1. The Golden Age of Hollywood Verticalization in the Movie Industry Marianna Malaspina, SS09 – MBA MT Papers

3. It is hard to express an opinion about the above statement without trying to qualify what “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 to the limitations to the distribution of foreign movies in the US imposed by the war, up until 1948, a year of great changes for the US movie industry; a year which, with the return of the troops from WWII just a few years before and no other visual entertainment media available yet to compete with the movie theaters, was a sort of gran finale to the commercial fireworks and 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 annual production of more then 400 hundred movies). In reality however, at least from a qualitative and innovative point of view, the “Golden age of Hollywood” can probably be circumscribed to less then 2 dozens masterpieces including King Kong (1933), Snow white (1937), Gone with the Wind (1939), The Wizard of Oz (1939) , Bambi (1942), It’s a wonderful Life (1947), Miracle on 34 th Street (1947) and Citizen Kane (1941) by Orson Welles, the latter considered by many one of the best movies of all times. Just as Visconti’s “Ossessione” or Rossellini’s “Roma, Open City” or “Paisan” in Italy’s case, these movies quickly became integral part of America’s DNA and core culture, and, like good wine, they only seem to be getting better with years . 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 have 17 best movies done in 25 years (1923-1948), against 83 done in the following 59 (1949-2007). It would seem that rather than of a golden 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 – but very lucrative – production. As mentioned earlier, the US movie industry entered its true development phase in the 20’s. 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 process for everyone who worked in the industry prior to 1948,. The system was run – could be run really, because of its young age – by high energy, no nonsense, highly involved , tough but quite 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 Spiegel’s real life was probably more adventurous then most of today fiction plots - Hollywood first generation producers were joined at the hip with their audience and this almost symbiotic relationship was probably their best marketing tool. But most importantly, the industry was new: regulations were few and nobody had yet raised and issue about the creation of de 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 a the target output of 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, verticalization saved the industry during the Great Depression, a time when movie 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 Disney’s animated short film Flowers 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 producers suddenly became no longer valid. At the end of the 40’s, 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 UK the gradual decline of theatre-attending audiences , in part because soldiers who came back from the War had settled 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 divest themselves 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 and auteur directors, 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 of Hollywood bosses, healthily unsophisticated, focused on personal relationships and a “clan” feeling, was necessarily unprepared - with a few exceptions such as Lew Wasserman - to govern such a changed , complicated and threatening environment. One of the reasons why Hollywood’s best times are linked in some people’s mind with the 20s, 30s and 40s may have more to do with 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 visual bombardment on all fronts did not exist, images and 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 of TV syndicated and private channels, Internet, home theaters and all the myriads of visual gadgets and entertainment sources competing today for the audience’s attention, still untouched by the 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 just sit back, relax and produce the show. And that was truly golden . Ώ

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 about alternative 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. 40 years 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. Morita’s eagerness, which may have been negatively skewed because of the weak position Columbia was in 1989 and that paled 5 years later when 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 new business models – not that the words “business models” had ever probably 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 th Century 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 weight behind 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 product’s 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, popular actors, commercial script) and result in a disaster (“Town and Country”, K.Costner’s “The 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 2009 8 Oscars winner “Slumdog Millionaire”). Every movie is a new product with a relatively short shelf life. This characteristic renders pretty much any traditional marketing strategy and spreadsheet model ineffective . Every movie, today much more then in the past, has to compete with so much both nationally and increasingly across the globe to make it that 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 financial success a bit more in her favor? Control of as many distribution channels as possible probably helps, be they domestic, 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..