The Master Switch: The Rise and Fall of Information Empires - Tim Wu (2010)

Part IV. Reborn Without a Soul

Chapter 17. Mass Production of the Spirit

On November 19, 1980, the hottest ticket in New York was the premiere of Heaven’s Gate. Michael Cimino, acclaimed director of The Deer Hunter, had spent years and more than $35 million (over $100 million in today’s dollars) on this masterpiece, his take on the American Western. Rising stars Jeff Bridges and Christopher Walken were featured, as well as a giant supporting cast and extensive period sets. Everything seemed set for a major triumph, yet in the rush to the premiere, almost no one, including its producers, had actually seen the film in final cut.

Cimino’s effort followed in the footsteps of Francis Ford Coppola’s Apocalypse Now. A hard-won triumph, that epic of Vietnam had creative romance about it: a masterpiece and a box office success that almost didn’t get finished. Heaven’s Gate was another director-driven vision, a symbol, even a high-water mark, of the second open era in American filmmaking that lasted from the late 1960s through the 1970s. This period brought Hollywood as close as it has ever come to fulfilling the ideal articulated by W. W. Hodkinson in the 1910s: directors enjoyed a new level of independence from studio preoccupations, and when those deemed blessed with inspiration asked for something, they got it. No studio embodied the spirit of New Hollywood more than United Artists, the only major independent to survive the purges of the 1920s, whose entire approach depended on finding and funding directors with a certain vision. In the 1970s, United Artists became the leading platform for new directors with big ideas, including not only Coppola and Cimino, but also Woody Allen, Martin Scorsese, and others.¹

At the New York premiere, things got off to a bad start. The audience was oddly unresponsive during the first half of the film. Stephen Bach, a United Artists executive, later wrote that they were “either speechless with awe or comatose with boredom.” During the intermission Cimino entered a subdued reception room and found that the glasses full of champagne had gone untouched. Bach relates the director’s conversation with his publicist:

“Why aren’t they drinking the champagne?”
“Because they hate the movie, Michael.”²

The critics were brutal, particularly Vincent Canby of The New York Times. “ ‘Heaven’s Gate,’ ” he wrote, “is something quite rare in movies these days—an unqualified disaster.” It “fails so completely,” wrote Canby, “that you might suspect Mr. Cimino sold his soul to obtain the success of The Deer Hunter and the Devil has just come around to collect.”³

Indeed, Heaven’s Gate would be ever after remembered as perhaps the greatest single bomb in film history, but not just in a financial sense. True, the film would fail to make much money, but that’s not so unusual. This failure was deeper. Fairly or not, it would be understood as an indictment of United Artists’ approach to filmmaking, the approach that had become emblematic of the art in the 1970s, based on prizing the independence of directors and glorifying artistic innovation. Heaven’s Gate was the auteur film from hell and led directly to the financial collapse of United Artists and its subsequent sale to MGM, marking the beginning of the end for the second open age of film.

The fall of United Artists in the early 1980s and the second closing of the film industry represents a turn in the Cycle and the beginning of a new order that lasts to this day. This moment saw the triumph of a rival approach to production coinciding with the rise of the media conglomerate. Its greatest champion was a man named Steven Ross, a onetime funeral home director who pioneered a new way of organizing the entertainment industry. Unlike a freestanding firm like United Artists, Ross’s firm, Warner Communications (today, Time Warner Inc.), held dozens of media concerns and other properties under a single roof. This vision would spread throughout the 1980s and 1990s to become the dominant industrial organization for movies, music, magazines, newspapers, book publishing—all forms of content once called “leisure.”

There is no understanding communications, or the American and global culture industry, without understanding the conglomerate. Yet this industrial form, born originally to assist in creative accounting on the part of public corporations, remains surprisingly difficult to characterize, let alone justify. It is a hydra-headed creature whose operations and advantages have mystified lawyers and economists alike. As a 1981 paper in the Bell Journal of Economics put it: “Despite extensive research, the motives for conglomerate mergers are still largely unknown.”⁴

Nonetheless, the conglomerate is the dominant organizational form for information industries of the late twentieth and early twenty-first centuries; here and abroad it is inseparable from the production of the lion’s share of culture. Like the integrated Hollywood studio that preceded it, the conglomerate can be the worst enemy or the best friend of the cultural economy. With its hefty capitalization, it offers the information industries financial stability, and potentially a great freedom to explore risky projects. Yet despite that promise, the conglomerate can as easily become a hidebound, stifling master, obsessed with maximizing the revenue potential and flow of its intellectual property. At its worst, such an organization can carry the logic of mass cultural production to any extreme of banality as long as it seems financially feasible, approaching what Aldous Huxley predicted in 1927: a machine that applies “all the resources of science … in order that imbecility may flourish.…”⁵

DEFUSING BOMBS

The fact that a single big failure, Heaven’s Gate, could take down an entire film studio made it starkly obvious that all the studios needed better ways of protecting themselves against disaster. As we shall see, defense against financial meltdowns was perhaps the driving reason for the rise of the media conglomerate. But the implications are broader than that: the shape and tenor of our current entertainment world are largely owing to the imperatives of risk management in a world where failure had become catastrophically expensive.

A few basic points about entertainment economics will make this clearer. The fundamental fact in the business is a high level of uncertainty as to the success of any given product, and a giant disparity between the rewards that come to those that succeed modestly, as against the real hits. Another way of saying this is that the entertainment industry is the classic, indeed definitive, example of what economists call a “hit-driven” industry.⁶

In such a context, a few hits will outperform the rest, sometimes by several orders of magnitude. The difference between number one and number twenty on any entertainment media chart is well captured by Wired magazine editor Chris Anderson in his book The Long Tail (itself a hit). While the book is famous for celebrating Internet business models, what Anderson also shows, using actual industry data, is that a relatively small number of hits account for the bulk of the revenue in those businesses. Hence the peculiar distribution of demand, as pictured below, which typically confounds and frustrates management consultants. In practical terms, to take book publishing as an example, this means that the seven Harry Potter books outperformed many thousands of other books combined. Likewise, in film, a giant blockbuster can outearn the combined receipts of hundreds of independent films, and so on.^*7

The second peculiarity is that the hits are not so easy to predict. Sometimes a film comes out of nowhere and makes a killing, like the original Rocky; produced by a then unknown independent filmmaker (Sylvester Stallone) on a tiny budget, it became the top grossing film of 1976. On the other hand the big, obvious bets not infrequently do pay off, whether owing to classic mastery of craft, as with Apocalypse Now, or breakthrough technical wizardry and unsuspected thematic resonance, as with Avatar. But there is no long, expensive film that is so obvious a bet as not to be risky. The real fly in the ointment is those films like Heaven’s Gate, or Ishtar, which, for whatever reasons, despite famous directors and actors and large budgets, prove complete financial failures. The megastinker can be as hard to forecast as the runaway hit. Even in the cases of Titanic and Avatar, the two top grossing films in history, many industry watchers predicted a financial bloodbath.

Demand in the entertainment industry

We might well ask why success in entertainment is so hard to predict. It’s a tricky question, though one can start to answer it by looking to the nature of the demand. With any given entertainment product—as compared with, say, socks or beer—one is faced with selling something people don’t ultimately need; they have to want it. They have to be inclined to invest time and money—ninety minutes with a film, twenty-five dollars for a book—without certainty of satisfaction or desired effect. To be sure, there are times when the desire for entertainment seems like a need—for instance, on a long flight. Yet even then the need is not unique; just about any decent film will do to pass the time. The upshot is that every book, film, or TV show launches amid the unsettling awareness that it could be a total and absolute flop. As the film industry economist Arthur S. De Vany writes, “every actor, writer, director and studio executive knows that their fame and success is fragile and they face the imminent threat of failure with each film they make.”⁸

That uncertainty and variable demand at the heart of the entertainment industry has led to a wide range of countermeasures. As we shall see, the structure of the entertainment industries makes no sense apart from an understanding of the ways they manage risk. These range from the obvious—for instance, betting on well-known stars or directors (more typically the former) and the sequel (rerunning a past success in the hope that lightning will strike twice)—to somewhat esoteric systems of financial management and joint accounting aimed at diffusing success and failure over a broad balance sheet. All of these techniques have in common the way they end up altering the face of both American and global popular culture.

STRATEGY 1: CONGLOMERATIZATION

If unpredictability of success and failure was the chief problem in the entertainment industry, by the 1970s, a man named Steven Ross had the answer. As CEO of a company called Kinney National Service, Ross acquired the suffering Warner Bros.-Seven Brothers film and recording business for $400 million in 1969, and was on his way to becoming a player in entertainment. In two years, Kinney would be renamed Warner Communications, Inc., and over the next decade Ross would become the very first exemplar of a new archetype: the big media mogul, a breed apart from the studio heads and others who had preceded him in entertainment’s corner office. He was the first pure businessman, a figure who bought and sold business properties, as opposed to a producer or exhibitor who’d hit it big. As such he thought about risk in entirely new ways. Ross is no longer a household name, but remains a pivotal figure, not merely on account of the corporate structure he pioneered, but also because his firm and his person would serve as the role model for other firms and their chiefs, among them Disney’s Michael Eisner and Barry Diller at Paramount and Twentieth Century-Fox. Ross perfected the accounting practices that anchored the conglomerate, giving enough freedom to keep everyone happy, and the grand affect that would have made a Roman emperor seem mean.⁹

To be sure, as long as there’s been a film business, the necessity to contain inherent risk has figured in the equation; even the old industry’s modus operandi can be understood in relation to this imperative. The Edison cartel of 1908, for instance, fixed prices aggressively to make sure that, across the industry, costs would never exceed revenues. Likewise, the cartel’s enforcement of a certain homogeneity of product—simple plots, short films, no stars, and a ban on most imports—had the effect of ensuring that one film was as good as (or as bad as) another; by making all their offerings “fungible,” as an economist would put it, the cartel sought to iron out the discrepancy between the hits and flops, making the fate of any one film that much more predictable.

The vertical integration of the studios that arose in the 1920s with Paramount and the rest can also be understood as an attempt to minimize risk to their investments. By owning every single part of the production and exhibition process, from the actors down to the seats in the theaters, the studios were able not only to control costs, but also to guarantee the size of their audiences, to some extent. It didn’t always work, of course, but it did achieve a certain stability for the industry.

In contrast, Ross’s answer to the problem of entertainment failures was far more imaginative: he hedged the Warner Bros. film studio volatility with the steady revenues that came from unrelated businesses. Through the 1970s and 1980s, his acquisitions in the name of cash flow also included, at times, cleaning services, DC Comics, the Franklin Mint, Mad magazine, Garden State National Bank, the Atari video game company, and the New York Cosmos soccer team. Obviously, not every choice fit the rubric of “communications,” but it was all in the name of “synergy.”

There were, in fact, two forms of balance achieved by this weird portfolio. One, of course, was among various media. As we’ve said, record albums, television shows, and books are all subject to the vicissitudes of “hit-driven” industries. Collecting a group of media companies together is a means of sharing the risks and benefits across platforms, a bestselling novel helping to even out a movie dud to achieve something like a stable stream of revenue. But for real defense against Heaven’s Gate-magnitude bombs, Ross’s trick was to hedge the uncertainty of entertainment products as a whole with much more reliable sources of income. Under the Warner Communications umbrella sheltered not only films and music but parking lots, rental cars, and funeral parlors (his former métier).

What Ross was first to do with office cleaning and other services would be translated to the scale of heavy industry in the General Electric-Universal Studios merger of 2004.^* Only now it was not the media mogul acquiring a pizza parlor but an industrial mogul, Jeff Immelt, buying a film studio. Universal would enjoy as much of a hedge as any entertainment firm could hope for. By 2008, GE had annual revenues of over $183 billion, while Universal had income of $5 billion, less than 3 percent of the total. With a holding company of that size, the prospect of losing millions on a single film, while not pleasant, is no existential threat. Here was the ultimate defense against even the biggest movie bomb: a corporate structure so titanic that the fate of a $200 million film can be a relatively minor concern.¹⁰

The conglomerate structure looked like a real boon to entertainment and culture. The capacity to absorb heavy losses could, in theory, provide breathing room for creative experimentation, a way to do the worthy, if riskier, projects. The profits from GE lightbulbs alone could keep dozens of great directors working indefinitely, or fund thousands of Sundance-style films. In fact, one could fantasize about the film studios supported by a tiny internal tax on lightbulbs, a sort of alternative to government funding of the arts. By defusing the bomb, the conglomerate held out the promise of ushering in a golden age of film and other entertainment subsidized by American corporate profit from other sectors.

In the 1970s, when the model was first deployed, with Ross and others, such as Gulf & Western, beginning to combine film studios with more staid businesses, conglomerates created exactly this stabilizing, creativity-enhancing effect. Like the independent studios, they tended to fund the more speculative and interesting films of auteur directors. As long as they broke even or didn’t lose too much money, the conglomerate accepted the subpar return on capital. But this forbearance would not last indefinitely, and as one might fear, it was not long before the conglomerates would come to scrutinize their film divisions with the same green eyeshade they used for all their other products.

Before we consider how the values of conglomerates began to infect the business of cultural production, we might well ask why the conglomerates would have wanted any part of that business in the first place. It’s clear what a deep-pocketed parent could do for a film studio, but as for a company like GE or Time Warner? Sure, they could well afford to fund plenty of films, and even accept heavy losses, but what was in it for them? Why would a bottom-line for-profit corporation seek exposure to a business as risky as 1970s director-centered film? It seems the sort of property most savvy businessmen would be seeking to dump. Over time, the conglomerates themselves and their frustrated shareholders would begin to ask such questions, eventually tightening the free rein of their studios. But in the 1970s, when Ross established his Warner, he and his cohorts enjoyed being corporate America’s easy riders.

No honest account of the media conglomerate’s rise could fail to concede the role of purely personal motivations, indeed vanities. For while throwing media properties together wasn’t the likeliest path to profit, it provided Ross and his imitators with the chance to indulge some of the most primal pleasures known to the male of the species.

Being a corporate chief executive carries many rewards—above all, high salary and power—for suffering the loneliness at the top. But until relatively recently, those gratifications did not include being a national celebrity. Apart from those who actually owned their mighty companies—the J. P. Morgans and J. D. Rockefellers at the beginning of the twentieth century, the Bill Gateses at the end—the corner office was, for most of American history, a relatively anonymous place. When Ross ran funeral homes and parking lots he was very wealthy indeed but not famous, let alone glamorous. According to his biographer Connie Bruck, it was as a media executive that Ross found his passion, a life of such scale and drama as he craved. Running a conglomerate with media interests furnished Ross, and those who would imitate him, with the chance to befriend rock stars, date actresses, indulge in pet projects, and even influence public opinion.

These inducements are of course related to what economists call the will to “empire-build,” but strictly speaking the phrase refers to an activity that is its own reward, the fulfillment of an innate desire as expressed by someone like Theodore Vail. While Ross certainly had such “pure” yearnings, he was also unquestionably drawn to what we might term imperial prerogatives, and these lures account for why he was attracted in particular to the film industry when he was already running a very solid business. It can be astonishing how much some executives prove willing to spend or sacrifice—particularly of other people’s money—to enjoy visible proximity to and power over the world of the idolized. Few are the media executives who admit to the emotional need behind that vainglorious magnetism.

In available photos, Steven Ross is almost invariably arm in arm with the likes of Elizabeth Taylor, Barbra Streisand, and Dustin Hoffman. His obituary in The New York Times captures the giddy abandon with which he conducted life at the top:

As Warner grew, lavishness became a company trademark. Generous gifts were doled out to employees at Thanksgiving and Christmas. If an executive wanted a face lift, the company paid. Stars were invited to corporate holiday homes in Acapulco, Mexico, and Aspen, Colorado. Invitations were thrown around to championship fights in Las Vegas, Nevada, and Warner’s guests traveled on one of the company’s half a dozen planes. On the flights, Mr. Ross would dole out candies, entertain stars and employees with card tricks, and play backgammon and dominoes. In some ways, he was a sugar-daddy, in others almost a child in the way he relished the pleasures available to him.¹¹

His aggressive cultivation of celebrity friends sometimes cost Warner shareholders more than the odd trip to Acapulco. Donations to their favorite charities and expensive presents for their children were also in the sugar-daddy arsenal. As Connie Bruck relates, when courting Steven Spielberg, Ross spontaneously agreed to pay him over $20 million—ten times the reasonable value—for the rights to make a video game of his film E.T.: The Extra-Terrestrial. The result was the first major video game based on a movie—conglomerate synergy in action—but also a game generally acknowledged as the worst in video game history (“famously bad,” according to PC World); after disappointing sales, untold millions of unsold E.T. game cartridges were buried in the desert near Alamogordo, New Mexico. Ross’s disastrous deal damaged and may have wrecked Atari, whose role in the corporate portfolio was meant to be that of a cash cow, not glitzy loss leader.¹²

Of course it would be a gross oversimplification to say that the conglomerate represented a simple trade: the industrial mogul offering financial security in exchange for access to the Hollywood lifestyle. In addition to alleviating the volatility of cash flow in the movie business, and giving its master a new set of toys, the conglomerate served a more familiar purpose of empire building: material self-enrichment. For while most of the revenues of individual divisions might not justify truly outsize rewards, ganged together they represent a balance sheet that could justify the sort of compensation one would associate with an industrial or financial powerhouse today. Someone like Ross or Michael Eisner, Disney’s CEO, was well positioned to reward not only his friends and cronies but also himself. The fact of having made oneself a sort of celebrity creates some cover for such self-indulgence: Could a mogul fairly pay himself less than a movie star? In the 1990s, Eisner, for instance, famously awarded himself $737 million for five years of work.¹³

But there is an essential difference between a Ross and an Eisner. Ross was a service executive who bought into media, while Eisner was a born-and-bred media man. Though the latter would be forced out by a boardroom campaign orchestrated in part by Roy Disney, the founder’s nephew, who would accuse Eisner of turning the family entertainment firm into a “rapacious, soul-less” company,¹⁴ there is no denying that in his tenure, Eisner grew revenues by some 2,000 percent. Both men, for all their personal excesses, used the conglomerate structure in ways that were ultimately good for business, as a business, but detrimental to the variety and innovation in the production of content. With Ross we might say, generalizing broadly, that that effect was the result of being in the content business for all the wrong reasons, while with Eisner the problem was more nearly one of seeing content less and less as an end in itself. The Disney Company that Eisner inherited had pioneered the branding of content by way of various forms of merchandising, from theme parks to sweatshirts. But by the time Eisner would take the helm in 1984, the company, whose bread and butter was still the theatrical film release, was faltering and had barely survived takeover by corporate raiders. Eisner would turn the company around, making it for a while the largest media conglomerate in the world, but in ways that would seem to some, the founder’s nephew among them, a betrayal of the company’s founding devotion to content values above all. It was a common complaint against the media conglomerates rising in those years, and it stemmed from the other strategies typical of that corporate structure.

STRATEGY 2: INTELLECTUAL PROPERTY DEVELOPMENT

If Ross and Warner Communications pioneered the mixing of businesses to balance risk in the entertainment industries, through the 1980s and 1990s a complementary technique rose to prominence. As we’ve said, films and other entertainment products are risky investments, and the industry has historically structured itself to manage that risk. Among the oldest and perhaps the most intuitively apt strategies had been sticking with bankable stars.^* A development engendered by the success of investing in star-driven films was the pursuit of film franchises. It had worked with the Thin Man films in the 1930s and has continued to work with the James Bond films since the 1960s, and more recently with the Bourne films. Slightly different but following the same basic logic is the sequel, which has given us multiple follow-ups of proven hits, among them Jaws, Terminator, and Beverly Hills Cop. In the 1980s yet another variation on this approach began to emerge, one by which films could come to be seen as, in effect, a delivery system for an underlying property.

By this approach, every film is anchored to an underlying intellectual property, typically a character, whether a primarily visual one drawn originally from a comic book, like Batman, or a literary one, like Harry Potter. The film is thus simultaneously a product in its own right as well as, in effect, a ninety-minute advertisement for the underlying property. The returns on the film are thereby understood to include not simply the box office receipts, but also both the appreciation in the property value and its associated licensing revenue—merchandise, from toys to movie tie-in editions and other derivative works. Since every film based on such a property can enjoy multiple types of return on investment, there is strong motivation to concentrate assets on these naturally diversifiable investments.

Consider the most expensive films of the 2000s:

First, notice that with the exception of Avatar—the one flight of directorial fancy more like the high-risk gambles of days gone by—each of these films was a remake or a sequel. Even more telling, each was centered on an easily identifiable property with an existing reputation, appeal, and market value. And the power of merchandising is such that character would no longer appear to be entirely essential; one can be developed from something as inanimate as a toy, as with Transformers.

Let us now compare the most expensive films of the 1960s:

From a twenty-first-century perspective, the problem with these films as a business proposition is clear: they don’t build the value of an underlying property. A film like Cleopatra either makes money or it doesn’t (it didn’t—despite being the highest grossing film of 1963!). It doesn’t leave the consumer with a desire for ancillary consumption once the experience is over. Stated in advertising terms, it wastes the audience’s attention. In contrast, a film like Transformers or Iron Man doesn’t just earn box office revenue, but it demonstrably drives the sale of the associated toys, comic books, and, of course, sequels.

You can’t learn everything from looking at the most expensive films, but you can gain important insight into how the industry has changed, and how its energies and resources have come to be directed. The change has everything to do with the business’s being part of conglomerate structures.

How does a film like Transformers suit the conglomerate in ways that even a money-making film like Hello, Dolly! does not? We can see the reason in broad terms, but a deeper understanding depends on considering both the economics of information and the law of copyright.

Unlike almost every other commodity, information becomes more valuable the more it is used. Consider the difference between a word and a pair of shoes. Use each a million times: the shoes are ruined, the word only grows in cachet. Every time you utter the word “Coke,” “McDonald’s,” or “Lululemon,” you are doing the brand owner a small service of marketing.^*

One of the stranger consequences of the electronic age is that almost any word or image, reiterated a million, or a billion, times, can become a valuable asset. How likely does it seem that an odd-looking mouse with a squeaky voice and somewhat bland personality would become one of the world’s most famous icons? Or that so many people would know who Paris Hilton is, and, even stranger, would seek to pay for her association with various products?

The key to capturing the economic potential of such phenomena is turning an image or a brand into a signifier—a symbol of something. A picture of Adolf Hitler has come to make most people immediately think “evil,” although it seems just that no one profits from the association. By contrast, the image of Darth Vader leads just as directly to the same idea, but the character is a property owned by Lucasfilm. Snoopy the beagle has gradually become a platonic form, an image of fanciful fun, and that fact yields millions in licensing revenue every year for Snoopy’s owner, United Media. As this suggests, the intellectual property laws of copyright and trademark are a way to own and profit by some signifiers. You cannot own Hitler or the idea of a giant squid or driven snow. But you can own Darth Vader, Batman, or the Pink Panther, thanks to the federal laws of intellectual property.

Strong, enforceable ownership of characters is actually a relatively new phenomenon in the development of copyright law. In the days when heroes were historical or drawn mainly from books, the courts often denied ownership of characters, even ones as distinctive as Sam Spade, protagonist of The Maltese Falcon.¹⁵ But since the 1940s or so the courts have generally been more accepting of ownership rights, provided the characters meet certain marks of minimal delineation or distinctiveness. You cannot own a stock character, like the barroom brawler. But give him claws of adamantium, a distinctive look, and a few other specific traits, and you have the comic character Wolverine, one of the most valuable properties in film.^*

Legally speaking, it’s hard to be precise about the standard for what kind of character can be vested with copyright, but suffice it to say the standard is not onerous. Unlike a patent, a character copyright doesn’t require proof that you’ve invented something or effected a real innovation—minimal creativity will do. Nor is literary merit necessary—Grimace the Milkshake Monster resides safely in the protective realm of copyright. Characters are sturdy intellectual properties, whose ownership is protected by federal law. Their value can be measured and, by the device of film, increased.

So it was that in the first decade of the twenty-first century, many studios, almost in the manner of their contemporaries among real estate developers, would spend most of their time and money looking for properties ripe for redevelopment. They had tried selling stories, they had tried bankable stars. But by the 1990s, patience with plotting had reached a nadir and the salary demands of proven stars had reached a zenith. The coincidental revolution in digital technologies opened up the possibility for a much more notional type of film, in which dazzling effects and surreal imagery could serve just as well as, if not better than, absorbing narratives and memorable performances. By the twenty-first century, film would become much less predominantly a business of storytelling than it had been, and much more a species of advertisement, an exposure strategy for the underlying intellectual property. The exposure strategy also facilitated the globalization of entertainment media that had been under way for decades. While the export potential of the traditional sort of film, with its cultural particularity, was another unknowable quantity in the profit forecast, the new sort of film centered on literally cartoonish archetypes that traveled easily everywhere. And thanks to the accounting practices of conglomerates, the success of such a film was not reckoned based on its direct sales alone, but by its enhancement of the underlying property’s worth. The film was, then, to some degree, a kind of giant business expense as well as a product in its own right. It was a clever concept, to be sure, but also a very different approach to culture, one that has proved unrecognizable to many people over thirty, let alone the question of what the founders of Hollywood would have made of it.

By splintering opportunities for return on investment, the intellectual property approach has served the conglomerates as the ultimate means of risk diffusion in their entertainment businesses. Edward Jay Epstein, an expert on the strange economics of the film industry, explains the system very clearly. He points out that since the 1990s or so, the studios have considered box office receipts as far from the most important measure of how a film “does.” For it is outside investment partners that typically bear the risk at the box office. The revenue that matters to the studio, according to Epstein, is from everything else, including proceeds from the film itself in different media (DVD, cable video-on-demand, downloads, etc.) and in theatrical release around the world. But the studio’s mother lode of profit depends on the character copyrights, coming from the merchandising, spinoffs, sequel rights, and other “derivative works,” whose true value is never made public.¹⁶

That arrangement, Epstein suggests, makes the studio today more of a licensing operation than a filmmaking enterprise. It develops valuable properties and makes its money from licensing them in as wide a multiplicity of forms as possible. Such a view of filmmaking is a far cry from the essence of the medium since the rise of the studio. Whatever Michael Cimino may have had in mind when he created Heaven’s Gate, burning a brand onto the popular consciousness was definitely not it.

STRATEGY 3: MINE FESTIVALS

In 1989, the brothers Harvey and Bob Weinstein were the owners of a small independent distribution company named Miramax, whose success was mainly in distributing concert films. That year, however, they made an important bet. Based on its reception at the Sundance and Cannes film festivals, they theorized that the low-budget film Sex, Lies, and Videotape would appeal to enough people to justify the costs of national distribution. It wasn’t the traditional sort of Hollywood bet on a film to be made, but rather on one that already existed. But it was a highly speculative proposition all the same: with a production budget of $1.2 million, the film had a complicated plot centered on the subject of adultery and featuring a man who tapes women talking about their sexuality.

Sex, Lies, and Videotape was the test case of a third risk management strategy developed in the late 1980s and early 1990s, one that depended not on production but on discovering diamonds in the rough: films already in the can. The concept the Weinsteins pioneered looked primarily to film festivals—particularly Robert Redfford’s Sundance Film Festival in Utah, and for foreign productions, the Cannes and Toronto festivals—as a test market and hunting ground. Through leveraging, low-budget undervalued films would realize a very handsome rate of return on capital; but the festival approach was hardly as important an innovation in financial terms as the others we have discussed. Its true importance was rather in becoming perhaps the best means for foreign and artistically innovative film to reach a large audience.

The Miramax bet on Sex, Lies, and Videotape paid off, as the film made over $25 million in the United States alone. Of course, the Weinstein brothers were far from the first to turn low-budget efforts into gold. As we’ve already seen, it was a common operating move in the 1970s, when studios first funded productions by unknown independent filmmakers like Sylvester Stallone and Francis Ford Coppola. In fact, by the standard of Rocky or The Godfather, the success of Sex, Lies, and Videotape was quite modest. But since the failure of United Artists in the early 1980s and the rise of the media conglomerate, big investments in new directors had become increasingly rare.

The Weinsteins brought the model back, albeit with a twist. As we’ve said, they relied not so much on their own judgment, but on the collective judgment of critics, audiences, and industry insiders at the festivals. The institution of the festival—once the only exhibition chance for the potential art-house film, of which many were made but few were chosen—slowly evolved into something of a filter or wholesale market. Firms like Miramax, and its imitators like Sony Film Classics and Fine Line, began to see that by buying low and selling high, exposure to independent film could be profitable again.

There is a certain genius to the approach, which might be said to depend on the wisdom of crowds over the judgment of a single producer. Given the quarry, there may be no other realistic way of hunting for it: nearly ten thousand independent films are produced in the United States every year, and thousands more are made abroad. As with any other commodity, most are average or below average, but some will be brilliant; among that smaller cohort, an even smaller portion will have potential for popularity with the public. To find them oneself is to look for the needle in the haystack. The film festival, by happy accident of engineering, is a remarkably effective filter, with several layers of selection by festival staff, thinning the herd before the festival critics and filmgoers pronounce judgment. The process, obviously, isn’t foolproof; audiences in Sundance, Cannes, and Toronto are not a perfect proxy for the real world. But the festivals do deliver enough information to justify relatively small bets on films that have already been made and, to some extent, tested.

Consider the classic example of a film that broke through the Sundance model, Kevin Smith’s Clerks. The film portraying the life of a convenience store clerk and his friends was made on a budget of $27,000 and was shot, in black-and-white, in the very convenience store then employing Smith. Miramax was at first uncertain about the film’s investment potential. At Sundance, however, it proved a huge hit, and so the Weinsteins decided to buy it, paying $227,000. In theatrical release, it went on to make over $3 million—not a large number by blockbuster standards, but a great return on capital. Later, Miramax would invest more in Smith’s Chasing Amy, with even greater returns. The success of the follow-up of course meant further rental and residual revenues from Clerks. And meanwhile, in terms of cultural capital, Kevin Smith had been minted as an auteur, a bard of New Jersey culture.

The technique pioneered by Miramax in the 1990s was successful enough that within a few years, the media conglomerates began to adopt the model. Disney took the most direct route: it simply bought Miramax, while others built new boutique operations based on the same model: Sony Pictures Classics, Paramount Classics, and Fox Searchlight, among others. But as we have said, the primary benefit of this approach was artistic rather than financial. As with so many small-scale methods, once taken up by a conglomerate, the pressure was on for what in network engineering is called scalability. There are only so many films made for $20,000 that can be turned into a multi-million-dollar box office result. As a consequence, a certain amount of, as it were, ersatz Indie product has been marketed: pictures that resemble quirky successes without quite having a unique soul of their own.

THE MEDIA CONGLOMERATE IN THE TWENTY-FIRST CENTURY

By the year 2000, the form of the media conglomerate had reached its maturity and logical perfection. What had started as an impulse to group media concerns with other types of businesses had by virtue of the intellectual property revolution reconfigured the landscape of information industries exclusive of telecommunications. The homogeneous giant enterprises that dominated the first half of this book had, by the 1990s, given way to a gang of octopuses owning properties diversified mainly across media industries, typically holding a film studio, cable networks, broadcast networks, publishing operations, perhaps a few theme parks. The conglomerates added a management layer above the media firms, unifying their efforts by little more than a common name and the fact that, in some loose sense, they all trafficked in information.

Disney, once dedicated to its core brands (Mickey Mouse, Donald Duck, Snow White, and the rest), turned itself into a true media conglomerate, with completely unaffiliated holdings such as ABC, ESPN, and Miramax fulfilling an imperial dream of Michael Eisner while creating in Roy Disney’s eyes a “rapacious, soulless” abomination, though in the long run a quite profitable one. General Electric, the industrial conglomerate founded by Thomas Edison, having sold off RCA in 1930 bought back NBC and its associated properties in 1986, launching CNBC in 1989. It would later take over Universal Studios, joining Disney and Time Warner as one of the three players with holdings in every major entertainment sector: films, characters, television stations, publishers, theme parks, and recording labels. Meanwhile, Gulf & Western, another 1960s conglomerate that had started in 1934 as the Michigan Bumper Company, bought Paramount, remaking itself in the image of Warner Communications as Paramount Communications, an effort that would founder, resulting in the company’s sale to Viacom in 1994. In 1989, Sony bought Columbia Pictures and CBS Records, trying to create the first Japanese version of a Ross-style media/industrial conglomerate, with mixed results.

We have seen that size now and again attracts the notice of the federal government, and one might well wonder whether the Justice Department or FCC, noticing these new giants walking the earth, might have considered breaking them up. Once upon a time, the government had indeed been vigilant about discouraging, if not blocking, cross-industry ownership, but by the 1980s and 1990s, with the rise of antiregulatory sentiment, those days were over. Some restrictions did apply, as related to, say, acquiring concentrated holdings in a particular medium in one market. But as the conglomerates mainly sought holdings in unrelated markets—for instance, magazines and film—resulting in no price fixing or monopolies in any particular market, no Sherman Act alarms were sounded. The conglomerates therefore grew unmolested, with minimal oversight, through the 1990s, until they owned nearly everything. The only exception, as we shall see, was the world of the Internet and computing; but that seemed only a matter of time.

As a coda, let us consider one story of a better life through the corporate chemistry of the conglomerate, a twenty-first-century entertainment parable that avoided tragedy, indeed has a happy ending, thanks to creative risk management. Released in 2007 by Universal Studios, Evan Almighty concerns a man with a Noah complex: he is driven to build an Ark to save the world’s animals from a coming flood. Like many a prudent production of its time, the film was a sequel; it was developed to get another bite of the apple that was Bruce Almighty, the highly profitable film starring Jim Carrey as a man given God’s powers for a week. Evan starred Steve Carell, a sensible choice since he was by then a bankable star, having succeeded with The 40-Year-Old Virgin and, on television, with The Office. The script was written and rewritten by numerous writers, minimizing the risk of relying on the judgment of a single author. While the film, unfortunately, had no protectable intellectual property of which Universal could take possession, it was at least based, however loosely, on the Bible, a proven bestseller even if its copyright had lapsed. Based on these precautions, the studio ultimately invested $175 million in the production, making it, at the time, the most expensive comedy ever.

Unfortunately, the film had all the right ingredients but one: it wasn’t any good. The influential critic Richard Roeper excoriated it as “a paper-thin alleged comedy with a laugh drought of biblical proportions, and a condescendingly simplistic spiritual message.”¹⁷ On Rotten Tomatoes, a popular website aggregating reviews, the film garnered an embarrassing 8 percent positive response. Despite an extensive marketing campaign, and a national opening on 5,200 screens, Evan Almighty made just $30 million or so its first weekend, pitiful by blockbuster standards. For all of these reasons, it would find distinction on Rolling Stone’s list of the worst films of 2007, and many other lists of notable bombs.

Yet here is the miracle: the bomb went off, but it did no damage. There was no collapse of Universal Studios, and few lasting consequences for anyone involved with the project. Life went on basically as before at Universal, and more important, at General Electric. The failure of Evan Almighty, a bona fide disaster for Universal, was but a rounding error in the performance of General Electric, with revenues of $168 billion that year.

The immediate failure, in short, went unpunished. Even more remarkable, over time, through DVD sales and foreign box office, Evan Almighty actually came close to the break-even point, this even though no one had anything good to say about it. Had it been the type of film that lent itself to merchandising and licensing income, it is possible that Evan Almighty could have made a healthy profit despite the fact of being, as a film, unequivocally lousy.

It is instructive, and rather disheartening, to compare the failures of Evan Almighty in 2007 and Heaven’s Gate in 1980. As a consequence of Heaven’s Gate, Michael Cimino was effectively exiled, never allowed to make another major film, and the director-centered system he and others of his stature had embodied was severely discredited. In contrast, despite the failure of Evan Almighty, the system that produces films like it carries on unperturbed, because in financial terms there was little real damage. Evan Almighty, in this sense, is proof of how secure the studio structure now is. Mediocrity safely begets mediocrity: behold the true miracle of the modern entertainment industry.

* In his book Anderson also pointed out that contrary to popular belief, there was as much revenue available in the “tail” as the “head” of customer demand; that is, a business could do well offering a great variety of less popular products instead of just a few highly popular ones.

* The fact that Thomas Edison’s General Electric now owns Carl Laemmle’s Universal Studios is an irony appreciated only by film historians. It is the revenge of the Edison Trust, one century later.

* Strictly speaking, Hollywood’s reliance on star-centered films was pioneered by Adolph Zukor in 1912 with Queen Elizabeth and continued with Mary Pickford; it was based on this strategy that Zukor called his production studios “Famous Players.”

* Lawyers generally argue the opposite: that using a brand name too much destroys its value, because it makes the underlying trademark generic (as when one asks for a Kleenex or a Xerox, instead of a tissue or a photocopy), and therefore unprotectable as a matter of law. This helps explain why lawyers often don’t get along with marketing people, as the latter always favor maximum exposure of the brand.

* As Judge Hand put the point, “If Twelfth Night were copyrighted, it is quite possible that a second comer might so closely imitate Sir Toby Belch or Malvolio as to infringe, but it would not be enough that for one of his characters he cast a riotous knight who kept wassail to the discomfort of the household, or a vain and foppish steward who became amorous of his mistress.” Nichols v. Universal Pictures Corp., 45 F. 2d 119, 121 (2d. Cir. 1930).