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Final report hollywood cluster

  1. 1. 1 Hollywood Movie Cluster Analysis Hollywood Movie Cluster Analysis Ravi Kumar Joanna Zwirbulis Aleksey Narko Michał Goszczycki Eray Ersöz Warsaw School of Economics Microeconomics of Competitiveness 237481-0622 (licensed by HBS)
  2. 2. 2 Hollywood Movie Cluster Analysis I. Cluster Environment: US, California and LA 1. The United States economy and overall business environment The United States is considered to be the largest economy in the world with a GDP at purchasing power of 15.68 trillion and growth approximately 2.2% annually. The GDP growth rate has been changing significantly mainly due to the crisis that started in the U.S in years 2008-2009 and resulted in a enormous decline of GDP to negative 8.3% in 2009. However, the analysis of the GDP growth provided by the U.S Bureau Analysis of the Economy, suggests that the economy in the United States is gradually improving and in 2013 GDP growth rate expanded at the rate of 4.1%.1 GDP is comprised of three main sectors: services, industry and agriculture. The United States has one of the most diversified and most technologically advanced economies in the world. 40% of GDP is created by finance, insurance, real estate, rental, leasing, health care, social assistance, professional, business and educational services. Retail and wholesale trade account for another 12% of wealth, while the government related services involve 13%. Utilities, transportation, warehousing and information account for 10% of the GDP and manufacturing, mining, and construction constitute 17% of the output. Agriculture fuels only 1.5% of the U.S. GDP, yet due to the use of advanced technologies, the United States is a net exporter of food. Trading Economics. U.S Bureau of Economic Analysis. United States GDP Growth Rate. Available at 1
  3. 3. 3 Hollywood Movie Cluster Analysis (U.S. Bureau of Economic Analysis)2 According to Global Competitiveness Index the U.S. is ranked 5th globally in years 2013-2014 and 7th in years 2012-2013. 3The US market counts nearly 317 million consumers, which makes it one of the largest markets in the world. Even though US population contains only 4% of the entire world population, it’s GDP accounts for 26% of the world’s total economic output. The United States dominates in wealth. One third of the world's millionaires and 40% of the world’s billionaires live in the United States, making it the wealthiest nation in the world.4 Being one of the richest and largest countries in terms of population, places the U.S. market in a very dominant position. In order to analyze the US economy, it is also necessary to mention it’s key sectors such as consumers, businesses, government, trade, labor and inflation. Even though they are all playing a significant role in US economy, consumer spending is a sector, which seem to have a major importance when speaking of the United States and it’s historical and current situation. Consumer spending makes up 70% of all spending in the US economy so an improvement in the economic and financial well - being of the households contributes to gains in the broader economy. According to Economic Forecast Industry Outlook 2013-1014 consumer spending on durable goods, especially cars and trucks over each of the past three years continued to grow by approximately 6%. Speaking of consumer spending in the US, it is also relevant to refer to Rostow’s Stages of Growth Model. According to the American economist, the 5th stage of growth model, called “the age of high mass consumption” perfectly summarizes the economy and the population of the United States and indirectly explains it’s competitive advantage in entertainment industries such as Hollywood movies. According to Rostow’s model, this type of economy is consumer oriented and dominated by services. Furthermore, there is a widespread and normative consumption of high-value consumer goods (e.g. automobiles) and typically consumers have disposable income, beyond all basic needs, for additional goods. Here, a country's economy flourishes in a capitalist system and is characterized by mass production and consumption. Historically, the United States is said to have reached the stage of high mass consumption first, followed by other western European nations, and then Japan in the 1950s. The U.S’s economy is considered to be the largest manufacturer in the world, producing a fifth of the US. Bureau of Economic Analysis. Available at: Global Competitiveness Report 2012- 2013. Available at: Global Competitiveness Report 2013-2014. Available at: 4 10 Largest Economies in the World. Available at: 2 3
  4. 4. 4 Hollywood Movie Cluster Analysis entire world's manufacturing output. The largest manufacturing industries by revenue consist of steel, petroleum, aerospace, automobiles, telecommunications, chemicals, electronics, food processing, consumer goods, lumber, and mining. It is 3rd biggest oil producer and the second biggest natural gas producer. The U.S. exports totals $1.612 trillion and its imports equals $2.357 trillion. United States is also regarded to be one of the most influential and biggest financial markets in the world. More than half of the currency reserves around the world have been overwhelmingly invested in the U.S. dollar, as opposed to the euro. More than one-fourth of the 500 largest firms around the world have their main headquarters in the United States. The American economy is a free-market, private enterprise system that has only limited government intervention in areas such as health care, transportation, and retirement. American companies are among the most productive and competitive in the world. In 1998, 9 of the 10 most profitable companies in the world were American (even the non-U.S. exception, Germany's Daimler-Chrysler, has a substantial part of its operations in the United States). Unlike their Japanese or Western European counterparts, American corporations have considerable freedom of operation and little government control over issues of product development, plant openings or closures, and employment. The United States also has a clear edge over the rest of the world in many high-tech industries, including computers, aerospace, and military equipment. In the Global Competitiveness Report 2013-2014, the U.S. ranks as 7th best innovative market on the global scale. It is very strong in capacity for innovation (5th), companies spending on R&D (5th) and Universityindustry collaboration in R&D (3rd), availability of scientists and engineers (6th). 5 Despite its impressive advantages, the American economy faces a number of problems. Due to the financial crisis and the recession that hit the US market in 2008, the U.S. economy is still trying to recover, and in fact recovers very slowly. The areas that are still suffering include mostly: budget deficits, growing gap of inequality of wealth within the Americans, high unemployment rates, ineffective government, etc. 6 Despite signs of recovery and growth the US has not returned to pre-crisis labor-market performance. Despite rising employment growth and falling unemployment, the U.S., whose labor force of 155.6 million is the world‘s third largest behind China and India, is still estimated to have 7.3% unemployment according to data from August 2013. The unemployment varies by state, however it is estimated that approximately 300,000 or more new jobs a month need to be created to bring unemployment down with the speed desired. Global Competitiveness Report 2013-2014. Available at: 6 What the Current Economic Outlook Means for American Families. Economic Outlook for 2013. Business&Money. January 16th 2013. 5
  5. 5. 5 Hollywood Movie Cluster Analysis Source: Budget problems remain the most significant concerns to faster growth of the United States. Despite the fiscal cliff deal that reduced deficit almost $1.1 trillion last year, it had very small impact on recovery. Deficit still needs to be reduced by approximately $300 billion a year. This, however, means further spending cuts and tax hikes that will be a drag on the economy. The public debt constantly increases and in October 2013, reached the level of $17 trillion.
  6. 6. 6 Hollywood Movie Cluster Analysis 2. The US Diamond Analysis To explain the national environment and competitive advantage of the United States, we use Porter’s Diamond. It consists of four main attributes, such as Factor and Demand Conditions, Supporting Industries and Firm Strategy & Rivalry that all together reflect the country’s strengths and weaknesses in comparison to other nations. The diamond helps to understand the framework for businesses creation and clusters development in the United States. However, it also summarizes the flows that impact the competitive advantage of the country. The numbers in the parenthesis explain the global rankings in the Competitiveness Report. Availability of the latest technology (6th) Infrastructure (15th) Availability of research and training services (9th) Geographical condition (climate and topography) Intense local competition (14th ) Firm Strategy & Rivalry Ease of doing business (4th) Economic Freedom (10th) Labor market efficiency (4th) Macroeconomic environment (117th) Institutions (35th) Inefficient government & bureaucracy Total Tax rates/ % Profits (101th) Factor Conditions Demand Conditions Cluster Development (6th) Strong Innovation & R&D Financial market development (10th) Budget deficits/ General debt (140th) Supporting Industries Leader in the market size (1st) Innovation (7th) Business sophistication (6th) Buyer sophistication(9th) High mass consumption
  7. 7. 7 Hollywood Movie Cluster Analysis 3. California Business Environment With $2.0 trillion GSP and income per capita of $44 000 California has the most powerful state economy in the US and 8th largest economy in the world behind Brazil and in front of Italy (by Gross Product Comparison). State economic performance is based on the growth rate of 3, 5% in 2012, which is the 5th best in the country, the largest employment growth since 1990 of 3.3% and high innovativeness, ranking 4th in science and technology, 1st in the number of patents granted in 2010 and 3rd in start-ups among the 50 states. The cluster base of the state is also one of the most powerful in the US (Appendix 1). In spite of the fact that California has a very powerful economy it is still experiencing problems. Some of them are:  Barriers to doing business. Small Business & Entrepreneurship Council organization ranked California 45th among 50 states considering entrepreneur-friendly business environment. Approximately 254 business decided to leave California in 2011, which represents a 26% increase compared to 2010. The reasons for this are not only taxes, but also regulatory restrictions, legal costs, and energy expenses.7  High unemployment rate. 48 out of 50 states of the US have a lower unemployment rate than the “Golden State” with its official 8,9%8  Problems with law system discouraging businesses from locating in the state.  Negative Migration. People and companies, due to different issues tend to leave the state. In 2011 for every 100 people who moved in to California 120 moved out. The reasons for migration are mostly high costs of living and rent as well as high taxes.9  Controversies around state budget. With Jerry Brown- , the California’s longest serving governor at the top, “Golden State” budget is showing 1, 1 billion surplus in 2013. However, this figures are very controversial, due to the fact of the “Wall of Debt” around 27 billion, which is not included in the budget.10 Cochran,S., California Business Climate in the Eye of the Beholder., Available from: Morgan,H., Fix California and the country will follow., Available from: 9 Kolko,J., Trulia Trends, Why Do People Leave California?, Available from: 10 Del Beccaro, T., Jerry Brown Stands Atop California’s Collapsing House of Cards. Available 7 8
  8. 8. 8 Hollywood Movie Cluster Analysis 4. Los Angeles Economic Environment Los Angeles City is the most populous city in California and second when it comes to the country ratings. With a population of 3.85 million people in 2011 the city is governed by a mayor-council system with 15 districts and occupies the area of 1200 square kilometers. Los Angeles is a very multiethnic city and one out of two cities in U.S. without a majority population. People from 140 are calling the city as their home including: Hispanic or Latino (of any race) 48.5% , white, non-Hispanic 28.7%, Asian/Pacific Islander -11.4%, African-American - 9.6%, American Indian/Others1.8%. About 75% of the population has a high school diploma, while 28% holds a bachelor's degree or more. Los Angeles is the largest manufacturing sector in US with more than 430 000 workers in 2008 - more manufacturing jobs than the state of Michigan. The city has the nation’s largest customs district in the country including the ports of Long Beach and Los Angeles, Port Hueneme, and Los Angeles International Airport. This allows the city to benefit from trade and tourism and host more than 6 million international tourists yearly.11 Comparing the economy of the world’s top 20 countries; the five-county area of Los Angeles ranks at No. 16 and Los Angeles County itself ranks at No. 21. Los Angeles has a great support infrastructure for doing business, including different entrepreneurial trainings at UCLA and USC (University of Southern California) as well as a good network of small business development centers. Los Angeles county payroll employment numbered 3,856,800 in 2010 with an annual average wage of $53,143.12 Main clusters of the county include: Entertainment, Hospitality and Tourism, Business services, Distribution Services and Education. The main clusters in terms of employment and their national ranking are presented in Appendix 2. 11The Kyser Center for Economic Research, 20 Reasons to locate your business in Los Angeles county. Available from: 12 Discover Los Angeles., Facts about Los Angeles., Available
  9. 9. 9 II. Hollywood Movie Cluster Analysis Motion Picture Industry Nowadays almost everyone is watching movies. It is one of the greatest providers of entertainment for people of different ages all over the world. According to the Entertainment Economy Institute it is estimated that consumers spend around 5, 5% of household income on entertainment which is close to 5, 9% spent on healthcare.13 At the time when other means of entertainment appear very quickly, people are still spending a considerable amount of their time on watching films at home, buy DVDs, watch in the internet, go to the cinemas, and buy toys for their kids from favorite cartoons, soundtracks and all kinds of merchandise. At the beginning of the 20th century Hollywood merged with the city of Los Angeles and soon after that the motion picture or film industry started to emerge. While Hollywood, municipality of Los Angeles is still the biggest center of motion picture industry not only in the US, but all over the world, there are other big players at that arena, such as Hong Kong and India in Asia and Germany, Spain, Italy and France in Europe. 1. Short History of Motion Picture industry. History of cinematography dates back to antiquity and human interest in communicating with shadows and light. The first camera, ever projected, was camera obscura- sunlight, passing through a small hole, projected an inverted image on the wall of a darkened room. It was done long time ago by Aristotle. Later, in 1545 first drawing of the camera was drawn by Gemma Frisius. The occurrence of camera obscura has led to the development of the first photographic cameras. During this time it was simply the light, coming inside of the box and strucking a sensitive solution on a glass, metal, or paper base. The first practical photographic system was created in 1837 by Nicephone Niepce and Louis Jacques. It was recording sharp, simple images on silverized copper plates. In 1872 the first recorded attempt of the motion picture photography was made by Eadweard Muybridge. Californian Governor Leland Stanford hired him to win a bet and prove that there are moments during the horse race when the animal has all of its feet off Milnes,A.K., The Big Picture: Economic and Workforce Trends in Entertainment. Available from: 13
  10. 10. 10 Hollywood Movie Cluster Analysis the ground. Muybridge installed 24 cameras up in a row along a racetrack and was making photos one by one to prove that the governor is right. At the end of 19th century first primitive motion pictures started to appear. They were created by brothers Lumiere in France and Thomas Edison in the United States. They usually emphasized only the movement such as men playing cards, street vendor selling his wares or waves crashing at the ocean. At the very beginning it was a simple motion reproduction, however in 1903 Edwin Porter has created a first “story-telling movie "The Great Train Robbery". Many of this time motion picture creators wanted to produce even more complicated movies in spite of one-reelers and limited storytelling cuts, however the industry was controlled by the owners, resistant to any changes, who owned the machinery, patents and distribution channels. Therefore many dissidents left the East and moved as far as they could - to Los Angeles. After the First World War many powerful European countries such as UK, France and Germany started to develop their own motion picture industries. After the Second World War Asian players appeared in the motion picture production. These were Hong Kong and India, with its Bollywood production with movies, mostly produced for domestic purposes. The popularity of movies continued to increase with the appearance of sound in the motion pictures. Since then the industry was changing rapidly. In 1945-1948 90 million tickets were sold to the cinemas each week, however in 1960s this number dropped by half. The reasons for this were the changes in the industry such as the appearance of TV sets, innovations (such as wide screen cinemas and 3d movies in 1950s), emphasis on blockbusters and formulas (since 1950s segmented or niche movies started to be created)14. Despite all the changes in the industry and many decades since the appearance of the first motion picture the key point hasn’t changed – the superiority of Hollywood and US in the movie production sector. 14 The History of Motion Pictures. Available from:
  11. 11. 11 Hollywood Movie Cluster Analysis 2. The motion picture industry market and value chain The way of the movie starting from the idea to the final consumer is very long and complicated, even a small movie-project consists of several steps. Many of them are different depending on the type of movie being created,which can be seen from the example of Canal+ Advertisement at Appendix 3. The value chain of today’s movie industry is much more complicated compared to what it was at the early stage when motion pictures used to have a fairly simple business model. Whole process of movie planning, budgeting, pre and postproduction as well as distribution is kept by the studios behind the closed doors. Nevertheless, any film goes through almost identical value chain as any other consumer product. Whole process of movie creation starts with production.15 This stage is divided into 4 parts. Development – finding an idea continuing with the process of writing a script and finally pitching it. The idea can be taken by the project producer from the play, book, film, true story or an original one. Stage of pre-production which consists of developing, planning and visualizing the idea. During this stage budget for the movie is being prepared, members of the crew are hired and the schedule is made. This process continues with production which includes: working with cast and locations, reviewing the footage and shooting the scenes and finishes with post production when the film is being edited, and music, titles and special effects are added. Jehoshua.E.,Elberse,A., Leenders Mark A.A.M., The Motion Picture Industry: Critical Issues in Practice, Current Research, and New Research Directions. Marketing Science., Vol. 25, No. 6, November–December 2006, pp. 638–661 15
  12. 12. 12 Hollywood Movie Cluster Analysis Next is the Distribution phase16. At this point the distribution studio is signing a licensing agreement with the distribution firm. Distribution company decides how many copies of the motion picture to make and takes the finished product to the theatres, television, home video, internet and other venues for final consumers to watch it. Another level of the value chain is exhibition which is basically the issue of where, why, and how people have come together to show and watch films. There is a comment about this process:” Theatrical exhibition is the major factor in persuading the public what they want to see, even if that public never sets foot inside a motion picture theater. And how well and how long a picture plays in theaters has everything to do with its value in other markets" (Daniels, Leedy and Sills, 1998, p. 34). Exhibition is also about time, when the movie is shown at the cinemas or appears for the first time in the Internet. It is about the techniques and technologies used to show the movie to the customer: 2dimensional, IMAX or 3d. The last stage of the motion picture value chain is consumption of the final product after the theatrical release. Most of the movies, even the most popular ones, would hardly be able to bring back the money invested in the previous stages of value chain only from the first market. Distribution of the films on DVD and CD, broadcasting and Merchandising nowadays provide more revenues than theatrical releases. Some sequels like Batman, Harry Potter or Star Wars can easily raise millions to the studios long after the movie release dates. However, in most of the cases studios are licensing the characters to tshirts, toys, cups or other merchandise manufacturers for fees and percentage of retailers even before the movie is shown. Therefore, in such examples, as the ones mentioned above, as much as 40% of the motion picture merchandise is sold before the movie release. The amount of revenues are getting from merchandise can be sky high. In the case of the Lord of the Rings Trilogy the merchandise is said to have attracted more than 1.2 billion dollars.17 Motion Picture Association of America. The Economic Impact of the Motion Picture & Television Industry on the United States.April 2009. Available from: 17 The Merchandising process., Advamag Inc., Available from internet encyclopedia: 16
  13. 13. 13 Hollywood Movie Cluster Analysis 3. The US motion picture industry domination. Although France was a dominant player at the motion picture industry market before the 1st World War, it lost its share later on, while US was gaining power and was able to get an influential position at the European market. In 2007 the industry was responsible for 2,5 million jobs in US and 41 billion dollars in wages as well as 13$ billion in income and sales taxes. United States and Canada were the absolute leaders when it comes to the markets of the box office with 10,8$ billion, five times more than the closest competitorChina and one third of the whole amount. During the period of 2005-2009 US produced half the number of movies produced in Nigeria and India separately (around 554), however much more money was invested in the production of the motion pictures compared to the competitors. The most powerful motion picture distributors which include Dreamworks, Paramount Pictures and Walt Disney Pictures are also originating from the United States.18 III. Analysis of LA motion Picture Industry Cluster For almost a century, the Los Angeles was the biggest market of the world motion picture production. Before starting to analyze cluster, let’s have a look at a short history of Hollywood and its performance over recent years. History of Hollywood From 1910, movie companies started to move from the New York area to Hollywood because of weather. In Hollywood, it was better to make outdoor shootings. And also labor costs was cheaper in California at that time than on the East Coast. Also there was another reason, Tomas Edison, who held the patents on the movie equipment of these years, employed a large group of lawyers to enforce these patent rights, and California was almost out of reach for them in the times before air travel. The producers had set up and elaborate system to hide either hide the equipment before the lawyers came by train or move quickly into Mexico. From 1927 until 1948, it was the “Golden Age of Hollywood” which were the years end of silent film. Major Studios which located in Los Angeles controlled the whole value chain film production to exhibition and consumption. Statistic Brain. Motion Picture Industry Statistics. Available from: 18
  14. 14. 14 Hollywood Movie Cluster Analysis The first Academy Award ceremony was held in 1929. The studios themselves owned most of the movie theaters around the country, so they could country so they could control every aspect from promoting and scheduling to ticketing. This system came to a sudden stop in 1948: The landmark Anti - trust decision in the case “United States versus Paramount Pictures” forced studios to sell their theaters and broke up the vertical integration. .19 Not only the legal decision, but also technological progress challenged the studio system: From the 1950s on, home television spread at a very high speed around the country. Reluctant at first, studios recognized that the additional outlet did not threaten the motion picture industry, but offered additional revenue. However, the quality of movies produced during the 1960s was considered lower than in previous decades. The studios overcame this crisis from the 1970s on, when the “New Hollywood” era brought about what was soon called “post-classical cinema”: The companies developed a mix of culturally influential blockbusters and high-quality independent movies that fascinated the audience worldwide. This time of relative comfort was soon to be finished, with the 1980s and newly available technologies such as VHS, which made household ownership of entire movies possible for the first time. Again, after certain difficulties, the industry managed to embrace this change and learned from its mistakes by actively pursuing the next step, the use of digital technology. The cluster expanded and approached its current shape, going far beyond studio and distribution companies to a broad range of supporting and related industries, especially in the technical fields. At the same time, certain activities were relocated: while conceptual work and post-production was still mostly done in the Los Angeles area, shooting often took place in locations all over the world, from Canada to the United Kingdom, New Zealand and Eastern Europe. However, the studio companies could not escape the concentration process in the media business: large media conglomerates now own most of them. 19 Motion Picture Assosiation of America, Available from:
  15. 15. 15 Hollywood Movie Cluster Analysis Description and mapping of the cluster The Motion Pictures Production and Distribution cluster has linkages with a variety of other clusters. Some clusters have direct linkages at the factor input level, e.g. sound recording, specialized training programs etc, while others are linked on the demand side e.g. home entertainment, theatrical venues. A number of clusters are linked relatively indirectly e.g. IT, tourism, fashion, publishing and personal services like spa, fitness etc. The Cluster Map above identifies the value chain as well as linkages with supporting industries. The LA economic area has the advantage that the entire value chain and its supporting clusters are present in this area, or very close in the case of IT (Silicon Valley). 1. Profile of the Entertainment Industry in Los Angeles Definitions of the entertainment industry vary depending on the area of focus, but in Los Angeles the entertainment industry invariably begins with motion picture production and a handful of other industry segments that have a long-standing presence in the area. Added to these are a number of related industries. For the purpose of this study, the entertainment industry has been defined to include the following: Motion Picture &
  16. 16. 16 Hollywood Movie Cluster Analysis Video-Related Sectors, Sound Production & Related Sectors, Radio, Television & Cable Sectors, Live Entertainment Sectors, and both the artistic talent and the business side of the industry. Many of the companies and individuals who are the driving force behind creative content, production, and distribution call Los Angeles County their home. The entertainment industry is big business in Los Angeles. In 2011, over 13,000 establishments generated 161,862 jobs and over $18.9 billion in payroll. Among these are globally recognized companies such as Paramount, Warner Bros., NBC Universal, and MTV. Within the industry, the largest concentration of activity may be found in the Motion Picture and Video Related Sectors. This sector accounted for the lion’s share of industry employment with 117,841 jobs last year and payroll totaling $11.3 billion. Establishments in this sector tended to be relatively fewer in number but larger in size. The average annual wage for this sector was $96,000, slightly below the average for the entertainment industry as a whole. 20The other sectors of the entertainment industry were considerably smaller in terms of employment, annual payroll, and, with the exception of Agents and Managers, the number of establishments. Average annual wages across CollegeGrad.,Motion Picture and Video Industries, Available from: 20
  17. 17. 17 Hollywood Movie Cluster Analysis different sectors varied widely, from $103,000 in Sound Production to $261,200 for Agents, Managers, and Independent Artists. With 161,862 wage and salary workers, industry employment was equivalent to 4.8% of Los Angeles County’s 3.3 million private sector workforce in 2011. Total employment in the entertainment industry was 16.9% higher in 2011 than it was in 2001, but fell 8.5% shy of peak employment in 2004 when 176,830 worked in the industry. While part of the decline in recent years may be attributed to the Great Recession, runaway production was also a likely contributing factor as motion picture and video production alone lost over 16,100 jobs from 2004 to 2011. In addition to wage and salary employees, the entertainment industry is noted for its reliance on free-lance talent. Freelance artists, writers, lighting, sound, and other production professionals, as well as agents and managers provide the industry a diversified labor pool. These individuals who are generally self-employed and have no employees numbered 85,032 in 2010, the most recent year for which information is available. 21 This segment of the labor pool has grown consistently over the past 10 years. Actors, writers, and other professionals in the entertainment industry are represented by an array of labor unions and guilds. The most notable is the Screen Actors Guild-American Federation of Radio and Television Artists (SAG-AFTRA), which resulted from the CollegeGrad.,Motion Picture and Video Industries, Available from: 21
  18. 18. 18 Hollywood Movie Cluster Analysis merger of those two entities earlier in 2012. Nationally, this organization alone represents over 160,000 actors, announcers, broadcasters, journalists, dancers, DJs, news writers, news editors, program hosts, puppeteers, recording artists, singers, stunt performers, voiceover artists and other media professionals nationally. Similarly, the International Alliance of Theatrical Stage Employees (IATSE) counts over 100,000 members in its ranks nationally. Other organizations include the Writers Guild of America, the Directors Guild of America, and the Teamsters, to name a few. Finally, several companies in the entertainment industry that are “household names” are located in Los Angeles County. These include Paramount, Warner Bros., Sony, NBC Universal, Walt Disney, ABC, CBS, and Fox. Most of these companies are located in Burbank, Universal City, Culver City, Santa Monica, and West L.A. Paramount is the only one of the six major studios that still calls Hollywood its home. However, Hollywood houses numerous independent studies, including: Sunset/Gower and Bronson Studies, Raleigh Studios, RED Studios, and Prospect Studios. As for the rest of the entertainment industry, local network and independent television and radio stations are located in several parts of Los Angeles (City), as well as Glendale and Burbank, while live entertainment venues are scattered throughout Los Angeles County, with the largest facilities including Staples Center in downtown Los Angeles and the Hollywood Bowl in Hollywood. 22 2. Economic Impact Analysis of employment, wages, and the number of firms for a given industry within Los Angeles County offers only a partial assessment of that industry’s presence and economic impact on the county economy. An economic contribution analysis goes beyond the industry itself and describes that portion of the county economy that can be attributed to an industry. The table used to determine the value of the industry’s contribution includes employment, labor income and the value of output. Employment includes full-time, parttime, permanent and seasonal employees and the self-employed, and is measured on a job-count basis regardless of the number of hours worked. Labor income includes all income received by both payroll employees and the self-employed, including wages and benefits such as health insurance and pension plan contributions. Output is the value of 22 Cluster Mapping., Entertainment Cluster, Available from:
  19. 19. 19 Hollywood Movie Cluster Analysis the goods and services produced. For most industries, this is simply the revenues generated through sales; for others, in particular retail industries, output is the value of the services supplied. The total impacts include direct, indirect and induced effects. Direct employment refers to the personnel hired by firms in the industry, including rank and file employees, administrative, management, maintenance, retail, food service, parking attendants and so on. Direct output is the value of the services provided by each business firm or entity. Indirect effects are those which stem from the employment and output in the industry’s supply chain. Induced effects are those generated by the household spending of employees whose wages are sustained by both direct and indirect spending. The entertainment industry accounted for 585,800 total jobs (including direct, indirect, and induced) in 2011, of which there were 246,900 direct jobs (wage and salary workers plus self-employed), 118,900 indirect jobs, and 219,970 induced jobs. Associated with these jobs is labor income of $43.3 billion, while the industry output amounted to $121.2 billion, both of which are measured in 2011 dollars. In addition, the industry generated $5.6 billion in state and local taxes. When placed in the context of the Los Angeles County as a whole, Entertainment Industry-related employment of 585,800 jobs is equivalent to 17.6% of the County’s 3.3 million private non-farm wage and salary jobs in 2011. The industry also generates over $120 billion annually in output, with $47 billion in value added that is directly related to the entertainment industry (the balance attributable to indirect and induced effects). The industry’s direct value added impact of $47 billion is equivalent to 8.4% of Los Angeles County’s estimated annual Gross
  20. 20. 20 Hollywood Movie Cluster Analysis County Product ($558 billion) in 2011. Spending by these businesses and their workers also yields nearly $6 billion annually in state and local taxes. 23 3. Major Hollywood Movie Studios In the North American, Western, and global markets, the major film studios, often simply known as the majors, are commonly regarded as the six diversified media conglomerates whose various movie production and distribution subsidiaries command approximately 90 percent of the U.S. and Canadian box office. Most of today’s companies have their own distribution networks that concentrate on arthouse pictures or genre films. The Historic M-G-M Studios (Now Sony Pictures Studios) The vast studios of Metro Goldwyn Mayer (M-G-M) were actually located in humble Culver City, some seven miles southwest of Hollywood & Vine, closer to Marina Del Rey than to Hollywood. The studios were born in 1915 as Triangle Pictures. The first building on the lot (the huge edifice fronting Washington Street, with its classical colonnades) was built before M-G-M even owned the lot. The studio became Metro Goldwyn Mayer in 1924. M-G-M was the most powerful studio in Hollywood, renown for the glossy, bright, technicolor style of its films, complete with lavish wardrobes, high priced sets, and an unbeatable stable of superstars. in 1985 to 1994, Sony Pictures recently invested $100 million to refurbish the historic studio and help restore some of the luster to the lot. They repainted every building, restored the original ironwork gates on Washington Boulevard, built new walls, added nostalgic Art Deco touches and false fronts on Main Street, and put up huge, hand-painted murals of old movie posters. Studio buildings have been named after film luminaries such as Frank Capra, Cary Grant, Spencer Tracy and Katharine Hepburn. The much needed facelift has made the old M-GM lot one of the most attractive in Hollywood. And considering that Sony wrote off $2.7 billion in losses in 1994, that was quite a laudable accomplishment. 24 In September of 2004, MGM announced that it would merge with Sony Corp. of America. In short, Sony bought MGM for $5 billion. Sony acquired MGM mainly in CollegeGrad.,Motion Picture and Video Industries, Available from: 24 Wikipedia., Major Film Studio, Available from: 23
  21. 21. 21 Hollywood Movie Cluster Analysis order to get the company's library of films, which is believed to be its most valuable asset. It constituted the biggest library of color movies in the world, including franchises such as "James Bond", the "Pink Panther" and "Rocky". 25 Paramount Studios Most of the major motion picture studios have fled Hollywood for spots like Burbank or Culver City. There is only one big name movie studio still actually located in Hollywood: the huge Paramount Studios. It also happens to be the longest continually operating studio in Hollywood. And Paramount is also one of the few studios that admit the public on regular guided tours of the studio's back lot. Paramount Studios began in 1913 in a rented horse barn near Sunset & Vine, and moved to its current location on Gower Street in 1926, into an existing studio which had been built in 1917. In 2005, Paramount bought out the DreamWorks studio, which became a unit of Paramount, and as a result has had additional successes with DreamWorks productions such as "Transformers" and "Shrek the Third". Paramount is a huge, sprawling studio, covering an area almost as big as Disneyland. At peak season, the studio employees over 5,000 people. Just driving around the outside of the studio walls will give you an indication of the studio's vast size. A tall water tower with the blue Paramount mountain logo still looms over the lot, a throwback to the days when the studio had its own fire department and hospital. Warner Bros Studios Warner Brothers, one of Hollywood's most famous studios, was founded in 1923 by four actual brothers: Jack, Sam, Harry & Albert Warner. The siblings never seemed to get along with each other, but Warner Bros Studios managed to produce some of the most memorable movies in the history of Hollywood, including the world's first "talkie" with Al Jolson, "The Jazz Singer" (1927), "The Adventures Robin Hood" (1938), "Casablanca" (1942), "Yankee Doodle Dandy" (1942), "Cool Hand Luke" (1967), Seeing Stars in Hollywood., The Movie Studios, Available from: 25
  22. 22. 22 Hollywood Movie Cluster Analysis "Deliverance" (1972), "The Exorcist" (1973), "Chariots of Fire" (1981), "Body Heat" (1981), and the current string of "Batman" films. 26 The first Warner Bros studio (where they made "The Jazz Singer") was located in Hollywood, on Sunset Boulevard, in what is now KTLA Television studio. In 1928, with the success of that famous Al Jolson talkie, Warner’s moved to this 110-acre Burbank lot, in the east San Fernando Valley, and it has been their home now for 70 years. 27 In 2001, the studio broke all records with the opening of "Harry Potter and the Sorcerer's Stone," based on the popular book about a boy wizard, and in 2011 released the final "Potter" film ("Deathly Hallows, part 2"). With a $967 million take, "Sorcerer's Stone" turned out to be the second highest-grossing movie of all time, behind only "Titanic", and the Potter series has become the biggest movie franchise of all time, with each episode making close to a billion dollars. At the same time, the studio hit with another hit franchise, with the hugely successful "Lord of the Rings" trilogy (from its New Line division). 28 In January of 2000, Warner Bros was purchased by America Online (AOL), in what was the largest merger in history. AOL bought Time Warner Inc., which also owns CNN and HBO cable services, and publishes Time, People, Sports Illustrated, Entertainment Weekly and Fortune magazines. AOL already owned Netscape, Compuserve, and Moviefone. The cost of the deal was 163 billion dollars. Universal Studios Universal Pictures is actually the largest film and television studio in the world, with 9,000 employees and a long and proud history of film-making. In fact, Universal Studios produced the two of the highest-grossing movies of all time, "E.T.: The Extra Terrestrial" and "Jurassic Park." Founded in 1912 by German immigrant Carl Laemmle, Universal Pictures built their giant hilltop studio in 1915, on the site of a chicken farm. To make a little extra money, they used to charge tourists 25 cents to watch the actual filming of silent movies, with Seeing Stars in Hollywood., The Movie Studios, Available from: 27 Wikipedia., Major Film Studio, Available from: 28 Seeing Stars in Hollywood., The Movie Studios, Available from: 26
  23. 23. 23 Hollywood Movie Cluster Analysis stars such as Lon Chaney and Rudolph Valentino on the sets. But the carnival barkerstyle of the tour guides proved too much of a distraction to the film-makers, and the tours were discontinued. Five decades later, though, the idea was resurrected with a vengeance. 29 In June of 2000, Universal was purchased by France's Vivendi. Four years later (in 2004), General Electric/NBC bought out 80% of Universal, and the company was then referred to as "NBC Universal". Seven years after that, in 2011, NBC-Universal was purchased by the cable giant, Comcast. DreamWorks Studios In December of 2005, DreamWorks was purchased by Paramount Studios for $1.6 billion, effectively ending DreamWorks' 11-year run as an independent studio. DreamWorks was never able to produce enough films to cover the high cost of being their own distributors. The move will allow Paramount to increase the number of films it releases each year. Spielberg will stay on as a director & producer and Geffen will be chairman. The two agreed to produce up to six movies this year. In addition, Paramount has the right to distribute DreamWork's future animated features. To pay for the purchase, Paramount plans to sell DreamWorks' library of movie titles for as much as $1 billion. 30 IV. Diamond Analysis Like every other successful cluster there various points which come and work together to have a successful and sustainable performance. Particularly for the LA motion picture cluster it’s the collective inputs of favorable conditions like geographical and economical; availability of a market with huge demand and support from government and supporting industries. With changing world and economic dynamics the cluster has faced some tough times. In this part of the report we will discuss and analyze the LA motion picture cluster based on the Porter’s Diamond Analysis. Wikipedia., Major Film Studio, Available from: Seeing Stars in Hollywood., The Movie Studios, Available from: 29 30
  24. 24. 24 Hollywood Movie Cluster Analysis Following is a graphical representation of Porter’s diamond model in the context of LA motion Picture Industry Demand Conditions Taking a look at the individual points on the diamond and their effect on the cluster as whole: 1. Factor Conditions: Los Angeles being a part on California offers a variety of favorable conditions ranging from economic conditions to geographical conditions. It’s worth mentioning that California has a very diverse geographical features, featuring close proximity to ocean, desert, mountains and and a busy urban life. And the most important factor is the weather conditions in California which is not harsh at all and facilitates a yearlong movie production.. The human factor is probably the most important asset of this cluster. Over the last five to six decades LA has become the central attraction for film making talent across the world. There is a large pool of talent ranging from actors to writers, from directors to stuntmen and the strength of human capital is very much evident from the number of talent
  25. 25. 25 Hollywood Movie Cluster Analysis agencies registered in LA and number of personals signed with these agencies. Entertainment is the largest traded industry cluster in Los Angeles county, with 159.000 employees in 2010.31 Another important factor in film making is the capital investment required. Being the #1 international trade center in the US (as LA district handled $387 billion in two-way trade (2011)32, provides enough financial services to support the cluster. The demerits of factor conditions in LA is the rising prices of real estate and wages across all sectors, which increases the overall movie making cost. 2. Context for strategy and rivalry: In the film industry a major film studio is a production and distribution company which controls the every aspect of films from production to distribution and finally the box office revenue through it small subsidiaries, they are often called majors. They are commonly regarded as the six diversified media conglomerates or the “Big Six”. Their various movie production and distribution subsidiaries command the major (more than 90%)33 of the North American box office. The big six are: Paramount pictures, 20th Century Fox, Universal Pictures, Walt Disney Pictures, Warner Bros. Pictures and Columbia Pictures. The decades long competition for biggest share among the big six has shaped the cluster into being more cooperative this can be seen from the pre-production and post-production business partnerships among the big six. But they dominate and influence the market trends in a big way which limits and in fact diminishes the creative and business freedom of smaller production houses/studioes. 3. Demand Conditions : The demand conditions for LA motion picture industry is not limited to LA district. Considering the popularity and increase in ease of access to films the demand conditions are very international. 31, 32 Los Angeles County., The Entertainment Industry and theLos Angeles County Economy.Available from: 33 Global box office earning. Statistics available
  26. 26. 26 Hollywood Movie Cluster Analysis Firstly the domestic market, USA (including Canada) has the biggest box office share in global market, it accounts for 23.9 Billion USD out of total 34.7 Billion USD34. Secondly the popularity of American culture and the reputation of Hollywood cuts across boundaries and reaches every corner of the globe. Another factor of deep global penetration of American movies is the global acceptance of English as the international language. 4. Supporting and Related Industries: Movie making is a very intensive process which involves a lot of support from various different industries like sound recording, television broadcasting, video games, special/visual effects, computer animation, photographic equipment and supplies, advertising firms; talent agencies, celebrity magazines. LA motion picture cluster has good balance of these industries supporting film making and in turn film making supporting the growth of these industries. Also, the popularity of Hollywood has given the rise and a market for tourism in LA and movie based theme parks. It’s the popularity of Hollywood that has turned American movie awards into global festivals. 5. State government influence: The state government and the federal government offer a wide array of incentives and aids to facilitate film production and growth of the cluster. Movie Production incentives (MPI) is a term given to such aids by the government which mainly includes tax benefits also known as Tax Credits which remove a portion of the income tax. There are also cash rebates which are paid to small production companies directly by the state. California and some other states have started ‘fee-free location’ program to encourage production. The California Film Commission is constant supporting pillar for the growth of the cluster. Formed in 1985, it works for keeping the film making projects and jobs in the state of California by using Financial and Tax Incentives. Motion Pictures Association of America, Theatrical Market Statistics 2012. Available from: 34
  27. 27. 27 Hollywood Movie Cluster Analysis V. Problems facing federal government Several macroeconomic problems represent a challenge for the federal government. It has first to tackle the external imbalances and the lack of domestic saving. A persistent trade deficit could indeed raise some concerns and foreign investors might become more cautious, which would lead to higher interest rates and a depreciation of the dollar that would be harmful to investment. Moreover, higher interest rates would make it harder to achieve fiscal balance, in particular in the context of an aging population raising the cost of healthcare and social security. There is thus a risk of “hard landing” that requires careful macroeconomic policies. At the same time, the US will have to address certain weaknesses of its business environment, by simplifying and increasing the efficiency of its tax system and by providing better public education. California is also facing very serious challenges. In particular, the state is running procyclical budget deficits, which is contradictory to the principles of sound fiscal policy: while growth is still strong, the expected deficit for 2006 is $6.4 billion.35 California’s business environment also has weaknesses, as it is a very expensive location to work in: energy prices are still 25% higher than in the rest of the US and housing prices are booming. Moreover, taxes are quite high: California ranks only 40th in the State Business Tax Climate Index. This makes it harder for California to retain businesses within its border 10. Finally, the recent crisis in state politics was harmful to the confidence of the population in the state’s political leadership and this confidence has to be restored. VI. Challenges of the motion picture industry The global motion picture industry faces a revolution in the way films are conceived, produced and distributed. The coming of the digital age affects almost all sections of the global value chain. The demand side is threatened not only by piracy, made easier through technologies such as DVD Burners and Recorders, Video iPods and Video-onDemand. The improving equipment for digital home entertainment, creating a movie atmosphere in the living room, is quoted as major reason for the recent drop in theater admissions. A first response by the studios was to shorten the life cycle of movies: If they Feldstein, M. (2005). Rethinking Social Welfare , January 8, 2005, Published: American Economic Review, March 2005. 35
  28. 28. 28 Hollywood Movie Cluster Analysis don’t generate sufficient revenue, even movies with high budgets disappear from the theaters one or two weeks after their release. While releases on VHS in the early 1990s were scheduled on average nine months after the theatrical release, successful movies are now available on DVD less than three months later. If a studio wants to have a certain control over the entire value chain, large investments are required as the number of media channels is constantly increasing from cable television over the Internet to mobile communication devices. In the blockbuster segment, movie production is already dominated by digital compositing and motion capture, where all parts of the image are digitally reconstructed, including the movements of actors. 70 percent of all shots in the 2004 release “The Lord of the Rings: The Return of the Kings” were not filmed by camera at all, but produced on a computer. While the price of advanced digital processing and production is decreasing, the hunt for even more special effects requires high investments and close cooperation with computer companies, which have an increasing influence on the motion picture industry. The integration of both industries is also visible in the area of content: Video games turned movies (or the other way round) is a safe bet given the importance of teenagers in box office revenues. The next step is digital projection in movie theaters, Again, the studio companies might lose control over one part of the value chain: At present, they can control distribution by the number of physical film rolls they send out around the world and charge high rental films. Under digital projection, the original film can be copied in a matter of minutes. A prerequisite for digital movie theaters is a switch from traditional to digital film cameras. While this technology does not provide the same quality yet, experts consider it to be just a matter of a few years until digital imaging catches up with the traditional film roll. According to a report by the Los Angeles County Economic Development Corporation , the biggest threat to the LA motion picture cluster is runaway production. The movie production business is very lucrative as a means to create substantial jobs directly and indirectly. For this reason, more and more US states are offering incentives to promote film making in their areas. Moreover countries like Canada, Australia, New Zealand etc are also very actively marketing their countries as a prime location. According to the LAEDC study, production expenditure in Louisiana increased from $12 million in 2002 to $330 million in 2004 after adoption of its incentive package. According to the LAEDC
  29. 29. 29 Hollywood Movie Cluster Analysis study in 2004 only 39% of the movies were produced exclusively or partially in California, whereas 61% were shot either in other states or foreign countries.36 VII. Recommendations Increasing cooperation among the studios in the cluster is one of the solutions to the serious problems that might come up. These are among others the current prices that make production of movies more favorable to do in other places in the world and the availability of digital technology. The studios should also concentrate more on work with theaters companies in order to enhance the movie aging experience. The role of the institutions overseeing the cluster should finally be improved as The Hollywood cluster is in need of such structures which are able to provide strategies for revitalizing the cluster. To achieve this a decent amount of technological research and market data is needed. Also the studios admit a need of triad fairs on which the studios could exchange their experiences with competitors, supporting and related industries as well as the policymakers.37 This would allow for the creation of a long-lasting vision that will be shared among the players in the cluster. Feldstein, M. (2006)., The Effect of Efficiency and Growth, Published: National Association for Business Economists. 37 Waterman, D. (2005). Hollywood’s Road to Riches. Cambridge (MA): Harvard University Press. 36
  30. 30. 30 Hollywood Movie Cluster Analysis Appendix 1 Appendix 2
  31. 31. 31 Hollywood Movie Cluster Analysis Appendix 3. Canal+ Advertisements