Economy
Hollywood in the 1990s
The 1980s were good to Hollywood. Without having nurtured the new television distribution technologies, Hollywood became the beneficiary of two lucrative ancillary markets, pay-TV and home video (Balio 1990:262–70). […] Changes in the global political and economic environment, particularly the commercialization of broadcasting systems worldwide, created additional sources of profit. And on the horizon, still newer technologies offered even more intriguing opportunities for growth.
Conditions such as these led to the ‘globalization’ of the film industry. […]
Upgrading international operations to a privileged position, the Hollywood majors expanded ‘horizontally’ to tap emerging markets worldwide, formed ‘down-stream’ alliances with independent producers to enlarge their rosters, and ‘partnered’ with foreign investors to acquire new sources of financing. […]
THE DOMESTIC MARKET
Home video and pay-TV invigorated motion picture exhibition during the 1980s by enhancing the status of the theatre in the distribution chain. To consumers, the performance of a feature film at the box office established its value at the video store and on cable television. The vitality of the theatrical market, coupled with the laissez-faire approach to anti-trust by the Reagan administration, convinced the majors ‘to take another fling with vertical integration’ (Gold 1990). […]
Home video and pay-TV also stimulated demand for product. Domestic feature film production jumped from around 350 pictures a year in 1983 to nearly 600 in 1988. Oddly, the majors contributed little to the increase; in fact, the number of in-house productions of the majors held steady (…), between seventy and eighty films a year (Cohn 1990). The additional films came from the so-called ‘mini-majors’ (…). […] These companies took the plunge thinking that even a modest picture could earn money from the sale of distribution rights to pay-cable and home video. Although the proceeds from such sales were insignificant by Hollywood standards, the ‘pre-selling’ of rights to these markets could offset the entire production cost for an inexpensive picture and might make the difference between profit and loss for a more ambitious project.
Rather than producing more pictures, the majors exploited a new feature film format, the ‘ultra-high budget’ film (Logsdon 1990:11). The format was popularized by Carolco Pictures, an independent production company (…) that got its start with the Rambo movies starring Sylvester Stallone in the 1980s. (…) Carolco specialized in action-filled blockbusters and paid top stars like Sylvester Stallone and Arnold Schwarzenegger enormous fees to carry them. […] The most expensive pictures in 1989, such as Batman (Warner), The Abyss (20th-Fox), and Tango & Cash (Warner) cost twice the average (Fabrikant 1990a).
‘Ultra-high’ budgets and saturation booking went hand in hand. To recoup their investments as quickly as possible, film companies regularly booked new releases into 2,000 and more screens. Print and advertising costs tripled as a result to over $12 million per film on the average by 1989. […] The strategy resulted in ‘ultrahigh’ grosses; for example in 1989, six pictures grossed over $100 million in the US, (…) Batman (Warner, $250 million), Indiana Jones and The Last Crusade (Paramount, $195 million) (…)
With pictures like these in distribution, it was no surprise that the 1980s concluded with record-breaking box office results. In 1989, admissions reached a five-year high of 1.13 billion, and the box office a high of over $5 billion (Velvet Light Trap 1991). […]
The blockbuster had the desired effect from the majors’ perspective of raising the expectations of movie goers for high production values, special effects and big-name stars. But in the process, the ‘ultra-high budget’ picture seriously undermined the ability of smaller firms to play the game. A shake out occurred in the independent market in 1989 as many independent producers went bankrupt. […] Marginal films—those judged unlikely to recoup print and advertising costs—were shelved; others were lucky if they secured any playing time. […] To get national exposure, a picture had to open in New York and receive favourable reviews.
THE FOREIGN MARKET
The growth of the overseas market during the 1980s was a result of the upgrading of motion picture theatres, the emancipation of state-controlled broadcasting, the spread of cable and satellite services, and the pent-up demand for entertainment of all types. […] The largest revenue components for Hollywood product overseas had become video, theatrical and TV, in that order.
The largest influx came from Western European television. When governments liberated the broadcast spectrum, the number of privately-owned commercial television stations and cable and satellite services grew enormously. […] By 1989, Western European television reached 320 million people and 125 million households (vs 250 million people and 90 million households in the United States) and showed the potential of becoming the largest single market for Hollywood entertainment (Logsdon 1990:50).
Although Hollywood had become the principal supplier of programming to these new services, the value of this trade was considerably less than theatrical distribution. This disparity existed because in most major European markets, governments had erected import quotas on television programs similar to those imposed on motion pictures after the Second World War.
But European unification did not proceed as planned, so that the largest single source of revenue for Hollywood in Western Europe remained home video. The spread of VCRs in Western Europe demonstrated that, given a choice, consumers preferred entertainment with greater appeal and more variety than their state broadcasting monopolies provided. […] Like their counterparts in the United States, European VCR owners not only wanted to time shift programming to suit their own schedules, but also to enjoy different kinds of programming, particularly Hollywood movies. […] By 1990, video sales in the European Economic Community totalled nearly $4.5 billion, with the lion’s share generated by Hollywood movies (Watson 1992).
Western Europe’s video business was likewise fuelled by theatrical exhibition. By 1990, the major American film companies collected around $830 million in film rentals from Western Europe, which came to about half of the film rentals they earned in the United States (Illist 1991).
Two factors helped sales: more and better theatres and more effective advertising outlets. Going into the 1980s, nearly every market outside the US was under screened. Western Europe (…) had about one-third the number of screens per capita as the United States, despite having about the same population (Illist 1991). And most of its theatres were old and tired. To rejuvenate exhibition and to encourage movie going, American film companies and European exhibitors launched a campaign during the 1980s to rebuild and renovate theatres on the continent.
Taking advantage of the advertising opportunities created by commercial television, Hollywood pitched its wares as never before. […] Spending lavishly on advertising, the majors were able to bolster their ultra-high budget pictures in theatrical and in ancillary markets and overwhelm smaller, indigenous films that could not compete in such a high-stakes environment.
GLOBALIZATION
Urges to merge
Hollywood’s first response to globalization was to shift operations from vertical integration (e.g. studios acquiring theatre chains) to horizontal integration (e.g. studios partnering with other producers and distributors) (Logsdon 1990:4). The shift departed significantly from the merger movement of the 1960s, which ushered the American film industry into the age of conglomerates. […] Acquiring theatre chains in the 1980s was an extension of this philosophy. Horizontal integration was designed to strengthen distribution and represented a new way of controlling the world entertainment market.
Rupert Murdoch’s acquisition of 20th-Century-Fox in 1985 triggered the recent merger movement. Murdoch’s goal was nothing less than to create ‘the world’s first global television, publishing and entertainment operation’ (Cohen 1990:31).
Paramount Communications and Warner Communications, two of the strongest companies in the business, responded to globalization by ‘downsizing’ to concentrate on a core group of activities. Paramount Communications was the successor company to Gulf + Western, a multifaceted conglomerate that had acquired the studio in the 1966. […] Under the leadership of Martin Davis, G + W shed over fifty companies during the 1980s and created a new identity for itself by becoming a global communications and entertainment giant known as Paramount Communications.
Under the direction of Steven J. Ross, Warner Communications had evolved into a diversified entertainment conglomerate involved in a wide range of ‘leisure time’ businesses (…) In 1982, Warner decided to restructure its operations around distribution. […]
The ‘downsized’ Warner Communications emerged as a horizontally-integrated company engaged in three areas of entertainment: (1) production and distribution of film and television programming; (2) recorded music; and (3) publishing. […] (…) Warner had acquired the distribution systems associated with each of its product lines, including Warner Cable Communications, the nation’s second biggest cable operator with 1.5 million subscribers. Warner added considerable muscle to its distribution capability when it merged with Time Inc. in 1989 to form Time Warner, the world’s pre-eminent media conglomerate valued at $14 billion (Time Warner 1989).
Time Warner touted its merger ‘as essential to the competitive survival of American enterprise in the emerging global entertainment communications marketplace’ (Gold 1989:5). It had in mind not only the takeover of 20th-Century-Fox by Australia’s News Corp., but also the anticipated acquisition of Columbia Pictures Entertainment (CPE) by Japan’s Sony Corporation, which actually occurred later in 1989 at a cost of $3.4 billion. […]
The third takeover of an American media company by a foreign firm occurred when Japan’s Matsushita Electric Industrial Company, the largest consumer electronics manufacturer in the world, purchased MCA in 1990 for $6.9 billion. Like its rival, Sony, Matsushita ‘thought the entertainment “software” business could provide higher profit margins than the intensely competitive, and now largely saturated, consumer electronics appliance business’ (Pollack 1994: C1).
The parent of Universal pictures, MCA, had relied on television production and distribution for stability. Year in and year out, MCA’s profitable television operations accounted for over a quarter of the company’s revenues. In 1985, MCA had more network shows on prime time than any other producer. […] Afterwards, MCA saw its share of the television market shrink as stations stopped buying one-hour action programmes, MCA’s strength, in favour of half-hour comedies. And because MCA’s share of the US box office had also declined, the company altered its course by going on an acquisitions binge in 1985. […] The diversification strategy was designed to strengthen MCA’s existing positions and to extend the company into contiguous businesses.
Partnering domestically
Hollywood’s second response to globalization was to compete for talent, projects and product for their distribution pipelines. After the breakdown of the studio system during the 1950s, the majors regularly formed alliances with independent producers to fill out their rosters and to create relationships with budding talent. A deal might involve multiple-pictures, complete financing, worldwide distribution and a fifty-fifty profit split. (…) they typically involved partial financing, domestic distribution and lower distribution fees. (…) the majors needed not only more pictures to increase market share but also a means of sharing the risks and potential benefits of distributing ultrahigh budget pictures (Hlavacek 1990; Natale 1991).
After aligning with TriStar, Carolco delivered three big-budget blockbusters in a row, Total Recall (1990), Terminator 2: Judgment Day (1991) and Basic Instinct (1992). To raise financing, Carolco originally made a public offering of stocks (…). Carolco’s strategy was to cover as much of the production costs for a picture as possible by preselling the ancillary rights piece by piece, country by country. […] Thus the partnership lowered the risks of production financing for Carolco and enabled TriStar to share in the profits of an ultra-high budget picture without much of an investment (Stevenson 1991).
Columbia’s relationship with Castle Rock differed in that Columbia functioned as an equity partner as well as a distributor. […] Rather than going public for funding, Castle Rock sold stakes in the company to Columbia, Westinghouse Electric, Credit Lyonnais and other investors (Weinraub 1992). Castle Rock turned out hit movies just about every year, including When Harry met Sally… (1989), Misery (1990), City Slickers (1991), A Few Good Men, (1992) and In the Line of Fire (1993).
Warner’s deal with Morgan Creek provided substantial advances for production and advertising in return for domestic distribution rights. […] Founded in 1988 by James Robinson, a West Coast Subaru importer, Morgan Creek’s strategy was to produce big-name ‘event’ films to compete in the risky overseas market. The company’s biggest blockbuster was Kevin Costner’s Robin Hood: Prince of Thieves (1991).
Partnering with a group of independents that specialized in foreign art films and offbeat American fare, Walt Disney Co. and Turner Broadcasting System (TBS) moved aggressively into the independent field. […] (…) Disney hired a new management team headed by Michael Eisner to energize the studio. Setting a new course, Eisner transformed Disney into a motion picture heavyweight by forming Touchstone Films in 1984 and by aiming at the young adult market (Business Week 1986). As a result of a string of hits that included Down and Out in Beverly Hills (1986), Ruthless People (1986), Three Men and a Baby (1987), Stakeout (1987),and Who Framed Roger Rabbit? (1988), Disney captured an incredible 20 per cent share of the domestic theatrical market in 1988.
Branching out further into the adult market in 1993, Disney linked up Merchant-Ivory and Miramax Films, two of the most successful art film companies in the business. According to Peter Bart of Variety, Disney’s strategy was ‘to foster an eclectic slate of projects’ (…).
In addition to Howards End, Merchant-Ivory had made thirty-one films in as many years, including its breakthrough hit A Room With a View (1986) (…). The Disney deal was for three years and provided 50 per cent financing for any film the team developed with a budget up to $12 million in exchange for domestic rights. […] The arrangement freed Merchant-Ivory from having to raise substantial sums for financing and enabled it to take advantage of Disney’s considerable distribution might. The arrangement provided Disney with prestigious films aimed at adults that carried little financial risk (ibid.)
Disney’s deal with Miramax consisted of a $90 million buy out in which Disney acquired Miramax’s library of 200 art films and agreed to finance the development, production and marketing of Miramax’s movies. (…) Miramax had ‘become a logo that brings audiences in on its own’. Adopting a straight acquisition policy from the start, Miramax rose to the front ranks of the independent film market in 1989, when three of its pictures drew critical and commercial attention: My Left Foot, which starred a then relatively unknown Daniel Day-Lewis; Steven Soderbergh’s sex, lies and videotape, which garnered a Palme d’Or at Cannes (…); and Giuseppe Tornatore’s Cinema Paradiso, which won an Oscar for best foreign film and grossed $12 million to become the year’s highest-grossing entry in this category (Frook 1992).
Expanding its roster to over twenty-five pictures a year in 1992, Miramax released Mediterraneo, which won an Academy Award for best picture and became the top foreign language import of the year, and Neil Jordan’s The Crying Game, which won an Academy Award for best screenplay and became a crossover hit by breaking into the mainstream market and grossing more than $50 million (Fleming and Klady 1993). In 1993, Miramax had two more big hits, Alfonso Arau’s Like Water for Chocolate and Jane Campion’s The Piano. A Mexican import, Like Water grossed over $20 million to become ‘the all-time foreign language box office champ’ in the United States, surpassing the record of $19 million held by the Swedish import I Am Curious (Yellow) since 1969 (Karlin 1993). Produced at a cost of $2.5 million, this award-winning Mexican romance returned its investment in a remarkably short time thanks to Miramax’s aggressive marketing campaign.
[…] Miramax acquired The Piano only weeks before it was shown at Cannes and shared the festival’s top prize with another Miramax pick up, Chen Kaige’s Farewell My Concubine. At home, The Piano won a record eleven Australian Film Institute awards and in the United States, eight Academy Award nominations and three Oscars, including best original screenplay. […] As a fully-autonomous division of Disney’s distribution arm, Miramax sustained its position in the independent film market by releasing Quentin Tarantino’s Pulp Fiction in 1994 (Frook 1993b).
Turner moved into the independent film market by acquiring New Line Cinema and Castle Rock Entertainment in 1993 at a combined cost of $700 million. The founder of superstation WTBS in Atlanta and the owner of one of the largest film libraries in the business, Turner had become a principal programme supplier to cable. (…) the New Line and Castle Rock acquisitions fit neatly into Turner’s plans to become a major motion picture producer (Robins and Brennan 1993).
Castle Rock made its reputation producing top-shelf pictures (…). (…) New Line made its fortune during the 1980s producing and distributing genre pictures aimed at adolescents—the Nightmare on Elm Street horror series, Teenage Mutant Ninja Turtles, and two House Party films. Under the leadership of Robert Shay and MichaelLynne, New Line (…)created a division called Fine Line Features in 1990 to produce and distribute art films andoff beat fare. Within two years, Fine Line rose to the top independent ranks by backing such American ventures as Gus Van Sant’s My Own Private Idaho (1991), James Foley’s Glengary Glen Ross (1992), and Robert Altman’s The Player (1992) and by releasing such English languageimports as Derek Jarman’s Edward II (1991) and Mike Leigh’s Naked (1993)(Weinraub 1994a). Fine Line initially steered away from foreign-language entries, butsubsequently released Maurizio Nichetti’s Italian import, Volere Volare in 1992 (Stevenson1992). With Turner’s financial backing, Castle Rock and New Line announced plans to sharply increase production beginning in 1994, the expectation being that TBS wouldsoon rival Paramount and Warner as motion picture suppliers.
Partnering internationally
Hollywood’s third response to globalization was to seek an international base of motion picture financing. To reduce its debt load, Time Warner restructured its film and cable businesses and created Time Warner Entertainment as a joint venture with two of Japan’s leading companies, electronics manufacturer Toshiba and trading giant C.Itoh. The deal netted Time Warner $1 billion (Laing 1992). […] Following the tack of independent producers, 20th-Century-Fox pre-sold the foreign rights to two high-profile ‘event’ films, Danny De Vito’s Hoffa (1992) and Spike Lee’s Malcolm X (1992), to reduce its exposure (Variety 1991b). Another common practice was to seek out co-production deals to take advantage of film subsidies in overseas markets. Studios chose this option mostly with ‘unusual material’—which is to say a picture that was not a sequel, that did not have a major international star, or that did not have an ‘unflaggingly high-concept’—such as Universal’s Fried Green Tomatoes (1991) and Paramount’s 1492 (1992) (Natale 1992b).
To finance television programming, the majors invested in foreign media industries. (…) the European Economic Community decided against removing trade barriers and tariffs on movies and television programmes in 1992 (…). No longer did these companies think of Western Europe only as a programming outlet: instead they considered it as another investment source and formed partnerships with European television producers, broadcast stations, cable and satellite networks and telecommunications services.
AFTERMATH
Signalling a resurgence in the merger movement, Paramount Communications, one of the two remaining major studios besides Disney not to change ownership during the 1980s, was acquired by Viacom Inc. for $8.2 billion in 1993. […] The following year, Viacom acquired Blockbuster Entertainment, the world’s largest video retailer with over 3,500 video stores and various side businesses—purchase price, $7.6 billion.
Aside from the belief that bigger is better to compete in the international market, the motivation for these combinations was a faith in synergy, a belief that one plus one could equal three. […] Acquiring New Line Cinema and Castle Rock Entertainment, Turner Broadcasting moved into the front ranks of Hollywood and positioned itself for global expansion.
After spending billions to acquire CBS Records and Columbia Pictures Entertainment, Sony lavished money ‘on hiring executives at enormous salaries and giving golden handshakes to others, on bonus pools reaching into the millions, on perks and for rebuilding the studios to make offices and dining rooms the sleekest in Hollywood’ (Weinraub 1994).
Sony performed reasonably well under the new regime until 1993, but afterwards, Columbia and TriStar struggled to fill their distribution pipelines. Virtually all of Sony’s hits had been produced by its independent producer affiliates, Carolco and Castle Rock. But when the Carolco deal lapsed and Castle Rock hooked up with Turner, Sony lagged behind the other majors in motion picture production and market share.
The Matsushita-MCA marriage foundered as well, but for different reasons. By producing a string of hits that included two Steven Spielberg blockbusters, Jurassic Park (1993) and Schindler’s List (1993), MCA become a financial bright spot in the Matsushita empire as it confronted the recession in Japan and the rising value of the yen.
The second surge of mergers that started with the Viacom takeover of Paramount Communications will continue and probably involve the three major American television networks. […] Since the networks would likely reduce the number of programmes they ordered from outside producers and rely more on in-house projects after the expiration of the ‘fin-syn’ rules, big suppliers like Time Warner and Disney might be hard hit. To avoid this, conventional wisdom had it that the majors would work to control the networks to ‘assure themselves of a guaranteed outlet for their product’ (Fabrikant 1994a).
The globalization of motion picture industry has significant film policy implications for the following reasons: (1) it has resulted in the growth of giant media companies in Germany, Italy, France, Holland, Australia and Japan, as well as in the United States; (2)it has occurred with the consent of foreign governments, the same entities that formulatenational film policy; (3) it has resulted in ownership changes of Hollywood studios either through takeovers by foreign companies or through partnerships with overseas investors;and (4) it has created more demand for ‘software’, to the benefit of talent, and more entertainment options, to the benefit of consumers.
[Film: Pulp Fiction, 1994, dir. Quentin Tarantino]