EXPLAINING HOLLYWOOD

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EXPLAINING HOLLYWOOD

• National and International Market Supremacy

2
2003 Retail Sales Estimates

• 10 billion box office revenues
• 23.8 billion video/DVD sales, rentals (5-6
  months after release)
• 2.2 billion from cable, pay-per-view
• (7-8 months after release)
• 10.4 billion from premium cable channels (a year
  after release)

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Douglas Gomery The Economics of Hollywood

• (From Alexander et al., pp. 175-183)
• 1990s saw major consolidations (Time and Warner,
  Disney, Capital Cities/ABC, Viacom/Paramount)
• Dominant companies have been around since 1930s

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6 Majors (1990s)

• 1. Time Warners Warner Bros (later acquired by
  AOL Time Warner)
• 2. Disney
• 3. Murdochs News Corps Twentieth Century Fox
• 4. Sonys Colombia
• 5. Viacoms Paramount
• 6. Seagrams MCAs Universal Studio (Seagram later
  acquired by Vivendi)

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Causes of Hollywood Oligopoly (1)

• Hollywood is classic oligopoly
• New contenders rarely survive, as they lack the
  advantages of the giants, namely
• Cross-subsidization opportunities
• Privileged dealing with other units of the
  conglomerate
• Horizontal and, esp. vertical integration
  theaters, cable, terrestrial TV, networks

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Causes of Hollywood Oligopoly (2)

• Robust survival of theater provides instantaneous
  national/international marketing outlets boosted
  by huge TV advertising
• Price discrimination (one pays less down the line
  of outlets)
• Importance of box office revenue falling (now
  down to 20) due to home video, pay cable and
  other revenue sources.

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Causes of Hollywood Oligopoly (3)

• Strong international trade, protected by Motion
  Picture Association of America
• Regular production of films encourages foreign
  buyers to deal with the majors
• Hollywood product dominates many foreign film
  markets
• Joint deals with foreign companies to build
  theaters co-productions
• International box office revenue is increasing
  relative to domestic, now approaching 50

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Development of the Hollywood Business Model

• (1) Characteristics of USA Market
• Highly-populated, immigrant melting-pot of
  internationalism and unity, English-speaking,
  wealthy, good transportation an/communication
  links, strong media systems, many cinema screens
  (now 37,000). Hollywood could easily cover costs
  on national market (7Bn,1998) and sell
  aggressively overseas

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(2) Advantages of Location

• Hollywood offered (originally) non-union labor,
  cheap land, easy access to diverse scenery, mild
  climate
• High-concentrated industry (LA), with dense
  networks of multi-media services, supplies,
  producers, distributors, linking in with
• Local culture of flexibility, seizure of
  opportunity, inventiveness.

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(3) Industrial Production

• Market driven
• Assembly line production
• Star system assisted promotion
• Genre system assisted promotion, gave economies
  of scale in production
• Horizontal and vertical integration
• Increasingly pushed envelope in matters of
  content relative freedom from censorship
• Blockbusters
• New technologies sound, color, wide screen,
  digital animation etc. enhanced competitiveness

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(4) Investment Strategies

• Huge markets attract large investments for highly
  competitive product (Prod. cost for top-ranking
  films,1999, ranged 10m-55.m, yielding gross of
  22m-85m ).
• Huge additional marketing investment (averaging
  25m per film in 1998)
• Attractive to German, other foreign investors
• Product-placement links with Pentagon

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(5) Distribution/Exhibition Strategies

• First weekend fast, blanket release
• Control of critics
• Selective openness to small-budget and
  international films
• Openness to independent producers and
  distributors (though these are not necessarily
  alternative and may have close ties to
  studios).
• International sales increasingly important (46
  of revs in 2000), enhanced by co-productions, and
  increasing television outlets

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Dangers

• Threats to income from
• Personal video recorders (allow skip
  commercials, subvert concept of prime time,
  copy DVDs)
• DVD burners and recorders (do away with need
  to rent)
• Digital television (may intensify piracy)
• File-sharing services (undermine value of
  syndicated programs, sales of prerecorded shows
  and movies)
• Camcorders
• Wi-Fi (makes it easier to copy and to set up
  file- sharing networks)

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Studio/Network Solutions

• Sue to prevent automatic ad-skipping and online
  sharing
• Recording devices that delete shows after a
  period of time
• Limit hard drives of recording devices
• Set-top boxes that make only one copy of
  cable/sat shows, and prevent copies of
  pay-per-view programs
• Suing customers of file-sharing networks
• Provision of studio online subscription movie
  services
• Watermarking master copies so camcorders cant
  work
• Pressure on wi-fi companies to go for streaming
  rather than downloading and transfer
• Piracy taxes on hardware and software
• Offering movie products to the consumer much
  sooner