Analysis of the American motion pictures industry gives ground to conclude that there exists a strong tendency toward oligopoly market structure, i.e. concentration of resources, influence and power in the hands of several corporations. This trend exists for almost a century, yet in 20-s years of XX century the movie production market was dominated by 8-6 major companies. Thus, these several companies that define Hollywood competitive landscape have been on the market since the times of Great Depression. These companies have survived the world wars, recessions, innovated color and wide-screen technologies and dealt with advance of over-the-air and cable television and home video. All these factors, including other technological, economic and social changes of American and global landscape did not influence major Hollywood companies in drastic way. Actually, the studios have become even more powerful. In this regards, the list of the main Hollywood players of 1990s doesn’t significantly differ from that compiled in 1930s with the rare exception that happen due to extraordinary circumstances, such as RKO, which left the movie-making business in 1950s. Then, in 1940s and 1950s, the film production, distribution and film exhibition was dominated by five largest companies: Paramount Pictures, Loew’s (parent company of MGM), Fox Film (later called Twentieth Century Fox), Warner Bros. and RKO (Compaine, Gomery, 2000). These companied did not only rule Hollywood, but conducted their operations around the world and thus were strongly vertically integrated enterprises. They owned most famous movie theaters. During the past century, the American movie industry has undergone significant changes, but still it preserved its main trend – concentration of ownership in the hands of few major companies that remained relatively constant throughout these years. The industry has undergone such stages as oligopoly of vertically integrated studios, the rise of MPEAA as main international cartel that supported that oligopoly and consisted of American firms, the downfall of vertically integrated major studios, the rise of independent movie production, the concentration of influence and power in several major producers/distributors, the acquiring thereof by multinational corporations and conglomerates linked with theatre chains, large electronic media corporations, including cable, broadcast, satellite TV networks, and video rental companies.
Today, the major movie production companies are called the Big Six and include (with relevant media corporations owning them): Twentieth Century Fox (owned by News Corporation), Paramount (Viacom), Warner Bros. (Time Warner), The Walt Disney Company, Columbia (Sony), and Universal (Matsushita/MCA) (Davis, 2002). These companies, as seen, entered major diversified multinational media conglomerates.
Motion picture Industry overview
Since its establishment in 1923, The Walt Disney Company has remained committed to producing unique entertainment and motion pictures products on the basis of its exceptional storytelling and rich legacy of creative content (Compaine & Gomery, 2000). Today, Disney Company comprises four major business segments: Studio Entrainment, Parks and Resorts, Media Networks, and Consumer Products with the first segment pertaining to motion pictures production industry. This unit, the Studio Entertainment, is the foundation of the company and is the very heart of Disney company due to its function of creating animated and motion pictures. Walt Disney extensively used television to promote its pictures. After his death in 1966, the company was managed by his heirs. The drastic change was brought in 1984, when Michael Eisner became the company CEO. Eisner with the help of Jeffrey Katsberg added new brand named into the company – Touchstone and Hollywood Pictures, and the success of the company began (Kindem, 2000). In 1987, Three Men and a Baby acquired more then $100 million in domestic box office sells, which was the first time Disney passed that $100 million mark. Michael Eisner was CEO of Disney for nearly then two decades, and made the company a well-oiled machine, fashioning films in what many call almost paramilitary order. Disney issues its films under various brands including mainstream Hollywood Pictures, Touchstone Pictures, or Miramax division pictures and retains the status of major Hollywood power. In 1995, Disney acquired Capital Cities/ABC (Kindem, 2000). From the middle 1985 to the late 1990s the company broke profit records for all its operating timeline. During the 1990s, Disney became so successful that Eisner decided to switch from solely cartoon films to feature films. Eisner gathered over $1billion from outside investors for the aims of filmmaking. Also, Disney CEO pioneered real exploitation of home video medium. A new era for home video started in 1987 when Lady and the Tramp brought more then 2million in order even before shipping of single copy (Kindem, 2000). With renting tapes generating 90% of the company revenue, Disney placed Bambi and Fantasia into “video sell through” line. In that way, every family could purchase a copy of the film. Beginning from the Little Mermaid in 1989, Disney launched a series of new animated classics, including: Beauty and the Beast (1991), Aladdin (1992), The Lion King (1994), Pocahontas (1995), Toy Story (1995), and the Hunchback of Notre Dame (1996). In selling animated videotapes, Disney set records in the industry. In 1997, Disney announced 10-movie deal with Pixar Animation Studios, which was joint producer of Toy Story. In 1997, Walt Disney Company started transmitting its animated films of a newly acquired ABC-TV network. Once Esner took a position of CEO in 1984, the value of Disney Company stock rose from $2 billion to $50 billion. Still, this success was followed with a number of controversies. Eisner took risk through producing ‘green lights” films for adults through Miramax division of the Company. Miramax was acquired in 1993 for $80 million, and it increased releases of the company from 20 to 30 per year, and thus domestic grosses rose from $146 million in 1993 to $400 million already in 1997. Eisner was very proud of its new acquired Miramax brand. In his view, it gave the company new movie niche – “intelligent, hip cinema with an edge” (Kindem, 2000, 317). Yet, many corporate critics argue that this edge includes excessive violence, drug use and unnecessary sex scenes which does not conform with traditional image and reputation of Disney Company. Yet, by 1999, Miramax studio alone produced $125 million in pre-tax company profits. In this, Eisner again set a trend in motion pictures industry. Following him and encouraged by Miramax’s success, Time Warner established new niche brand, New Line, and Universal purchased October Films. Sony thus founded a Classics division, and Fox responded with creating Searchlight. These new companies were aimed at educated, film buff audience. A turning point came in 1996 when Miramax, with its English patient and Sling Blade, received the Academy awards. This proved that Miramax was not just respectable way to promote a new brand, but the very core of proper strategy to run media conglomerate- provide something for all audiences. In 1998, Disney produced four major hits: animated Mulan, Armageddon (produced by Touchstone, it set the mark as the highest live action movie ever released by Disney, earning $500 million in global box office), Good Will Hunting (Academy Awards Winner, Miramax’s al time box-office champion) and Scream, produced by Miramax as well. Though Eisner is no more CEO of Disney Company, its contribution to the development of the company cannot be undervalued.
Apart from Miramax, Disney Company operates such labels as Disney, Touchstone, and Hollywood Pictures, Walt Disney Television, Buena Vista Pictures Distribution, Buena Vista Home Video in Film and Television Industry. In 2005, the Walt Disney Studios reached 7600.00 M revenue.
AOL - Time Warner
In outlining history of AOL Time Warner as movie producer, it would be appropriate to refer to the history of Warner Bros. Studio and New Line Cinema rather then to AOL-Time Warner media conglomerate, since the whole conglomerate has numerous holdings pertaining to such media sectors as broadcast television, cable networks, magazines (Fortune, People, Sports Illustrated, Time, Weight Watchers, Asiaweek, Money), music(Warner Bros. Records, Ivy Hill Corp), publishing (Warner Books, Little Brown book publishers, History Book Club, others) that do not directly relate to motion pictures industry.
Warner Brothers was the family run company established in 1923 by Harry Warner and his brothers Albert, Sam and Jack. The innovation of sound actually brought success to the company, along with the fact that the brothers possessed nearly every large movie place in Atlantic region. While being moderately profitable in 1930s and 1940s, the company entered its prosperity age in 1970s, when Steven Ross fashioned Warner Communications as it is known today. The advance of television and suburbanization of America did not impact major movie producers in drastic way. With the downfall of RKO and prosperity of Disney, the Big Eight turned into Big Six only after the failure of MGM/UA, leaving Warner, Paramount, Fox, Columbia (later to be acquired by Sony), Universal and Disney as industry leaders (Kindem, 2000). Warner Bros became part of Time Warner in 1956, when two founding brothers sold their shares in the company to syndicate headed by New York Investment banker Charles Allen and Boston banker Serge Semenenko. In 1969, Warner Bros was purchased by Kinney National Services, Inc. It was the time when the company acquired modern shape under guidance of Steven Ross, who in 1989 merged the company with Time giving birth to modern Time Warner conglomerate. As the largest media company in the world, Warner Bros. had long success record. In late 1990s, the company encountered some difficult, not due to new owner, but due to conflicts and non-adaptability of Hollywood’s oldest studio executives, Robert Daly and Terry Semel. After they were fired in 1999, the company commenced new era of development. The Warner Bros. studio produces large number of motion pictures that were transmitted on television cable systems of the conglomerate with its HBO and other relevant networks. Structurally, Time Warner was arranged into four divisions: film and TV entertainment, publishing, music, and cable TV (Compaine & Gomery, 2000).
In movie production sphere, the company done well in the early 1990s but then proved weaker in sales. The Batman sequels, such as Batman returns and Batman forever, did not match the company expectations. In 1999, Warner has two hits, Analyze This and The Matrix. Most industry observers believed that the studio has long relied on a limited number of directors and producers, such as Clint Eastwood, to produce new hits. With firing of Daly and Semel, the group was refreshed with new producers and directors. Warner Bros. pioneered product placement technique according to which the studio sold companies ad places in upcoming movies. For instance, in 1998, Warner Broth released You’ve Got Mail which integrated this placement in the very title of the movie as it was based on American On Line (AOL) famous internet greeting. Actually, AOL co-starred with Mag Ryan and Tom Hanks. The movie frequently featured shots of AOL logo, its instant messaging template and its sign off the screen. In that way, the line of television with ads versus movies without ads blurred ad the bottom line of Warner Bros. increased (Kindem, 2000).
2004 was one of the most successful and history-making years for the company. It was the most successful year of the studio ever, with 3.41 billion in worldwide box office with $2.19 billion overseas receipts, which was the first tie the studio crossed $2 billion mark in international market. The reasons of such success were Harry Potter and the Prisoner of Azkaban, Ocean’s 12 and The Polar Express animated movie. In 2005, the studio kept leaderships with such films as Million Dollar Baby, Batman Begins, Charlie and the Chocolate Factory, Miss Congeniality 2, Dukes of Hazzard, Tim Burton’s Corpse Bride, Rumor Has It, and The Harry Potter and the Goblet of Fire (Time Warner Company Profile).
Another unit of AOL –Time Warner is New Line Cinema, by far one of the most successful independent film companies on the globe. Established 40 years ago, it aims at producing innovative, profitable and popular entertainment in creative environment. New Line Cinema is a pioneer in franchise filmmaking with Lord of the Rings Trilogy as the most successful franchise experience ever. Box Office receipts for All The lord of the Rings films totaled $2,9 billion. The final film of The Lord of the Rings, Return of the King, earned more then $1.1 billion at the worldwide box office since its release in 2003, and became the second highest grossing movie of all times.
In 2005, New Line achieved solid success with the summer box office earnings for Wedding Crashers and Monster-In –Law. These films have generated domestic box office receipts of $230 million. The company works on new movies to appear in the nearest future which include The New World, A History of Violence, and His Dark Materials. Among other recent hits on New Line are Elf and The Notebook.
Sony Pictures Entertainment has its roots in Columbia Pictures. The New Columbia was established in 1951 by brothers Harry and Jack Cohn who founded a subsidiary to Screen Gems to produce TV series and involved such producers as David Lean, Sam Spiegel, Otto Preminger, Fred Zinnemann, and Elia Kazan to create movie hits like From Here to Eternity (1953), The Caine Mutiny (1945), On the Waterfront (1955), and The bridge of the River Kwai (1957). In 1960s, prosperity of the company continued with such hits as Lawrence of Arabia 91962), A Man of All Seasons (1966), In Cold Blood (1967), Funny Girl (1968), and Oliver! (1968). The 1970s were not very successful, and in 1971 the studio lost $30 million. In 1980, Columbia, due to financial hardships, was sold to Coca-cola. Coke had unsuccessful experience in running the company, and subsequently resold it to Sony (Kindem, 2000).
Sony Pictures, a company of one of the largest global electronic manufacturers, merged with Columbia Pictures in 1989 in the framework of long-term experiment proving if it was possible to combine movie studio with a producer of mass entertainment. First, the results were poor, since Sony, just as Coca-Cola, did not have any comparative advantage in Holywood. Having bought Columbia, Sony acquired not only movie and TV studio, but huge library of about 3,000 movies and 23,000 television episodes. However, in early 1990s, Sony was not able to make the studio profitable. Moreover, Sony’s attempts to advertise Sony VCRs through films never worked, and in 1994 the company wrote off nearly $3 billion. Thus, Sony Pictures turned to merely operating the studio. In 1997, its invention showed results as it finished as one of the “top grossing Hollywood studios” (Kindem, 2000, 310). Hits of the company included Jerry Maguire, Men in Black, My Best Friend’s Wedding, and Air Force One. Though, heavily publicized Godzilla fail to return on investment as heavy TV advertising budget did not succeed in leading fans into theaters. In 1997, Sony reached box office revenue of $1 billion in North America in record time, which was the second best, after Walt Disney Company, result. Sony, in operating motions picture studio, established one trend in the industry: re-vertical integration with theatrical side. In September 1997, Sony Loews Theatre Exhibition Group theatres chain merged with Cineplex Odeon chained, establishing the second largest movie exhibition company in entire North America. This evidenced re-consolidation of movie exhibition side of cinema industry sector with a member of the Big Six. The chain promoted Sony products and demonstrate if the move might lead to greater sales.
In late 1990s, Sony shut down its specialized Triumph Films thus leaving Sony Classics as only specialized independent brand. The films produced by the company tend to be lower-budget movies focused at teenagers, or those picked up from independent producers. In 2004, SPE’s movie unit, Columbia TriStar Motion Picture Group, produced Spiderman 2, which was a huge success. SPE umbrella also hosts operations aimed at TV (Sony Pictures Television), digital (Sony Pictures Digital), and DVD and home video production (Sony Pictures Home Entertainment) (Compaine & Gomery, 2000).
In 2005, sales of SPE equaled $6,867 million (while its parent company, Sony Corporation of America, reported earnings of $67 billion).
Industry analysis of Disney, AOL - Time Warner, and Sony
Industry size is measured by the annual revenue of firms in the industry. Since all three companies analyzed in the current work, Disney, AOL-Time Warner and Sony are the members of the Big Six, a modern oligopoly setting trends in motion pictures industry, annual income of these three firms can be fair measure of industry size. Current revenue data are relevant only to those units within the three conglomerates which are directly involved in motion pictures production. Respectively, in Disney Company such unit is Disney Studios, in AOL – Time Warner – Warner Bros. and New Line, in Sony - Sony Pictures Entertainment. In 2005, Disney studios reached revenue number of $7.6 billion, Warner Bros. reached the point of $4.2 billion and Sony Pictures Entertainment 6.857 billion respectively. These are very good indices demonstrating, first of all, that motion picture production is powerful industry generating high profits, and secondly, that these companies are among leaders in their market with only Twentieth Century Fox, Paramount and Universal reaching their level of performance. At the same time, the figures show that Warner Bros. demonstrated the lowest revenue level this year as against to the last year. In 1990s and in 2000s, the Big Six experiences strong economic growth and acquires status of powerful multinational corporations. The Big Six form the core of the Mass Media globalization. According to Business Week ranking in 1999 of Top Global 1000, Walt Disney Company took 28th place, Sony 74th, and Time Warner ranked 105th. In their respective countries of origin, these corporations are doubtlessly among leaders.
It’s necessary to note that while in 1986 two largest companies, CBS and Capital Cities/ABC, took 10.5% of media industry revenue, in 1998, Time Warner and Disney, the members of the Big Six, possessed 16.4% of the revenue in media industry (not to mention inherently movie production industry segment, Kindem,2000).
The media industry and its motion picture production segment is highly dynamic and evolving, the revenue of the companies rises each year. According to industry growth scoring, motion pictures production can be defined as growing industry, and the indices of the leading companies confirm such assumption. Thus, both Warner Brothers and Sony Pictures Entertainment experienced growth in their income as compared to the last year in 5-6%. Disney Studios is the sole exception with its revenue growth as compared to 2004 totaling -12%. Though, this fact is due to high sales numbers in 2004 and doesn’t indicate industry decline.
For the period of late 1980-s-early 2000s the revenues in media industry grew more then four times, while the economy on the whole did not even double. This is very good sign of dynamic development. At the same time, it should be noticed that the rates of industry development are even higher then it might seem since the cost of movie production rises drastically as well. In 1997, the average cost of movie production jumped by 34% to reach $60 million. The drastic rise was not only demonstrated by Titanic (production cost amounted to $200 mil) or Batman and Robin ($125-150 mil), but such seemingly pedestrian movies as Postmen and Starship Troopers with average costs of nearly $100 million. Actors also were credited much more, with average salary of $15-25 million. For instance, Director James Cameron made about $100 million on one Titanic movie. With such costs and yet such annual revenues, there is a ground to state that the industry experiences solid growth.
Industry concentration measures the comparative power and importance of major firms in the industry. In motion pictures industry, major firms are very powerful. In fact, there is oligopoly market structure with main influence shared between six major movie producing and distributing companies: Twentieth-Century Fox( owned by News Corporation), Paramount (Viacom), Warner Bros. (Time Warner), Columbia (Sony), The Walt Disney Company, and Universal (Matsushita/MCA). It is evident that all these companies, except Disney, were purchased by large media conglomerates. Sony acquired Columbia, Seagram bought Universal, Viacom purchased Paramount, and Time merged with Warner. These six companies control 80-90% of the expanding motion picture industry in American market and a bit less worldwide. Almost every year, new companies, so-called bold pretenders, as Orion Pictures and New World in 1980s emerge, but very few survive the competition. One of the rare exceptions in the DreamWorks SKG, established in late 1990s, powerful company that managed to survive the challenge. As for all the rest, great numbers of independent companies have to seek distribution channels within Big Six to maximize their ROI or reach larger audience. The Big Six are competitors in producing the top hits, but at the same time they closely collaborate to make sure that the game remains among these companies. Each year, different company of the Big Six gets on top of revenue charts, but only they lead blockbuster hits in last decades. Time Warner was created by the $15 billion consolidation of Time and Warner, becoming the largest media company in the world. Yet, in 2000, with AOL – Time Warner merger, market capitalization of AOL-Time Warner reached recording sum ever – 250 billion as combined value of both companies. Sony, following the example, took Columbia Pictures, merged it with TriStar pictures to from Sony Entertainment, which comprises, apart from these two, Sony Pictures Classic, and Metro Goldwin Mayer (acquired in April, 2005) to form huge motion pictures corporation. At the same time, with all these mergers in action, the industry structure had little changed. The six Hollywood leaders – Warner, Paramount, Twentieth Century Fox, Universal, Sony and Disney – still define the trends in global motion pictures industry producers and distributors. American market of movie production and distribution was always oligopoly, but it’s since 1990s when the Big Six enjoys the greatest power and profits. To stay influential, each of the Big Six studios employed its own business strategy, reflecting financial condition and strategic goals of parent firm along with personality of studio CEO. Disney Studio is presented as perfectly oiled machine, producing films in almost paramilitary fashion. Sony was still seeking to conclude its grand experiment of making movie studio and electronics producer mutually profitable. With the change of business strategy, the corporation started to achieve real success. Its recent acquisition of Metro Goldwin Mayer is evidence thereof.
According to market share, Time Warner, Walt Disney and Sony are ranked 1st, 2nd, and 6th respectively in Film Producers as part of Global Top 50 Media Corporations. In domestic box office market share index, Disney, in late 1990s, took 21.9%, Warner Bros 18.7%, and Sony accounted for 10.9 percent. The other three companies, Twentieth Century Fox, Paramount and Universal, took 10.6%, 15.8% and 5.5% respectively. The power of the Big Six is evident in functioning Big Six trade association, The Motion Picture Association of America (MPAA), where these six companies deal with their common concerns, involving issues from movie rating to smoothing the way towards global distribution and protecting their copyrights worldwide.
Therefore, there is solid basis to state that motion pictures industry is characterized by high level of concentration.
Motion picture is a part of larger media industry. In its turn, motion pictures industry is divided into smaller segments including production (involving movie studios), distribution (marketing and advertisement) and presentation (theatrical exhibition and such windows of presentation as ancillary markets of pay TV and home video). The corporations like Warner Bros, Sony and Walt Disney comprise all three divisions, along with other unites of their operation, in thier globalized structure, therefore they can be claimed to have the strong hold on major film industry segments.
The term “industry structure” refers to both account of functions, interrelationships and form of individual elements, activities and organizations within a defined sector of the industry, and to so-called industry makeup: number of sellers, its size distribution, entry barriers and nature of the product.
As it was briefly mentioned above, the process of feature film creation is predominantly controlled by the Big Six, especially in what concerns distribution. These six companies control 80-90% of American movie market, and in most cases a feature film that aims at global audience must be “picked up” or “green lighted” by one of these six companies. Therefore the number of main sellers is small (6), and their distribution size is large as referred to in industry concentration section.
The process of creating film involves several stages: production, distribution and presentation. Production is primary and initial stage. Some companies in producing films work within Big Six, but the large number are “independent” producers or companies affiliated with market leaders.
Distribution phase is recognized by professionals as the key to corporate longevity. In fact, international distribution has become the basis of the power of Hollywood. In 1999, the overall advertising budget for motion pictures in the United States made up $2 billion. Presentation is often interpreted as solely theatrical exhibition, but also includes such presentation widows as pay TV and home video. To maximize their revenues, the major companies invented a system of classic price discrimination. This process involves opening feature with big premieres and publicity. Then they are available through other presentation windows.
Apart from these, the companies making the Big Six possess a number of other competitive advantages over their competitors. For instance, cross-subsidization allows big corporations with activities on various media markets, to direct profits from one area to another less successful one. Single-line companies do not have such possibility and thus don’t survive competition. Then, they employ principle of reciprocity in dealing with other members of Big Six for cooperation with other unites of media conglomerate. In the final run, these processes led to both horizontal and vertical integration of the Big Six. They drove considerable profits from such holdings as theme parks (Disney), recorded music (Time Warner, Sony, Seagram), and TV production (all the companies concerned). Each of these holdings helped the movie division. During 1980s and 1990s, the companies under consideration spent millions to acquire shares in movie theater chains, TV networks, cable television systems, and home video operations. Vertical integration is very advantageous from cost savings perspective, involving cost reductions for distribution and presentation phase, and, what is most important, the issue of market control. All three companies, Sony, Disney and AOL- Time Warner, keep strong hold on movie production market due to strong vertical integration and market positions. All these competitive advantages add up to the huge flow of revenues in major motion pictures production companies.
Robert E. Davis. The Instantaneous Worldwide Release: Coming Soon to Everyone, Everywhere. West Virginia University Philological Papers. 2002.
Gorham Kindem. The International Movie Industry. Southern Illinois University Press. Carbondale, IL. 2000. P. 328.
Benjamin M. Compaine, Douglas Gomery. Who Owns the Media?: Competition and Concentration in the Mass Media Industry. Lawrence Erlbaum Associates. Mahwah, NJ. 2000. P. 563.
Time Warner Company Profile. Retrieved from: www.ketupa.net/time.htm