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Why Every Business Will Be Like Show Business

It was television, however, that struck the final blow. By the late 1950s Americans could view for free an entertainment medium that could rival the basic product coming from the studios. Movie receipts in the country began to plummet. Suddenly, what had been sold by the foot faced a marketplace filled with more and more discriminating customers demanding new and ever-better motion pictures.

Those factors forced Hollywood to "restructure" and "reengineer" itself long before doing so became the rage in other industries. Its main strategy was to specialize: if television and cheap imports had captured the market's low end, the movie industry would create a high-end product that would draw people back to the theaters. Rather than flooding the market with formula movies, Hollywood would offer far fewer movies, but they'd be blockbusters for which exhibitors and moviegoers would pay a premium.

Those shifts required massive changes within the studio system itself. Filmmaking became a craft instead of a commodity, with all contributors -- actors, writers, musicians, public-relations specialists, cinematographers, editors, and financiers -- adding only the highest caliber of skill in order to generate a final product that no one could easily copy. Yet as people became more specialized and capable, they also demanded higher pay. Soon the studios were unable to keep much of their key staff in-house.

As a result, starting in the mid-1960s, Hollywood witnessed an explosion of independent filmmakers, service providers, and other entertainment-related companies. Between 1966 and 1981 the number of independent production companies almost tripled. In 1960, 72% of U.S. films were made by the major studios; by 1990 the studios' share had dropped to a mere 36%.

Today it is independents such as Steven Spielberg, not the studio bosses, who are the true stars in the Hollywood production world. Indeed, even the films "made" under the studio trademark often rely on independent vendors for critical artistic and technical contributions.

By late last year there were clear signs that the old studio system was not just changed but possibly doomed altogether. The announcement of a new alliance by three of the industry's creative giants -- record promoter and former agent David Geffen, director Steven Spielberg, and former Disney executive Jeffrey Katzenberg -- shook the multibillion-dollar corporate owners of the major studios to their foundations. In the starkest terms, the move by the three showed to what extent the studios could become empty vessels, whose direction and value were determined by the people who understood the new Hollywood network economy.

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Being There
Why where your company locates matters after all
It's not an accident that the new studio of the "dream team" -- as the three powers are collectively known -- will be located in Los Angeles. At a time when conventional wisdom suggests that companies would do better to locate far from urban areas (or anywhere they wish, for that matter), the predominance of the Hollywood entertainment complex highlights the importance of location for companies in any highly networked, high "knowledge value" industry.

Hollywood's entertainment-business concentration has produced remarkable economic results even during the 1990s recession. In defense-cut-devastated Los Angeles County, home to 92% of the nearly 370,000 people directly or indirectly employed in the California entertainment industry, the number of production companies grew at a 10% to 12% clip from 1991 to 1993. The industry improved sales by 7% in 1993, despite the continued economic weakness in such key overseas markets as Europe and Japan. Entertainment also is one of the few American industries in which U.S. competitiveness is virtually unchallenged, with total net exports of more than $3.5 billion.

The extraordinary density of the crafts companies within Hollywood, note UCLA professor Storper and other experts, goes far toward explaining why U.S. entertainment products enjoy such extraordinary global success. Over the past two decades, in fact, Hollywood has all but crushed its chief European and Japanese rivals -- to a degree unimaginable in other key industries -- dominating major markets from Britain and Japan to Hungary, Brazil, and Turkey. When it comes to exports, show business is second only to aerospace: foreign sales now account for more than one-third of all revenues for U.S.-based entertainment companies and could make up fully half the industry's sales by the year 2000.

Given Hollywood's huge success in world markets, it's not surprising that many regions and countries have sought to blunt or break up what is widely perceived as its entertainment hegemony. The most quixotic efforts have been made by French bureaucrats who seem to compare Hollywood's dominance -- American films accounted for 8 of the top 10 films and 40% of French box-office receipts in 1993 -- to the German occupation of the country during the Second World War. So bitter are the French that one top producer, Daniel Toscan du Plantier, joked that the January 1994 L.A. earthquake was a sign that God was taking France's side in the dispute.