Hollywood’s Dominance: How did it arise and how has it been maintained?A Revisionist Approach.

© Jon Silver 2008

Historical Context

Until World War 1 (WW1): European films dominated world cinema 1904-1914 Pathe (France) held 50-70% global market share (units of production i.e. films)

Until WW1: A different set of firms dominated the U.S. film market 1895-1914 Edison, Biograph, Vitagraph, Lubin, Selig, Kalem, Essanay, George Kleine, Pathe, Gaumont

1895-1908 Edison used litigation for patent infringement on film equipment to try to constrain rivals 1909-1915 Edison organised the MPPC (“The Trust”) and the GFC to monopolise the U.S. Market 1912 Universal founded - the first of the Major studios.

Hollywood dominated globally since WW1 (the war halted European production) Universal, Paramount, M.G.M., United Artists, Warner Brothers, Fox, Columbia and R.K.O. (replaced by Disney in 1950s).

Hollywood studios went broke TWICE during Great Depression & 1960s Yet no rivals displaced or replaced them.

Other industries market leadership changed substantially over time

Automobiles, airlines, hotels, computers, others….

Hollywood’s Biggest Rivals There have been larger film companies than ‘The Majors’ - Pathe (1910s), Edison/MPPC (1910s), UfA (1920s), Rank (1940s/1950s)

Largest rival producer nations have operated commercial film industries:

France (1900s-1910s) and Germany (1920s) mass-produced and exported popular films.

Italy (1911-1914) big budget historical epics were global box office hits.

Japan and England - have always operated commercially-orientated film industries.

India - now world’s largest commercial industry - more films + higher attendance.

Business problem for Hollywood’s rivals:

Hollywood historically - 75% - 90% market share in most countries. sources: European Audiovisual Observatory; Variety; Film Daily Yearbooks.

Rivals have limited access to world cinema screens.

Multi-disciplinary literature review identified:

20 different explanations

Root-cause analysis + clustered them…..

Hollywood’s dominance and popularity of its movies

THE GAP in the Literature Politics

WW1 halts European film production

U.S. Govt. pressure on Europe to remove

trade barriers

Economics Sunk costs theoryIndustry structureBarriers to entry

Clustering

Social factorsIndustry legitimacy

Censorship

TechnologySound Television

VideoDigital

Absence of a single

unifying theoryexplaining

Hollywood’sDominance

DemographyMass migration Large size of U.S. market

Pop Culture Wealthiest channel U.S. is a melting potFilm was first mass entertainment

Major studio strategies: Old Hollywood - mass output; Commercial focus and production strategy;

Vertical integration; Distribution channel dominance; Old Hollywood controlled exhibition (retail);

MPEA lobby and export cartels; Flexible specialisation; Hollywood publicity machine and advertising budgets

Root cause analysis: 20 explanations

All linked back to effective strategic marketing management

Not what the literature was saying……

Perceptions that strategic marketing only began in Hollywood in 1970s

Hollywood’s product orientation resulted in financial decline of Major studios

(Levitt 1960 p. 2)

Marketing developed in Hollywood with tailor-made campaigns in 1972 (The Godfather)

(Izod 1988 pp 183-184)

Multi-disciplined marketing departments evolved in Hollywood after 1975

(Wasko 2003 p. 189)

Hollywood only discovered how to segment + target effectively from mid-1980s

(Rothenberg 1990 New York Times)

Needed to understand why firms dominate…

So what did the economic and business literature say?

Dominance Implies Power and Control (Rosenbaum 1988) CONFLICTING SCHOOLS OF ECONOMIC THOUGHT: STRUCTURALISTS vs EFFICIENCY SCHOOL - no actual ‘models’ on dominance

SCP - Industry structure affects firm conduct and firm performance (Scherer 1996)

Key weaknesses of SCP: 1) offers only an after-the-event perspective of an existing industry structure that does not account for new industries and emerging structures; 2) SCP treats the firm as a ‘black box’ (Hay & Vickers 1987) assumes firms are captives of a fixed industry structure with little ability to influence their market position and 3) SCP fails to explain why some firms do better than others in same business environment (Kay 1997) - model is too abstract to facilitate insightful explanations of how dominance is acquired and maintained.

RBV - Management decisions on deployment of resources influence firm growth (Penrose 1959, 1972) - dominant firms are those that have been more efficient with resources than their rivals

Effective competitive strategy enables firms grow and to deter new entrants (Porter 1980)

Success of dominant firms is underpinned by their strategic intent & ability to stretch resources (Hamel & Prahalad 1989)

Firms differ in strategic orientation. Market position determined by their strategic orientation. ‘Shaping’ the environment to optimal advantage is the basis of strategic management (Aaker & Mills 2005)

Market orientation positively correlates with superior market performance (Day 1994; Jaworski & Kohli 1992)

Excellence in six key marketing capabilities underpins the success of market-driven firms enabling them to outperform rivals (Vorhies & Harker 2000; Vorhies & Morgan 2005)

Five routes to the acquisition of market dominance

Source: This figure was constructed based on Hay & Vickers (1987) The Economics of Market Dominance. Basil Blackwell. Oxford, England pp. 10-14.

Theoretical approaches explaining persistence of dominance

A Market Orientation delivers superior performance

source: Cravens, David (2000) Strategic Marketing. 6th International Edition. McGraw-Hill. Boston p5.

Superior Marketing Capabilities of Market-Driven Firms(Vorhies and Harker 2000)

Marketing research

Product development

Pricing

Distribution

Promotion

Marketing management

Theoretical framework for analysis of market dominance

Mergers occurred but did not play a defining role in Hollywood’s acqusition of dominance

KEY FINDINGS

1910 - MPPC = 41.7% market share Universal companies = only 12.3% combined market share 1913 Famous Players already the largest feature film producer prior to the merger in 19171914 Paramount -the largest film distributor - 25 year deal with Famous Players prior to the merger in 1917

From the earliest days the Major studios were marketing orientated firms and possessed superior marketing capabilities to rival firms and rival industries

KEY FINDINGS

Marketing Capabilities since late 1910s / 1920s

HOLLYWOOD

Marketing Research Systematic Intel + Surveys since late 1910s/1920s

Product development High investment in R&D (5-10% of budget)

Rigorous process, big budgets, high quality

DistributionGlobal, strategic diffusion, channel relations

PromotionMarcoms expertise + spend, STP stars + genre

PricingHighest film rental rates

Marketing ManagementMarketing orientation, pro marketers, integrated departments,

IMC, strategic brand management

RIVALS (NATIONS & FIRMS)

Marketing Research Very little market research, if any

Product development Low investment in R&D (1-2% of budget)No rigorous process, low budgets, artisanal

DistributionNo significant competitors since early 1910s

Promotion

Less expertise, lower spend, local stars, genres

PricingLower film rental rates

Marketing ManagementPredominantly artisanal orientation, much lower capabilities - if any

Marketing Intelligence Gathering Capabilities

Since 1920s: Majors monitored potential threats e.g. development of radio & TV, video (Wasko 1994 pp. 12-14).

Since 1922: MPPDA industry statistics, surveys publishes market reports (Goldberg 1991 p. 165).

Since 1920s: Majors global distribution networks feed back intelligence (Hampton 1970 p. 239).

Since 1920s: Majors closely monitor the daily trade press - Moving Picture World, Film Daily, Variety, Hollywood Reporter, Screen International.

Since 1920s: Channel partners provided intelligence - theatre chains, exhibitor conventions, legal advisers, agents, accounting firms.

Since 1930s: Majors monitor legislative changes and trends through MPPDA (Washington lobby) (Puttnam 1997).

Talent spotting at film festivals and film markets.

Market Research Capabilities

1911 First in-theatre audience surveys (Craw in Waller 2002 p. 72; Franklin in Waller 2002 p. 158)

Since 1910s Daily sales analysis / box office (Zukor 1953 p. 37; Sinclair 1970 p. 51)

1916 First exhibitor survey commissioned by Paramount (Bakker 2003)

1922 Primitive consumer panels (Hampton 1970 pp. 311-312)

Since 1920s Product testing with audiences (Zukor 1953 p. 223, March 2005 pp. 35-41)

Since 1920s Previewing to fine tune campaigns (Fiske and Handel 1947 p. 224)

1920s Audience research used to aid media buying (Gomery in Waller 2002 p. 125; Bakker 2003)

1930s Hollywood pioneered segmentation research and tracking studies (Bakker 2003)

Since late 1930s regular movie-going audience surveys (Garrison 1973 pp. 146-147)

1939 Positioning research for Gone With The Wind conducted by George Gallup

Since 1940s Movie title testing (Fiske and Handel 1947 p. 274)

Since 1940s Advertising effectiveness studies (Fiske and Handel 1947 p. 275)

NPD - Key FindingsOnly Hollywood has employed a rigorous new product development process

(Fawcett 1932 pp 35-36; Dale 1997 p. 164; Puttnam 1997 pp. 291-295; Sawyer 2002; Finney 1996 p. 24; Ross and d’Amico 1996; Zee News 2006).

Escalation of film budgets since 1915-1917 = quality-based strategy

(Izod 1988 pp. 35-36; Bakker 2003)

‘Quality’ = big budgets, big stars, glossy production values, special effects,

technological innovation and movie awards (peer recognition)

“Motion pictures had to be made with quality stories, quality production, quality stars and quality directors” (Zukor 1956)

Paramount’s corporate advertising: “If it’s a Paramount Picture then you know it’s the best show in town”

M.G.M. corporate advertising slogan: ‘More stars than there are in heaven’ (Eyman 2005)

European rivals chose not to escalate or could not afford to escalate film budgets

(Bakker 2003)

Rival industries predominantly artisanal from 1910s-1920s

(Puttnam 1998 pp. 237-238; Degli-Esposito Reinert in Kindem 2000 p. 224; Ulff-Moller 2001 pp. 23-24)

New product development Booz Allen model + Hollywood

Sources: Booz Allen Hamilton (1988) Crabb (2005) p. 7-10

Booz AllenNPD

8 step Model

2. Idea ScreeningHW: Readers

& coverage1/200 go into development

3. Concept development

+ testingHW: script

development, revisions, concept

testing, & packaging

4. Marketing Strategy

HW: Strategy Formulation,

Packaging finalisation

5. Business Analysis

HW: Business analysis

+ green-light

6. Product Development

HW: Film Production

7. Market Testing

HW: Test screenings,

re-editing, tracking

8. CommercialisationHW: distribution strategy, release pattern, P&A, launch all aided by market research

1. Idea GenerationHW: Sources books, plays,

articles, outlines, treatments, scripts

NPD process ABSENT in other major film producing nations

EUROPE

“Most of Europe’s media groups have traditionally proved very reluctant to invest development funds, or even take the concept of script development very seriously. The total development expenditure by Europe’s media groups is around

$12-15 million a year – 3% of the Hollywood total” (Dale 1997 p. 164).

An Artisanal orientation has held back Hollywood’s rivals (Puttnam 1998 pp. 237-238).

FRANCE

“Films are made for one or maybe two people” - Jean Luc Godard. (Puttnam 1997 pp. 291-295)

BRITAIN

1930s “Stories are either ill-chosen or ill-adapted” (Fawcett 1932 pp 35-36).

1990s / 2000s: British scripts are too parochial and underdeveloped (Sawyer 2002; Finney 1996 p. 24).

ITALY

Artisanal orientation since the silent film era ( Degli-Esposito Reinert in Kindem 2000 p. 224).

“There are no rules. Anything can happen”. It depends on the intelligence of the individuals”

(Ross and d’Amico 1996).

INDIA

“the lack of necessary budgets for script development and market research manifests itself in the relative non-profitability of Bollywood cinema, despite its growing revenues every year. Bollywood needs to concentrate on intelligent

selection of scripts while factoring-in audience preferences and market trends as well as a feasibility analysis of target audience preferences before embarking on a project” (Zee News 2006).

Distribution capabilities - Key Findings

Unrivalled intensive global market coverage. Short length corporate-owned channels.

Nine decades of distribution know-how controlling diffusion and optimising profitability

Superior channel relations with stars, agents, film financiers, theatre chains, critics

Unrivalled capabilities in acquisitions, sales strategy, logistics and cost control

Strategic diffusion - release patterns and distribution practices

Promotional capabilities - Key FindingsEarly use of established promotional channels

Significant influence of marketing professionals since 1910s and 1920s and sophisticated marketing communications

Unrivalled promotional expertise - advertising, publicity, promotion, merchandising

STP using stars and genres to segment and target early adopters and early majority

Hollywood outspends the rest of the world in film advertising / movie marketing

CAREER BACKGROUNDS OF THE FOUNDERS & SENIOR EXECUTIVES & MARKETING OFFICERSOF THE MAJORSTUDIOS IN “OLD HOLLYWOOD”1912-1949

Earlier quotes:Hollywood didn’t begin strategic marketing until mid-1970s(Levitt 1960, Izod 1988, Rothenberg 1990)

Multi-disciplined marketing departments evolved in Hollywood after 1975(Wasko 2003 p. 189)

Wyatt, Justin (1994). High Concept.The University of Texas Press.p. 114.

Image removed due to copyright policy

1921 1924 1933 1958

1981 1970 1991 1972

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The Jazz Singer Warner Brothers (1927)

IMC before mid-1970s?Image removed due to copyright policy

Image removed due to copyright policy

The Sound of Music 20th Century Fox (1965)

IMC before the mid-1970s?

Image removed due to copyright policy

Pricing capabilities - Key Findings

Hollywood strategy optimised film rental rates

- output, quality, stars, release patterns, P&A.

Block booking was a bundling strategy

Strategic marketing management capabilities - Key Findings

Major studios have been marketing-orientated and responsive to external threats and opportunities

“Quality” strategy differentiates Hollywood movies - budgets, stars, ‘glossier’ look, production values, awards

Marketing professionals occupied senior executive positions in Old Hollywood and still do today.

Old Hollywood Major studios operated integrated “marketing departments” comprising advertising, publicity, sales and promotional staff that reported to a single executive and still do in New Hollywood.

Integrated marketing communications since 1910s - centrally driven strategy using press books and de-centralised local promotion (Old Hollywood) - centrally driven globally orchestrated launch campaigns (New

Hollywood)

Adaptability and innovation - feature films, movie star system, new technologies, release patterns, advertising & media strategies, new forms of cinema / new exhibition markets, vertical integration (1910s),

vertical disintegration (1950s), vertical re-integration (1990s) - Hollywood once again controls all entry points.

Strategic brand management - star-as-brand, director-as-brand, sequels, remakes, movie franchises

Segmentation and targeting via stars, genres and temporal distribution practices based on price discrimination

Massive barriers-to-entry - Hollywood-the-Brand, production and marketing expenditures, global distribution.

Six enduring barriers-to-entry that sustained the Majors’ dominance over time were are all rooted in strategic marketing capabilities

KEY FINDINGS

Enduring barriers-to-entryBiggest movie budgets ensure highest quality production

values

Escalating star salaries - rivals can’t afford biggest stars

Worldwide distribution + channel relations

MARCOMS capabilities and expenditure

‘Hollywood-the-brand’ enjoys unrivalled brand equity

Parallel world - 4 pillars: movie publicity, cult of celebrity, merchandising and awards = high consumer involvement +

interest

Conclusion - Hollywood’s dominance results from highly effective strategic marketing management

ACQUISITION OF DOMINANCE:

Mergers did not play a defining role

Marketing orientation and superior marketing capabilities do account for the rise of Hollywood’s dominance

MAINTENANCE OF DOMINANCE:

Marketing orientation and superior marketing capabilities do account for persistence of Hollywood’s dominance

Six enduring barriers that sustained Hollywood dominance are all rooted in superior marketing capabilities