The Industry at the Dawn of the Decade

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The Industry at the Dawn of the Decade

20th Century-Fox
Warner Bros.
Universal Pictures
Metro-Goldwyn-Mayer Film Co.
Walt Disney Productions
Orion Pictures Corp.

As the 1980s began, the Hollywood industry was poised for five straight years of record box-office returns. Industry grosses climbed steadily, from $2.8 billion in 1980 to $4 billion in 1984, before dipping 7 percent to $3.8 billion in 1985.1 While the studios celebrated this record-setting influx of money as the sign of a robust industry capable of generating ever-increasing business, the grosses provided an incomplete portrait of the industry's performance. Gross data made for compelling publicity and little else. Despite each year's inflated figures, national ticket sales had remained relatively flat, at the 1 billion mark, since 1969.2 Furthermore, the box-office records of 1980-84 accompanied a steady rise in ticket prices from a national average of $2.69 in 1980 to $3.36 in 1984. With relatively flat sales, the rise in ticket prices helped fuel the box-office records. Table 1.1 summarizes these trends, showing the decade's domestic box-office performance. Chart 1.1 visualizes the disparity between ticket sales and yearly grosses.

Box-office grosses are epiphenomena of the industry, unreliable measures of its health, despite the hoopla they receive in popular media, which track film performance like a horse race to see which title is "winning," that is, which has the biggest gross. National box office might be booming, but Hollywood faced a decade of extraordinary challenge in which the conduct of business as usual would entail certain ruin. Any major that ignored the signposts of change that were everywhere apparent in 1980 would not stay in the game. Change was the watchword in 1980, and the CEOs of the major studios understood that the next several years would be crucial determinants of their firms' abilities to prosper in what would be a new industry with new markets and new products. Yearly box-office grosses, therefore, provided at best a snapshot portrait of the industry, freezing its extraordinary fluidity and openness to change into one moment in time epitomized by a dollar figure that was itself a poor summary of industry performance.

The keys to understanding the industry at the dawn of the decade lie in recognizing this readiness for change and the economic problems and challenges that elicited it. The industry embraced change because it had to. Serious impediments to its continued well-being mandated swift, sweeping, and flexible responses. The welfare of the Hollywood industry would be tested by its ability to survive, and indeed to master, a complex set of institutional, economic, and technological factors that would transform the business as

YearGross ($billions)Ticket Sales (billions)Average Ticket Price

nothing had since the 1947 consent decrees and the appearance of television. From an industry standpoint, the story of the 1980s is the exciting chronicle of a business reinventing itself to accommodate new delivery systems for its products. As a result of these changes, the industry's corporate structure was vastly different by decade's end, as was its definition of the product it produced. Film ceased to be primarily a theatrical medium, based in celluloid. It assumed a variety of alternative and more potentially profitable storage and retrieval formats, including videotape, laserdisc, and satellite transmission to the homes of prepaid cable subscribers. In this new context, movies took their place as one "software" stream among others (e.g., books, magazines, recorded music, television programming) merchandised by global media companies who viewed their marketplace as the planet itself. Thus, on a variety of measures Hollywood entered a period of tumult in which the roiling changes were like a fermentation process, producing a more refined and powerful industry once it subsided.

Outwardly, though, to its theatergoing public, the industry gave few signs that anything was changing. Certainly, the films that Hollywood made in the initial years of the decade held few clues to the industry's mutation. Surveying the big moneymakers, a casual observer might conclude that Hollywood was engaged in business as usual. (Appendix 2 shows the decade's top box-office films.) The biggest moneymaker in 1980 was the second installment of George Lucas's Star Wars trilogy, The Empire Strikes Back, which returned $120 million to its distributor, Universal, helping to ensure that Universal would have the year's top studio market share. (Revenues returned to a major studio distributor are known as rentals. These are distinct from the box-office gross, which designates the total monies collected from ticket sales. As I will explain later, grosses are subject to deductions taken by several parties. The gross, minus these deductions, yields the rental.) Empire was such a standout box-office leader that year that its closest competitor, Kramer vs. Kramer, a drama about a marital breakup starring Dustin Hoffman, returned just half as much ($60 million) to its distributor, Columbia Pictures. Both of these films offer normative, highly conventional narratives and emotional rewards, giving moviegoers the kind of excitement and sentiment they had come to look for in Hollywood products.

The other pictures in the top ten that year were from solidly traditional genres, primarily comedy (The Jerk, Airplane, Smokey and the Bandit, Private Benjamin, The Blues Brothers) but including also horror (The Shining) and the biopic (Coal Miner's Daughter). Another George Lucas production, Raiders of the Lost Ark, dominated the box office in 1981, returning $90 million to its distributor. Fantasy-adventure held a strong appeal for the nation's moviegoers that year. Along with Raiders, the top ten included Superman II and the James Bond thriller For Your Eyes Only, both of which were sequels and entries in highly popular franchise series. As in the previous year, though, comedy was the primary genre represented in the top ten films of 1981 (and Raiders and Superman II both have strong comic elements). Stir Crazy, 9 to 5, Stripes, Any Which Way You Can, Arthur, The Cannon-ball Run, and Four Seasons were showcase comic vehicles for such popular personalities as Richard Pryor, Gene Wilder, Dolly Parton, Lily Tomlin, Bill Murray, Clint Eastwood, Dudley Moore, Burt Reynolds, and Alan Alda.

In 1982, Steven Spielberg's, E.T.: The Extra-Terrestrial was the number one hit, returning $187 million to its euphoric distributor, Universal Pictures. Filling out the top ten that year were sequels (Rocky III, Star Trek II: The Wrath of Khan, fantasy-horror (Poltergeist), comedies (Porky's, The Best Little Whorehouse in Texas), melodramas (On Golden Pond, An Officer and a Gentleman), a musical (Annie), and a dark horse candidate (Chariots of Fire). Nothing much was different the next year. In 1983, the top ten were nearly all either fantasies (Return of the Jedi, the year's leader with $165 million in rentals, Wargames, Superman III, Octopussy) or comedies (Tootsie, Trading Places, Mr. Mom). The remainder were musicals (Flashdance, Stayin' Alive) and comedy-dramas (48 Hrs.).

The industry's top theatrical products in the early years of the decade make the business seem essentially unchanged. The product lines are very traditional. Hollywood's moneymakers fall cleanly into established genres whose story lines offer viewers the pleasures of repetition and familiarity. Moreover, the top films tended to be showcases for such popular stars as Harrison Ford, Dustin Hoffman, John Travolta, Clint Eastwood, and Roger Moore, or for such filmmaker stars as Steven Spielberg and George Lucas. Furthermore, the studio distributors of these pictures were old, familiar names (Columbia, Universal, Warners). Some of these were subsidiaries of parent corporations, but the ownership patterns that persisted until the 1980s were relatively stable ones. Thus, to a casual viewer, Hollywood seemed to show few signs of what was to come.

Before I detail the problems and the challenges that the industry faced, it will be helpful to see where the studios were as business enterprises when the decade began, because the corporate playing field and the players would change drastically and at an accelerating pace. Across the 1980s few majors maintained a continuity of corporate identity and business portfolio. What follows, therefore, is a brief profile of the Hollywood majors at the dawn of the decade. The reader will wish to keep this profile in mind as the zero point against which the changes discussed in the next two chapters should be measured. This profile shows (a) that the majors had already achieved a significant degree of entertainment market integration (e.g., activities in film, music, and video) by 1980; (b) that this integration was accompanied by a maladaptive, old-fashioned style of conglomerated business structure; and (c) that the majors were cognizant that a sweeping technological revolution lay just ahead, though they could not yet envision its shape, outcome, or effects.

20th Century-Fox

Fox was a stand-alone company in 1980. It was unaffiliated with a parent corporation, and its corporate structure was somewhat less complicated as a result. Its operations fell into two major business segments, Fox Entertainment and Fox Enterprises. Fox Entertainment included (a) production and distribution of movies and television; (b) telecommunications, focusing on the home video market; (c) lab processing of film by Deluxe General, Inc., a Fox subsidiary; and (d) record and music publishing. Fox Enterprises consisted of (a) soft drink bottling through its operation of a territorial franchise, Coca-Cola Bottling Midwest, Inc.; (b) television broadcasting via three VHF stations in Minneapolis/St. Paul, Salt Lake City, and San Antonio; and (c) luxury resort operations through the Aspen Skiing and Pebble Beach Corporations. In addition to Fox Entertainment and Fox Enterprises, the company also had overseas theater operations (seventy-six theaters in Australia and twenty-eight in New Zealand).

This portfolio of operations is significant in several respects. First, it shows that Fox, although a relatively small enterprise, had already begun to diversify its filmed entertainment operations into key areas that would be crucial to industry expansion in the 1980s, namely, those alternatives to theatrical exhibition represented by home video. Second, although Fox stayed out of the mid-decade rush into theater ownership by the majors, it already had exhibition operations when the decade began. Fox's broadcast television operations produced relatively small revenues in comparison to its filmedentertainment segment, which generated the lion's share of company revenues. (Table 1.2 shows Fox's 1980 revenues by industry segment.) Its recorded-music operations were folded within the filmed-entertainment segment, which also included Fox's production of television programming. (In 1980 Fox produced four primetime network series; "M*A*S*H," "Trapper John, M.D.," "Breaking Away," and "Ladies Man.")

Filmed Entertainment581,913
Soft Drink Bottling106,136
International Theatres71,563
Resort and Recreation48,663
Television Broadcasting38,983

Fox recognized the future trend lines. Its fastest-growing segment was the Telecommunications Division, focused on home video; company CEO Alan J. Hirschfield foresaw markets in this area "entering a period of unique and extraordinary change and growth."3 Fox had moved quickly to gain leverage here. In 1979, Fox acquired Magnetic Video Corp. to generate earnings from the newly developing home video market. In 1980, Fox's Alien and All That Jazz videocassettes set million-dollar sales records, and Magnetic Video Corp. released 9 to 5 and The Stunt Man only ninety days after completion of their first-run theatrical engagements. Shrewdly anticipating events in the course of the decade, Fox noted the burgeoning growth of the home video market, predicting that demands for "software" here would only increase. This area would thus remain of key importance for the company. CEO Hirschfield concluded, "It is expected that consumer demand will continue to increase and that this ancillary market for filmed entertainment will generate a significant portion of future revenues."4

Fox distributed fifteen films in the theatrical market during 1980, the most significant of which, The Empire Strikes Back, provided the single biggest chunk the $474 million revenue earned by Fox motion pictures in 1980.5 Other Fox pictures that year included Brubaker, My Bodyguard, All That Jazz, The Rose, and 9 TO 5. Film entertainment revenue alone accounted for a 23 percent increase in the company's operating revenue over 1979, a dramatic illustration of the importance for a studio of having a year's leading blockbuster as well as robust videotape sales.

Fox, therefore, was fairly well positioned to maneuver in relation to developments in the home video market. But in other respects, the company was maladapted for the challenges of the 1980s. Revenues from soft drink bottling operations were the company's second largest by industry segment, but these operations represented unnecessary diversification. Most critically, unlike the operations in recorded music and home video, which could be synergistic with theatrical film, soft drink bottling would not enhance film entertainment revenues. Thus it was an area of operation fundamentally unrelated to Fox's main enterprise, film. The same problem was apparent in Fox's resort operations. The Pebble Beach Corp., operating a luxury resort and golf courses, and Aspen Skiing Corp., with four ski areas in Colorado, were leisure-time businesses, but they offered no synergies for filmed entertainment. Taken in the context of 1980s industry developments, they represented an unproductive scattering of Fox's resources, and they gave the company an unattractively diffuse corporate portfolio. Thus, they were quick to go on the auction block, along with the soft drink bottling operations, following Marvin Davis's purchase of Fox in 1981. In sum, Fox, like the other majors, was uncertainly poised for new directions on the threshold of the eighties. The company was an ambiguous mix of forward-looking film entertainment businesses and diffuse nonfilm operations housed within an old-line conglomerate structure.


Columbia was a stand-alone company at the beginning of the decade, and its subsequent corporate history, with acquisitions first by Coke and then by Sony, was among the liveliest of the majors in this period. As a stand-alone company, it saw somewhat smaller revenues from its operations than did either Warners or Universal. Columbia's total 1980 revenues were $692 million, whereas their filmed-entertainment and music operations alone generated $1.5 billion for Warners and $953 million for Universal. But Columbia's theatrical film business looked good in 1980, producing record levels of income ($314 million worldwide, a 29 percent increase over 1979).6 Much of this was attributable to the performance of its hit film, Kramer vs. Kramer ($94 million worldwide and the number two film in the domestic market). Other pictures released by Columbia that year included The Electric Horseman, a Robert Redford vehicle, and the Neil Simon comedy Chapter Two.

As an independent company, Columbia was modestly diversified, especially in comparison to Warner Bros.' place in Warner Communications' array of product lines or Universal's in MCA's portfolio of activities. Columbia's main business was the production and distribution of theatrical films, but it was also heavily involved in television production and syndication. Columbia Pictures Television saw 1980 revenues of $182 million, up 30 percent over 1979. Among the shows it produced were "Fantasy Island," "Police Story," and the popular soaps "Days of Our Lives" and "The Young and the Restless." Columbia Pictures Television Distribution placed in syndication "The Flintstones," "WKRP in Cincinnati," "Charlie's Angels," and "Bewitched." Through its subsidiary EUE/Screen Gems, Columbia produced television commercials for clients including Ford, Sears, General Motors, NBC, and Chevrolet.

Like the other majors, Columbia was beginning to explore the market for home video. Columbia Pictures Home Entertainment completed its first year of operation in 1980, releasing twenty-four pictures on video, with another sixty scheduled for release in 1981, including Close Encounters of the Third Kind: The Special Edition and The China Syndrome. Columbia had also moved to exploit the pay-cable market, creating Columbia Pictures Pay Television, which in 1980 released The China Syndrome, California Suite and Midnight Express. TO realize subsidiary filmrelated profits, Columbia Pictures Merchandising generated revenue through the licensing of characters from film and television. In addition, Columbia operated an assortment of other businesses, including a pinball game company, five radio stations, and a music publishing company. These areas, however, contributed much smaller revenues than the film and television segments.

Columbia, therefore, was modestly diversified and in sensible directions, with its major operations concentrated in the important markets of film, video and television. These would be the growth areas in the years to come. In contrast with Warner Communications Inc., however, Columbia owned no cable television systems nor any cable programmers like the Movie Channel. In 1980, it attempted to rectify the lack of affiliated operations in this area. Along with Paramount, MCA, and 20th Century-Fox, it tried to move into pay cable with the attempted launch of Premiere (more on this later in the chapter), a cable programmer intended to be a competitor with HBO. The effort would fail, and the scale of Columbia's operations at the top of the decade thus remained relatively modest and was focused almost entirely on the theatrical film, home video, and broadcast television markets. Furthermore, like Fox, Columbia did not have access to the capital resources of a larger parent corporation, and, again like Fox, it was attractive and vulnerable to acquisition by an outside company. Accordingly, along with Fox, Columbia would be the first of the majors acquired by an outside corporate buyer in the merger-and-acquisitions phase of the decade. Its alliance with Coca-Cola and subsequently with Sony helped Columbia move aggressively into the home entertainment operations that it had only begun to explore tentatively in 1980.

Warner Bros.

Unlike Fox or Columbia, Warner Bros, in 1980 was a subsidiary of a parent company, Warner Communications, Inc. (WCI), a conglomerate engaged in a wide array of business operations. These were primarily in the areas of communications and entertainment and included six business segments: (1) consumer electronics and toys (Atari, Knickerbocker Toy Co., Malibu Grand Prix Corp.); (2) recorded music and music publishing (Warner Bros., Reprise, Electra, Asylum, Nonesuch, and Atlantic labels); (3) publishing (D.C. Comics, Warner Books, Mad magazine); (4) cable television (Warner Amex Cable Communications owned and operated 141 cable systems, in twenty-seven states, with 730,000 subscribers;7 Warner Amex Satellite Entertainment Company distributed the Movie Channel and Nickelodeon pay-cable programming to 600,000 subscribers); (5) filmed entertainment; and (6) assorted other operations. These latter included ownership of the Franklin Mint direct-mail operations, the Cosmos professional soccer team, and live theater presentation through Warner Theater Productions, Inc.

In 1980, WCI evinced an attitude that would become increasingly outmoded and retrograde in the film industry as the decade developed. WCI believed that its wide assortment of business segments made it a strong and competitively positioned company, and that its diversified, conglomerate structure was a market asset. WCI's report to its stockholders stressed the advantages of its broad-based, loosely related product lines. Noting that as recently as two years previously, WCI derived most of its revenues from only two business areas, filmed enertainment and recorded music, CEO Steven Ross told stockholders that WCI anticipated expanding revenue sources from its consumer electronics (Atari), cable television, and direct-mail marketing (Franklin Mint) operations. These, Ross wrote, were "significant milestones in the transformation of WCI" from a company with limited revenue sources to one with multiple sources. "Most recently, the merger of the Franklin Mint Corporation into WCI … brings to the company a rapidly growing new line of business in the increasingly important area of direct response marketing."8

Atari would bring WCI huge revenues before it crashed, but it would have little to offer in combination with film or music entertainment. In fact, Atari's movie-derived games sold poorly when they went on line in 1983. The Franklin Mint offered no overlap with film and music operations. WCI thus had overextended its resources into unproductively related areas of operation. Atari and the Franklin Mint would not long survive. WCI's loose portfolio of activities was not consistent with the way media industries would evolve in the 1980s. Films, toys, soccer, and direct-mail marketing do not create synergy with each other, and "synergy" would be, for the Hollywood industry, the decade's fundamental economic premise.

Filmed entertainment for WCI included Warner Bros., Inc., and several subsidiaries. Warner Bros, and Warner Bros. Television financed, produced, and distributed films to theaters and television stations and produced television movies and programs. Through joint venture agreements, Warner Bros. also distributed films produced by Orion Pictures and the Ladd Co.; through Panavision, Inc., WCI manufactured and leased cameras, lenses, and other film equipment needed by the industry. Warner Home Video, created in 1979, marketed prerecorded videocassette and laserdisc programming. In 1980, Warner Home Video placed forty-one titles on the home video market. These included 10, Superman, Blazing Saddles, Dirty Harry, and Enter the Dragon. Through the Licensing Corp. of America, WCI controlled the use by other manufacturers of film-related characters or logos, an important ability that enabled it to maximize revenues from film-related lines of merchandise.

In 1980, Warner Bros. released twenty motion pictures worldwide (five were produced by Orion and one by the Ladd Co.), including The Shining, Private Benjamin, Caddyshack, Bronco Billy, and 10. Theatrical film revenues of $328 million for Warners declined in 1980 relative to 1979, which had been Warners' best year ($394 million, with the top two pictures that year, Superman and Every Which Way but Loose). Despite this, the Film Entertainment Division overall had its best year ever, owing to huge increases in revenue from its licensing of films for television distribution and from television series production. From its television operations WCI generated $299 million.

Despite its belief in the advantages of a diverse company portfolio, WCI was cognizant that it was in the midst of a changing industry driven by new formats and distribution technologies. Like other majors, it had home video operations in place by 1980, but it was in an especially strategic position in relation to cable television. Warner Amex Cable Communications, at the hardware end, was affiliated with Warner Amex Satellite Entertainment Company, a programming distribution service carrying The Movie Channel and Nickelodeon. When WCI merged with Time, Inc., in 1989, Warner Cable served 1.7 million subscribers in twenty-seven states, and Time's HBO had 17.3 million subscribers for its premium movie programming. This would be a handsome combination of cable systems and programming abilities.

WCI clearly understood the long-range earning potential of cable programming for the movie industry, but it also appreciated the key role of home video in the expanding markets for filmed entertainment. Its financial report for 1980 stressed the importance for the company of new technologies in the industry's entertainment sector. WCI perceived an opportunity for creating new businesses based on these technologies for each of the company's operating divisions. Presaging the company's monumental merger with Time, Inc., at decade's end, WCI's 1980 report already takes the long, strategic view by announcing that a revolution, brought about by videotape, laserdisc, and the satellite delivery of cable programming, was underway:

WCI has spearheaded these advances in such areas as two-way interactive cable television, video games, and personal computers. It is or soon will be the beneficiary of other companies' substantial investments in new forms of hardware that create additional markets for WCI's software…. Each new development confirms the Company's belief that our society is in the midst of a communications revolution which will bring to consumers an unprecedented variety of relatively inexpensive information and entertainment in the convenience of the home9.

In the years to come, WCI would move aggressively to maximize its involvement with these new revenue streams. This required, and produced, a major revamping of WCI's corporate structure and operations, a shift away from consumer electronics and toys and toward filmed entertainment as the key engine driving corporate growth.

Universal Pictures

Universal Theatrical Motion Pictures was a subsidiary of parent corporation MCA, Inc., whose operations were grouped into five business segments.10 Even more than WCI, MCA's corporate structure exhibited the agglomeration of disparate, loosely related business areas that would make synergy difficult and that the firm's restructuring activities throughout the decade would seek to overcome. In addition to filmed entertainment, MCA's business segments included records and music publishing (primarily on the MCA label and an area of great potential synergy with film), retail and mail order (via Spencer Gifts retail outlets nationwide), financial services (conducted through subsidiaries Columbia Savings and Loan Association and Mid-Continent Computer Services), and other operations. These latter were mostly nonfilm operations, comprising of such disparate enterprises as MCA New Ventures, a minority enterprise small-business investment company; Yosemite Park and Curry Co., providing visitor services in the national park; Womphopper Wagon Works restaurants; Universal Studios Tour and Amphitheatre; MCA Publishing (Putnam); and Disco Vision Assoc, a joint venture with Phillips and IBM to explore an optical videodisc system. MCA's film, book publishing, recorded music, and theme park ventures (in 1981, MCA purchased 423 acres of land in Orlando to be the site for its planned Universal Studios Florida park) were the mutually reinforcing business areas that would become the hubs of the company's restructuring, at the expense of the other, disparate operations.

The filmed-entertainment business sector consisted of the theatrical division, which commanded a 20 percent market share in 1980.11 MCA was also active in the key areas of pay and cable television. In 1981, MCA joined Time, Inc., and Paramount Pictures as equal partners in a joint venture, USA Cable Network, with over 9 million cable television viewers. USA Cable was designed as an advertiser-supported network carrying sports and entertainment programming, and the partners retained their independent privileges to license films to pay-cable services. For MCA and Paramount, this venture followed their earlier unsuccessful attempt to create Premiere, a national pay-cable competitor with HBO. MCA was also active in production for broadcast television (series production of "Quincy, M.E.," "Magnum, P.I.," "Simon and Simon," and others), in the licensing of characters and logos from films and television for product merchandising via MCA Merchandising, and exploitation of the developing home video market. MCA Videocassette placed eighty titles in release by the end of 1981.

In the early years of the decade, Universal saw year-to-year fluctuations in its theatrical film revenue of amounts approaching $100 million, but this was typical of all the majors, whose theatrical fortunes depended on the number of hits they produced in a given year. Revenue for 1980 of $397 million was up $92 million over 1979 because Universal's product was well represented among the year's biggest-renting films (four out of the top ten), though it did not have the year's number one film. In 1981, revenues dropped $84 million, but in 1982, the year of E.T.: The Extra-Terrestrial, they jumped to $608 million, nearly double those of the previous year, giving Universal 30 percent of the domestic film market. Like Warners, Universal was a major contender for theatrical market dominance throughout the 1980s, and its home video and cable television operations positioned it strategically for competition in the ancillary markets. The MCA corporate structure, however, was an awkward mix of unrelated business operations. Filmed entertainment generated the great bulk of corporate revenues, and MCA, like other film company parents, would evolve in that direction during the decade.


Paramount Pictures was a subsidiary of Gulf and Western Industries, Inc., which in 1980 was the epitome of a corporate conglomerate. G&W was a diversified, multi-industry company whose operations fell into seven unrelated business segments: a leisure-time group, financial services, manufacturing, apparel and home furnishings, consumer and agricultural products, automotive replacement parts, and natural resources and building products. G&W had sales in 1980 of $5 billion. Revenue from the leisure-time group stood at $1 billion, with theatrical film rentals generating $330 million.12

Paramount (housed in the leisure-time segment) released fifteen films domestically in fiscal 1980, including Star Trek, Starting Over, Friday the 13th, and Urban Cowboy. Paramount Television produced such popular series as "Happy Days," "Laverne and Shirley," "Mork and Mindy," and "Taxi." "Happy Days" went into syndication and helped generate Paramount Television's record 1980 revenue of $224 million. Paramount Home Video, Inc., was formed in 1980 to sell videocassettes to the home video market.

In addition to Paramount Pictures, G&W's leisure-time group also included music publishing (Famous Music Corp.), book publishing (Simon and Schuster), theater operation (the Famous Players circuit in Canada, 386 screens in 266 theaters), and sports entertainment (Madison Square Garden and several horse-racing facilities). Moving into the expanding area of cable programming, G&W, through Madison Square Garden, created a national cable network (USA Network) to carry sports events. Thus, with some exceptions such as the horse-racing operations, the leisure-time group was sensibly diversified along the lines that would be critical for a majors success in the 1980s. Its operations anticipated the mutually reinforcing entertainment synergies (movies, books, music, television programming, home video, cable, and theatrical exhibition) that would be so important throughout the decade and guide the industry's development.

G&W's other operations, though, ranging among manufacturing, mining, sugar harvesting, and financial services, offered little or no overlap with its leisure-time segment. Many of these required the maintenance of a heavy-industry infrastructure that the company was increasingly unwilling to fund, and G&W soon came to regard them as antiquated operations, as yesterday's businesses, not tomorrow's. The future was in leisure time, and G&W knew it. Outside the leisure-time segment, G&W was a sprawling entity, with little essential connection among its components. To keep pace with the evolving communications and entertainment industries, therefore, G&W embarked on the decade's most striking corporate makeover. It willingly cannibalized itself and permitted the leisure-time group to swallow the corporation.

Metro-Goldwyn-Mayer Film Co.

Among all the major studios, by far the saddest fate befell MGM. It grew sicklier and more impoverished with each year. By decade's end it was a shell of its former self, so poor that nobody wanted to buy it, while the other majors were enjoying the fruits of the industry's reconfiguration. By contrast with this ultimate fate, MGM commenced the 1980s full of hope, as a newly restructured company and one with aggressive ambitions to expand its share of the film market.

Before January 1980, Metro-Goldwyn-Mayer, Inc. (as it was then called), operated in two dissimilar business segments, filmed entertainment and hotel and gambling operations. The company produced motion pictures and television programs and also operated two luxury hotels. These were the MGM Grand Hotel-Las Vegas, a twenty-five-story, 2,076-room hotel and casino, and the MGM Grand Hotel-Reno, a 1,015-room hotel and casino. Since the mid-1970s, hotel and gambling operations consistently generated greater revenues for MGM than filmed entertainment. In 1979, for example, film operations saw revenues of $193 million as compared with hotel and gambling's $298 million.13 The poor showing of its film operations, relative to hotel and gambling, was a direct result of the company's decision in the 1970s to withdraw from the film business. Beginning in 1973, MGM had reduced its film production activities. It eliminated its worldwide distribution organization and produced films only on an occasional basis. These two developments were related. By releasing its product through another major, United Artists, MGM did not need to produce a yearly quota of pictures to feed an in-house distribution organization. Throughout the 1970s it was an intermittent producer of motion pictures, and its status as a film major had become degraded.

Because of the disparities between its business segments and its perception that film production in the 1980s held new opportunities for revenue growth, MGM in 1979 began to study the possibility of divorcing the segments from one another, and the following year it spun off its filmed-entertainment activities. In effect, the company split in two. In January 1980, the spun-off film operations were incorporated as Metro-Goldwyn-Mayer Film Co., and on 30 May Metro-Goldwyn-Mayer, Inc., became MGM Grand Hotels, Inc.

The former MGM had two principal reasons for splitting apart. One was to enable it to concentrate on its hotel and gambling operations, which had been the company's revenue horse. But the other reason was that new pot of gold which the industry as a whole was gearing up to secure. MGM planned to expand film production with the goal of producing ten to fifteen pictures per year in the 1980s, in comparison to the three to six pictures that it had been producing in the 1970s. Its plans for expanded production were directly tied to the rise of the ancillary markets and to the increasing revenues that top theatrical pictures were earning. MGM saw new opportunities here for reviving its moribund film operations. As management explained in its annual report:

Among the factors which were considered by MGM when it decided to increase film production were the increased theatrical rentals which have been received on successful pictures in the industry, the improved license fees obtained for both network telecasting and syndication of films to local television stations, and the development of new sources of revenue for film products, including pay television, video cassettes and videodiscs.14

To launch its plans for expanded production, however, and to rejuvenate the company as a major studio, MGM confronted some serious problems. One was a problem the entire industry faced—inflation. Because of a substantial industry-wide rise in production costs, MGM implemented a budgetary policy that restricted its production funding to a ceiling of $15 million per picture, with a preferred average in the area of $10 million. These production costs would be competitive with industry averages in the early years of the 1980s. This was, therefore, a sensible and effective policy. Two other problems, though, had more serious consequences: a severe shortage of production capital and the lack of a distribution organization.

MGM "solved" these problems in a manner that placed the company under a crushing debt load for the remainder of the decade and that was a major factor in the repeated attempts of its majority shareholder, Kirk Kerkorian, to dismantle and sell off its assets. MGM increased its revolving line of bank credit to $200 million to finance its expansion of film production. (Studios that have a revolving line of credit may borrow up to a fixed amount within a specified time period, usually a year. As the studio makes payments on principal and interest, it may borrow amounts equal to its repayment.) MGM also borrowed heavily to finance its purchase of a distribution organization. In 1981, MGM purchased United Artists, a major distributor, from its parent company, Transamerica, for $380 million. Transamerica's motive for selling UA was tied to UA's ruinous production of Heaven's Gate; this saga is profiled later in the chapter. Of note is MGM's desperation to regain a distribution organization. MGM's cost for acquiring UA exceeded the net book value of UA's assets by over $243 million, a sum that MGM was willing to amortize over forty years.15 MGM wanted a distributor badly, so badly that it debt-financed the entire transaction. Under a bank credit agreement, it borrowed $250 million in cash to buy UA and offered a promissory note for the remaining $130 million. MGM was paying a lot and in some ways getting a very bad deal. UA was itself heavily indebted, $200 million worth.

As a result of these activities, tied to its plans to renew itself as a film major, MGM in 1981 had assumed an aggregate long-term debt of $685 million. What is especially striking about this huge figure is its instantaneous appearance. In 1980, MGM's long-term debt was a mere $60 million.16 In very real terms, MGM was mortgaging its future on a highly speculative plan, namely, that its film production activities would be sufficiently successful to keep it afloat on this ocean of red. Unfortunately, its slate of films scheduled for release in the early 1980s included a line-up of box-office duds: Rich and Famous; Whose Life Is It Anyway?;… All the Marbles; Cannery Row; Pennies from Heaven; Buddy, Buddy; and Yes, Giorgio. MGM'S only real asset would prove to be its film library, which included 1,600 of its own features (and what features they were—Gone with the Wind, The Wizard of Oz, Ben-Hur, Singin' in the Rain plus 2,500 pictures for which UA owned distribution rights. These included twelve James Bond features and the Rocky and Pink Panther series. The UA library also included 550 pre-1950 Warner Bros, titles (including Casarlanca, The Maltese Falcon, and The Treasure of the Sierra Madre) and 700 RKO features (including King Kong and Citizen Kane).

Here was the money. The rise of pay cable and home video markets would turn this library into a gold mine, but it would not be enough to salvage MGM. The company's debt-financed plan of expansion was a daring and foolhardy venture. The company could not stay afloat, and even in the merger-and-acquisitions frenzy of the period, MGM had great difficulty attracting buyers. Hardly a prized purchase, MGM's fate in the 1980s was to be cannibalized and dismembered, its assets scattered and sold. From its ambitious start at the beginning of the decade, the company quickly became the industry pauper, passed unwanted from buyer to buyer. Among the majors, MGM was the big loser in the high-stakes game that the industry had entered.

Walt Disney Productions

In contrast with MGM, Disney in the 1980s was one of the industry's great success stories. During the latter half of the decade, Disney reemerged as a major force in motion picture entertainment, but at the top of the decade, it seemed directionless and its family films increasingly anachronistic. Disney's share of the theatrical film market in 1980 was a paltry 4 percent, and it saw worldwide film rentals of $161 million, only about half of what the other majors were experiencing.17 Its 1981 animated feature The Fox and the Hound generated $28 million in rentals, this during the blockbuster era, when the biggest films could approach or surpass $100 million. In development were several projects that would perform dismally at the box office upon release: Tex (1982), Tron (1982), and Something Wicked This Way Comes (1983). Disney's film revenues were especially small in comparison with its Disney World and Disneyland theme park revenues ($640 million) and were not much more than the company realized through its Character Merchandising, Records and Music Publishing, and Educational Media divisions ($109 million).

A corporate image study demonstrated that, despite its theme park operations, most people thought of Disney as a producer of motion picture and television programming, yet the income generated by these activities was out of balance with the company's other sectors. Upcoming films would not help much: The Devil and Max Devlon ($6 million in 1981 rentals), Dragonslayer ($6 million in 1981 rentals), and Condorman ($2.5 million in 1981 rentals). Popeye (1980) earned $24 million, but this was a coproduction with Paramount and incurred a split in rentals between the two distributors. Worse yet, Disney was heavily extended in 1980-82, having committed $800 million to Epcot Center, scheduled to open in 1982. In addition, Tokyo Disneyland was in development for a 1983 opening, and Disney was preparing to launch a pay-cable programming service, the Disney Channel, that same year. The Disney Channel suffered a $28 million operating loss its first year and did not become profitable until the second quarter of 1985.18

Disney, therefore, had committed major capital reserves to these theme park and cable ventures, and it could not look to its filmed-entertainment segment for compensatory returns. Film entertainment was failing Disney. It had become a chronic underperformer, and the Disney studio label was synonymous with poor to mediocre box-office performance. In a blockbuster era, when other majors were winning 15-20 percent of the annual market, Disney's films were out of the competition. The company had to increase film revenues, especially given its expensive ventures into cable television and new theme parks. Disney achieved this goal with spectacular success, and it did so, virtually alone among the majors, on its own, without seeking to merge with a giant power in the communications industry. Disney's remarkable success is chronicled in the next chapter. In 1980, though, Disney was barely alive as a major studio.

Orion Pictures Corp.

Orion was one of the smallest of the industry's major producer-distributors and has sometimes been called a "mini-major." Since it was not a key player in the events covered in the next chapters, it will be helpful to profile Orion in a broader time frame than has been allotted the other majors thus far. The company originated in 1982 from a program of corporate and financial restructuring that was then underway at Filmways, Inc. Filmways had been experiencing severe financial constraints. Its operating loses were substantial, and it could not raise enough capital to finance its production and distribution operations. On 8 February 1982, the company installed new senior management. Arthur Krim, Eric Pleskow, William Bernstein, and Mike Medavoy assumed responsibility for the company's operation. These four had been executives at United Artists. They left UA in 1978 and formed Orion Pictures Company. With their installation as chairman of the board (Krim), president and CEO (Pleskow) and executive vice presidents (Bernstein and Medavoy), Filmways changed its name to Orion Pictures Corp.

Also in February, the company restructured its finances by negotiating a capital infusion of $26 million. The Warburg Pincus Capital Corp. and HBO provided the capital in exchange for newly issued debt and equity securities. Orion also received a new revolving credit line of up to $55 million and formed an extensive pre-sale arrangement with HBO. Orion pledged to license exclusively to HBO all films for which it had the cable and pay-television rights, from February 1982 until January 1985. Just before its restructuring, the company discontinued subsidiary operations so it could concentrate on entertainment programming. Discontinued operations included its publishing business (Grosset and Dunlap), a broadcast equipment manufacturing business, and a paper-board slide mount manufacturing business.

Orion planned to release fourteen to sixteen theatrical films per year. Releases for 1982 included Woody Allen's Broadway Danny Rose; Under Fire, with Nick Nolte and Gene Hackman; and Easy Money, with Rodney Dangerfield. Orion's film library in 1982 included six hundred theatrical and television movies. Recognizing that video and cable markets increased the library's value, Orion engaged independent investment bankers to reassess the library and the company's film distribution operations. As a result, these inventories increased in value by $18 million. Orion, though, moved relatively slowly into these markets. Unlike the other majors, who released films to the video market through their own subsidiaries, Orion licensed home video rights to outside companies, who duplicated and distributed the videos. In 1986, Orion created Orion Home Video to distribute its product to the home markets. Orion also syndicated television programming, some of which had been produced by other companies (e.g., NBC's "Saturday Night Live" episodes from 1975-80).

Compared with other majors, then, Orion was a smaller-scale operation. It remained active in film production and distribution but saw smaller revenues from these in proportion to the other majors. In 1985, for example, Gulf and Western (Paramount) reported revenues from film and television of $916 million, as compared to Orion's $223 million. Unlike the other majors, however, it never claimed the largest share of the theatrical market in any year (see ch. 2, table 2.1). Orion saw its best year in 1987 (thanks to the December 1986 release of Platoon), when its films garnered 10 percent of the domestic market, but this was substantially behind the 20 percent commanded by Paramount as the market leader. In all other years, Orion's share ranged between 1 and 7 percent. Furthermore, Orion escaped the mergers and acquisitions that reshaped the other majors, though it did see substantial stock ownership by Viacom and Metromedia Co. Orion thus remained somewhat on the periphery of those events that were remaking the industry.

Problems and Challenges Compelling Reorganization

As the preceding survey shows, at the top of the decade many of the major film studios operated as part of a traditionally conglomerated corporate sector that included key, interrelated components (film and television, book publishing, recorded music) as well as unrelated operations (direct-mail marketing, retail gift stores, restaurants, catering services in a national park). By decade's end, this diffuse structure of business activities had been replaced by a tight focus on entertainment and communications operations in which theatrical film was a small but vital component. What changed things? Why did the Hollywood industry, and its parent corporations, shift from an old-line pattern of conglomeration to a tightly focused range of mutually reinforcing entertainment operations?

The majors confronted twin dilemmas. Runaway inflation was devouring their operating capital at the moment when new markets for filmed entertainment were becoming viable. The industry worried over a seemingly uncontrollable rise in film production and marketing costs in the face of a theatrical market that was stagnant, while wrestling with the challenges posed by the new, nontheatrical delivery systems of cable and pay television and home video (cassette and disc), whose precise effect on the industry was as yet unknowable, though everyone realized its scope would be huge. At a minimum, the new delivery systems would change the production, distribution, and consumption of filmed entertainment, and the majors were determined to maintain their accustomed prerogative to control film products and their revenues, whatever the new shapes and formats these might assume.

In 1980, theatrical motion pictures were apparently making more money than anyone dreamed possible just ten years previously. Blockbuster films like The Empire Strikes Back were returning over $100 million in a single year to their distributors. At the same time, though, as I noted at the beginning of the chapter, the theatrical market, measured by ticket sales rather than rental returns, had topped out. Annual ticket sales had remained relatively constant, at around 1 billion, for the past twenty years.19 Measured in terms of the number of individuals going to the movies, the theatrical market was no longer growing. As Warner Communications, Inc., acknowledged in its 1981 shareholders report, "Although U.S. box office reached a record total of nearly $3 billion, the gain was entirely due to ticket price increases."20

The flat theatrical market was especially worrisome and dangerous in the context of the wildly escalating production and marketing costs. These were frightening because they eroded profit taking. Hollywood was not the only industry to face this problem. In the late seventies and early eighties, the U.S. economy as a whole was gripped by recession and inflation. In early 1980, the Consumer Price Index had climbed by nearly 9 percent above its 1975 level, and the economy had seen price increases of almost 40 percent in energy, 16 percent in home prices, and 27 percent in the cost of home financing.21 By fall of 1982, the national unemployment rate stood at 9.8 percent, and throughout 1981, real disposable income grew less than 2 percent.22

The inflationary crisis in Hollywood was a subset of this larger national problem, though it also had its own industry-specific causes. Chief among these was the role assumed by the talent agent and agency in negotiating star and director salaries and offering packages of talent to studios or other funding agencies. The exorbitant salaries paid the industry's top stars were a function of the institutional presence and power of talent agencies and of the willingness of studios to embrace high-cost filmmaking out of a belief that these monies ensured the production values necessary to generate big box office. (Ch. 5, examines the talent agent and the evolution of this industry segment during the decade.)

The price tags attached to big stars and the talent packages marketed by agents were not the only factors driving up production costs. National economic forces also intervened to make production more expensive. In 1980, the Hunt brothers of Texas tried to gain control of the silver market and nearly succeeded. As a result, the price of silver exploded through the roof. In early 1979, silver was priced at $5.40 an ounce; it shot up to $42 an ounce by 14 January 1980. The impact on the film industry was immediate and powerful. Silver halides in color and black-and-white stock register light and form the image on a strip of film. Because it contained these silver halides, the price of raw film stock was responsive to the fluctuations of the silver market. In early January 1980, Eastman Kodak announced large hikes in the price of raw stock, a 45 percent increase for color and a 70 percent increase for black-and-white, which contains a higher concentration of silver.23 The price hike added approximately $250 to the cost of a release print. For a studio spending $16 million on its theatrical prints, this entailed an additional $4 million to that cost. The release costs of a thousand-print national saturation campaign for a prominent film like Star Trek would jump a quarter of a million dollars. Peter Myers, senior vice president of domestic distribution for Fox, noted, "Up to now, our only consideration was whether we could afford to go on with the national tv buys required in a mass saturation, assuming that was the only factor because it's so costly. Now, we'd probably have to start taking print costs into consideration as well."24 Thus, as talent prices were escalating, the studios also faced an unwelcome rise in basic print costs.

These inflationary forces, coupled with the studios' willingness to fund expensive, effects-driven pictures, helped produce the steady escalation in production costs. This ugly trend was one of the decade's most striking features, and it generated considerable anxiety throughout the industry. Chart 1.2 shows the dramatic increase in production costs (known in industry terminology as "negative cost") and the accompanying rise in print and publicity costs. ("Negative cost" designates all of the expenses incurred in a film production prior to release and distribution. These would include the costs of securing the literary property on which the film is based, hiring the talent, constructing sets, operating the camera, etc. "Print cost" designates the expense of manufacturing prints for release to theaters. If a single print costs $2,000, a national saturation release of one thousand prints could cost a studio $2 million in lab fees alone. Publicity for the film would be an additional expense.) In 1979, the average negative cost of a feature was $5 million.25. In 1980 it jumped to $9 million. In 1981, it reached $11 million, and in 1982 it climbed to $12 million. By 1989, it had soared to $23 million.26 Advertising and print costs in 1989 averaged $9 million per feature, bringing production and marketing expenses per feature to $32 million, as compared to $13 million in 1980. In its 1980 annual report, 20th Century-Fox observed ominously, "The costs of production and distribution of theatrical motion pictures continue to escalate tremendously," and the studio acknowledged that "the high rates of inflation experienced in recent years have significantly affected the Company's earnings."27 If adjusted for inflation on a constant-dollar basis, Fox's net earnings for 1980 of $54 million reduced to $33 million. In a similarly sobering tone, Warners explained to its shareholders, "Part of the explanation for the reduction in industry profits in 1980 on essentially flat volume lies in the cost side of the equation. More movies were released in 1980, the average cost of production rose substantially, more money was spent to advertise and promote each picture and thus the industry's profits and return on investment fell sharply."28

From December 1980 to September 1981, the majors released 114 films, costing $1.08 billion and returning $1.07 billion in rentals.29 Thus, returns from domestic box office barely matched production costs. (As we will see, industry financing and distribution practices are considerably more complex than the matching of box-office returns

with production costs would imply.) Warner Bros, released 21 pictures, returning $235 million in rentals, but the production costs for this slate of pictures totaled $230 million. Universal released 21 films generating rentals of $155 million, but they cost $210 million. In the worst shape was MGM-UA, releasing 18 films that cost $210 million but that returned only $115 million. The following year, industry-wide domestic rentals increased by 17 percent but the accompanying production costs rose by 19 percent.30

Production costs were outpacing the industry's revenues from theatrical exhibition. Returns to the distributor from theatrical exhibition, however, do not in themselves determine a picture's profitability, and it will be helpful here to demonstrate the complexity of industry financing. This complexity makes it difficult to assess the profitability of a given picture and indicates that box-office returns do not map directly onto production costs, though they are, of course, very relevant to those costs. A tangled network of additional factors, beyond box office and production costs, comes into play when assessing profitability, and these are important for the reader to grasp. They include the financing arrangements on a given production, the presence of profit participants, and the multiple points at which the revenue stream from box office is diverted. To minimize their expenses, the major studio-distributors often sought outside investors in production, and the majors were contractually bound to honor the outside or joint investors' claims on exhibition revenues. Such investors, who claim a share of revenue returns based on their initial investments in the production, are one of the two common types of profit participants; the other is the industry talent (a major star or director) who claims a percentage of box-office gross based on the marquee value of his or her name. The rising inflationary costs of the 1980s compelled the studios to look to outside investors as a means of reducing risk and spreading studio capital among a greater range of productions, few of which would be totally funded by studio monies. Financing arrangements often stipulated that outside investors recover their funds as gross profit participants before the distributor would take its cut of returns. In this sense, the gross profit participant is to be distinguished from the net profit participant. The majors are notoriously skilled at claiming losses on popular films when it is in their interest to do so and when the affected party is a net profit participant. Net profit participation (i.e., returns based on revenues left after the distributor, exhibitors, gross profit participants, and the production company take their cuts) is typically a losing bet because net participants are often last in line. When Art Buchwald filed suit against Paramount Pictures, charging that the film Coming to America (1988) was based on a treatment he wrote but for which he was uncompensated as a net profit participant, the studio demonstrated, through its byzantine bookkeeping practices, that the picture lost money despite its having been the second biggest film of 1988! (The Buchwald case is covered in more detail in Ch. 5.)

In addition to these factors complicating assessments of a film's profitability, which has to be evaluated in relation to gross versus net proceeds and the negotiated splits among the production company, distributor, exhibitor, investors, and profit participants, films are long-lived assets and continue to generate revenue from other, or ancillary, markets after the theatrical distribution window has closed. These ancillary markets grew tremendously in importance during the decade until their revenues outpaced those generated at the theatrical box office. Thus, at a time when production costs were outstripping revenues and when the revenues themselves were hostage to the claims of multiple parties, the ancillaries offered the studios an irresistible opportunity for augmenting their income. In the ancillaries the studios perceived a significant potential solution to the problem of how to generate sufficient revenues from film production and distribution in a climate of rising costs and increasing profit participation by a range of parties. With uncontrolled inflation in the industry, and with production costs growing at an alarming rate and flattened ticket sales placing a roof on the monies that could be earned from theaters, the industry needed new markets, new venues in which films could be distributed and from which additional revenue streams could be derived.

Hollywood is a business that finds it difficult to make a profit from production under the best of circumstances. Merrill Lynch analyst Harold Vogel has stressed how tough the numbers are.31 If a major funds twenty productions in a year, budgeted at an average of $15 million with $6 million allocated for print and advertising costs per picture, that studio would have to amortize $420 million in debt over the release cycles of those pictures. If half that cost is allocated for the theatrical release cycle, the distributor must see a return of $210 million. To receive that (assuming the distributor receives 42 percent of box office), the box-office gross would need to be $500 million. In 1989, domestic box office was $5 billion. Thus, the studio would need a 10 percent market share to break even on its production outlay. During the 1980s, only Paramount and Warner Bros. achieved this minimum mark each year. Market share among minor studios rarely hit 10 percent. Chart 1.3 shows how little remains from the box-office dollar to cover print costs and profit. (It will be helpful to explain the terminology used in the chart. The "distribution fee" is a sum levied by the distributor to cover its operating expenses and the maintenance of its home and branch offices. Typically, this ranges between 15

and 40 percent of gross receipts, less what the exhibitor claims per contract specifications. The "house nut" is a fixed amount of the box-office gross that the exhibitor keeps to cover its operational costs. The chart segment designated "theater" is the remaining amount of the gross kept by the exhibitor [after deducting the nut], as per the contractual terms of the distributor/exhibitor split.)

The picture is even bleaker than the chart indicates. Vogel's display of the data lumps print costs and profit as a single category. In effect, though, "print cost" as Vogel uses it conceals several different categories of expense. Along with the lab costs of duplicating prints and the expense of an advertising campaign, these include the negative cost (i.e., the expense that the production itself has incurred). As I explained earlier, negative cost includes the salaries for everyone from stars to grips and gaffers, as well as the costs of the film stock and all of the resources involved in the production (set design, costuming, etc.). Negative costs can vary wildly depending on the type of production (period films and special effects films are often among the most expensive) and the talent involved. Thus, in Vogel's presentation, the thirty-one cents of the box-office dollar left for this category must be assessed in terms of the negative cost and the claimants to any "profit." It will take much longer for this residual revenue to cover the cost of expensive productions than it will for modestly budgeted pictures. The addition of profit participants further erodes the remaining revenue available for print cost amortization and profit taking by the studio. Participants (e.g., big-name stars) with "points" taken on gross receipts will receive a specified percentage of these off the top. The financing arrangements for a given production may also have stipulated that outside investors, as limited partners, are due a portion of these gross receipts. Thus, the box-office dollar is split into an aggregate of smaller units by the complex nature of film financing and distribution. The remunerative opportunities represented by the ancillaries must be seen in this highly qualified context, one marked by many claimants to the revenue stream produced by film distribution.

As the decade began, the majors had already taken initial steps into video and cable distribution, but important segments of the industry failed to see some of the long-term benefits of these delivery systems. As we will see, they made some foolish decisions. Nevertheless, the new delivery systems would in time rejuvenate film production and strengthen the importance of theatrical exhibition at precisely the moment when it was contributing a diminishing portion of the revenue pie. As WCI explained to its share holders in 1981, "There is an almost exponential growth in ancillary markets for current feature films and film libraries as well. This growth is the basis for an optimistic view of the long-term prospects for feature films."32 Other sectors of the industry were also cog nizant of the strategic value of these new markets, including the critically important financiers upon whom the studios depended for their capital loans. John Fisher, vice president of the Entertainment Industries Center of Wells Fargo Bank, an important source of industry financing, identified the relevance of new distribution methods for the long-term health of the industry: "A major factor contributing to the growth of entertainment industries in the 1980s will be the revolution in distribution methods which has already begun as a result of the proliferation of television channels made possible by cable, pay TV and advanced electronic systems such as satellite communications."33 These technologies and distribution venues, he predicted, could be expected to have a favorable effect on the industry by creating an expansion of demand for film product in the 1980s. "This, combined with the maturity and continued profitability of the industry, will be accompanied by increased support from traditional business financing sources."

The promise of new revenue sources for the industry, and increased demand for film production that could result from these, placed Hollywood in a critical phase of its history as the decade began. The majors were embarking on a race for these revenues, and the results could be costly for the losers. MPAA president Jack Valenti foresaw "a pot of gold" for Hollywood at the end of the decade, but he warned that not all would reach it. Quoting Alfred North Whitehead, Valenti remarked that "those events most benefitting mankind almost wrecked the society in which they occurred."34 Twentieth Century-Fox president Dennis Stanfill concurred, predicting a shake-out in the industry that would eliminate the weaker players as production and marketing costs soared and competitors vied for control of the markets promised by cable and home video. Stanfill said, "We may go through a valley of discontent for a few years before we are able to take advantage of the growing new markets."35 The shake-out period was accompanied by the wave of mergers and acquisitions as the major studios jockeyed for position. Some majors welcomed buyouts by powerful parent corporations that facilitated control of an integrated stream of revenue from related leisure-time markets. Others tried to fend off hostile takeover attempts, but by decade's end almost no Hollywood major emerged unchanged from the protracted process of shake-out and adaptation. Paramount's president Michael Eisner called the early 1980s "the survival years" and predicted that those film companies "without a strong financial structure will fold."36 The fiscal and corporate challenges triggered conceptual shifts in the way the industry thought about its medium. In a web of interconnected distribution venues, film would no longer be a celluloid based medium tied to theaters. Film would be conceived as a form of software needed by an array of technologies servicing the rapidly increasing distribution venues. Smart companies would seek to keep all of those revenue streams in house.

In 1981, studio chief Michael Eisner spoke in detail with Variety, the industry's trade paper, about Paramount's corporate philosophy regarding the important role the new markets would play in the company's plans for the 1980s and about the changing role of film in relation to the new technologies. Eisner explained that the company's goal was to obtain "a wholly owned stream of rights that will expand our ability to make software for every entertainment medium." Filmmaking was a kind of software programming, and the most successful such programming would be that capable of running on several different media platforms. "It's all tied to one purpose," Eisner explained, "creating a stream of rights that may start off in motion picture theaters, then move to cable, network, off-network and foreign; or might start in the legitimate theater, or may go directly to cable. It doesn't matter where it ends up. The point is that we will own the software every one of those media needs." Paramount would aim to produce programming for every entertainment medium and to simultaneously control the rights to all media uses of that programming. Furthermore, this philosophy would guide the studio's decisions about which proposed film projects it would back. Eisner cautioned, "We do not make motion pictures for which we don't have the full stream of rights."37 Eisner's predictions for Paramount would come dramatically true. Gulf and Western, Paramounts parent corporation, would redesign its company structure to more effectively become an allrights software corporation. (G&W's redesign is detailed in ch. 2.)

Paramount clearly recognized the extent to which control of the ancillary markets was crucial to a firm's success and to its ability to survive the shake-out years. As the president of International Film Investors, Inc., warned, "When you lose control of a film's ancillary rights, you're in trouble. Today that's the core of the movie business."38 The risk of losing control was real, and it was strikingly illustrated by the pay-cable war waged between Time, Inc.'s HBO and the major studios at the beginning of the decade. This was a battle about the revenues generated by pay-cable transmission of studio films and who would control those revenues. The conflict was significant because it illuminated the new configurations of power in the eighties industry and the extent to which the pursuit of new markets was forcing change. It also demonstrated how the redefinition of films as software necessarily brought new corporate players (sometimes unwelcome ones like HBO) into the industry and forced into being new economic alliances. The most dramatic result of these alliances in the cable war was the overnight creation of a major film studio.

The HBO War and Tri-Star

The majors made a number of miscalculations and errors in their attempts to implement strategies for dealing with the new markets. MCA/Universal, for example, strongly backed the laserdisc format and spent lavishly to develop it in joint ventures with Pioneer and Magnavox, only to withdraw after a few years when that market failed to show much growth. Sometimes the majors were simply slow to act, with perceptions encased by traditional business paradigms that were becoming outmoded. The cable war was an example of the latter problem.

The Hollywood majors nearly lost a substantial amount of control over the production and distribution of films for pay cable. The industry slept unaware while HBO, an industry outsider, maneuvered into a position in the early 1980s from which it could dictate, by virtue of its size and the absence of an effective competitor, the terms of its payments to studios for cable distribution of their films. The industry's slow response to cable facilitated HBO's dominance. The majors' vested interest in theaters and broadcast television as the main delivery systems for its product made it difficult for them to reorient their distribution practices to accommodate a new television medium. According to Time, Inc.'s vice president for video, Gerald Levine, "The movies grew out of the nickelodeon. It's a little hard to transfer allegiance to a new system of distribution when you look at the world in a certain way. HBO happened to find the formula early."39

Since 1975, when HBO booked space on RCA's Satcom 1 satellite, it grew to become the number one pay-cable service, locking up more than 60 percent of the nation's pay-cable subscribers (12 million according to HBO, 18 million according to A. C. Neilson Co).40 By 1983, that had become a $2.4 billion market, of which HBO had the lion's share. Furthermore, Time, Inc., through HBO, had become in the early 1980s one of the nation's largest financiers of movies. In 1983, HBO allocated $250 million for theatrical production and licensing fees (not including funds for production of made-for-cable movies), an amount comparable to the production budget of a Hollywood major.41 HBO's competitors, Showtime (owned by Viacom before its merger with The Movie Channel) and The Movie Channel (a joint venture of Warners and American Express), had together less than half of HBO's subscribers. By any measure, cable was a significant market. Revenues of $2.4 billion from pay cable were comparable to the domestic box-office gross of $3.4 billion in 1982 and $3.7 billion in 1983.

The Hollywood majors belatedly discovered that they were effectively shut out of this business because HBO was an outside player (owner Time, Inc., was then unaffiliated with any of the majors). Whereas the majors typically received 45-50 percent of revenues generated at the theatrical box office, they complained that HBO's commanding presence in pay cable permitted it to pay the majors less than their films were worth and to retaliate when a studio turned down an HBO bid as being too low. When Fox rejected HBO's bid for its hit film Breaking Away (1979) and sold television rights to NBC instead, HBO bought no films from Fox for a year.42 Furthermore, HBO's extraordinary capital reserves and its dominance of the market permitted it to pre-buy the cable rights to a film, which incensed the studios. In a pre-buy, HBO would secure exclusive cable rights before a film production was complete and its hit potential could be assessed, effectively shutting studios out of a critical source of ancillary revenue on pictures they agreed to distribute. HBO, for example, paid Universal $3.5 million for exclusive cable rights to On Golden Pond, starring Henry Fonda and Katharine Hepburn. The picture was the third biggest box-office film of 1982, earning a rental of $118 million.43 Had Universal waited to sell the cable rights, the picture would have commanded a better price. Escalating production costs compelled the majors to seek outside financing for their pictures, and pre-buys were a strategic source of such financing. But the majors grumbled while taking HBO's money. They regarded HBO's pre-buys as an end run, cutting them off from more favorable licensing fees that might otherwise be obtained.

Further antagonizing the majors, HBO in 1983 established Silver Screen Partners (through E. F. Hutton), a limited-partnership financing arrangement seeking to raise $75 million for production of twelve films. HBO guaranteed investors a return of production costs and claimed full rights to exclusive pay-cable showings and television syndication of the completed films.44 As noted previously, the studios had been compelled to decrease their financial outlay for productions by seeking outside lines of financing (e.g., selling some ancillary rights up front or offering limited partnerships) or by distributing an increasing number of "pickups," finished films that did not require a major to assume production costs. By investing in production and by providing a guarantee for outside investors, HBO was playing the industry's own game. Thus, as the majors faced curtailed abilities to invest in production, HBO's participation in the financing and production of independent pictures threatened their economic dominance of the industry. When HBO provided over a third of the $12 million production budget of Sophie's Choice (1982), starring Meryl Streep, a project in danger of failing for lack of funding, the film's producer, Keith Barish, appreciatively noted, "Financing has become very difficult, and when someone like HBO is willing to step forward—particularly on a difficult project like this—it can have a revolutionary effect on the producing of motion pictures."45 As far as the majors were concerned, though, HBO represented an enormous and dangerous revenue drain. Fox chair Alan Hirschfield said, "They [HBO] are a tremendous threat to the structure of the industry as we know it today and ultimately to the viability of the creative process."46 In a fit of hyperbole that demonstrated the industry's anxieties, the chair of Gulf and Western's entertainment and communications sector, Barry Diller, said, "If HBO and Time, Inc. go on unchecked, the motion picture industry, without exception, will be under the total control of one company in less than five years."47

Hollywood struck back against HBO on two fronts. Studio executives appealed to the Justice Department for an investigation of HBO's cable practices, which they regarded as monopolistic. To prove monopoly, the executives ironically cited Hollywood's own history, specifically the divestiture ruling of 1948 that directed the studios to relinquish their theater operations because these, in tandem with a studio's production and distribution activities, constituted an unfair restraint of trade. The major studios drew an analogy between the industry's pre-1948 corporate organization (thereby tacitly acknowledging its monopolistic character) and HBO's current practice of financing and producing films that it then exhibited on its cable service, another production-distribution-exhibition combination, they alleged, operating in restraint of trade.

To the studios' disappointment, Justice failed to launch a prompt investigation. It did, however, quickly scrutinize, and then file suit against, Hollywood's attempt to launch its own pay-cable service, called Premiere, to compete with HBO. Worse yet, Justice seemed to be acting in response to an HBO charge that the studios were combining to restrict competition (e.g., by trying to squelch HBO and by forming Premiere) and were in violation of antitrust statutes. The majors loudly cried foul. Fox's Alan Hirschfield said, "We petitioned the Justice Department a year ago to take action against the dominance of Home Box Office. The Government dragged their feet for a year, but within 90 days of the announcement of the formation of Premiere they filed against us. The timing of this filing … is suspicious. Is it motivated by legal considerations or by political considerations?"48 MCA president Sidney Sheinberg retorted, "I have stated before that failure on the part of the Department of Justice to challenge activities and practices, including acquisitions, of Time Inc. and its subsidiary Home Box Office, raises in my mind the most serious questions of propriety and/or competence imaginable. The recent aggressive filing by the Department of Justice against the companies comprising the Premiere entity, while, to the best of our knowledge, not filing any actions against Home Box Office, significantly increases my earlier fears."49

The Premiere cable network was scheduled to begin operating 1 January 1980 and was to have offered twelve to fifteen films a month to cable subscribers. Four Hollywood majors—Paramount, Universal, 20th Century-Fox, and Columbia—combined as partners with Getty Oil, which owned a satellite, to form the network. In going ahead with Premiere, the industry was signaling its determination to compete with HBO and to seize a large, even commanding, portion of pay-cable film revenues. By licensing films to Premiere, the majors could bypass HBO. But the partners made serious blunders in their effort to best HBO. They agreed to set film license fees according to a formula they would work out among themselves, prompting Justice to charge them with price fixing. The partners also agreed to withhold the four participating majors' films from all other cable networks for a nine-month window while the films played on Premiere. This policy would prevent other cable services from playing the high-profile films that were offered to Premiere subscribers. These films included All That Jazz, American Gigolo, The Jerk, Coal Miner's Daughter, and Urban Cowboy. Since the four majors in the Premiere partnership distributed in 1979 nearly half of all films earning over $1 million in rentals, 34 percent of all films licensed by HBO, and 44 percent of those licensed by Showtime, Justice charged the Premiere partners with a violation of the Sherman Antitrust Act.50 (This was a federal statute designed to prevent monopolies and restraint of trade.) HBO's lawyer said, "It's simply illegal for companies to get together to set up a mechanism of pricing and to boycott competitors."51

A court injunction prevented Premiere from starting up, as planned, on 1 January 1980. Anticipating that they would lose the antitrust suit filed by Justice, the partners formally abandoned Premiere. As a result, the four Hollywood majors still lacked a cable distribution network of their own. The failure of Premiere, therefore, produced a flurry of strategic maneuvering among the majors to correct this deficit and led to new alliances with HBO. Late in 1981, for example, Columbia broke ranks with the other majors and signed a deal with HBO giving the cable service exclusive rights to its films in return for investments by HBO in its film production activities plus an agreement to accept film license fees based on box-office returns. The deal gave Columbia an additional source of outside funding for production and a more favorable return on the cable licensing of its films. But HBO also won in this deal. It had an extensive pre-buy arrangement with a Hollywood major.

In November 1982, Columbia, 20th Century-Fox, and ABC planned to buy a majority interest in Showtime, a smaller-scale competitor with HBO, from its owner Viacom. Columbia withdrew from the deal at the last moment, and another combination of majors—Paramount and Universal—attempted to buy Showtime and merge it with Warner-Amex's The Movie Channel. The Justice Department also blocked this plan, contending that the involvement of Paramount and Universal would produce substantial vertical integration. (Vertical integration designates a business structure in which a company controls multiple levels of production and distribution within a single industry and which enables it to affect other competitors adversely. In the film industry, vertical control of production, distribution, and exhibition could be manifest in single-company ownership of a theater chain, a film studio, and a distribution organization. As we will see, these ownership patterns were fraught with ambiguities regarding their likely market impact, and rulings by the Justice Department reflected these ambiguities. If Justice took a tough line against the majors in 1980, it exhibited greater tolerance later in the decade when the majors reentered theatrical exhibition.) The two majors withdrew, and Warner-Amex and Viacom then merged Showtime with The Movie Channel to create a more substantial competitor with HBO.

The Justice Department had blocked attempts by the Hollywood majors to act in concert with one another to create a cable distribution service, or gain control of one, in order to compete with HBO. In the meantime, Columbia, which withdrew from the Fox-ABC plan to buy Showtime, had been busy forging its new alliances. In 1983, Columbia, CBS, and HBO unveiled their plans for Tri-Star motion pictures (formerly called Nova while in the planning stages), an entirely new and eighth major film studio. Victor Kaufmann, the new studio's chair, described Tri-Star, launched fully funded with enormous start-up capital, as "an instant major." He said, "We think we have the ability to compete effectively against the seven major established studios."52 Tri-Star's initial plans called for the release of thirty-five films in 1984 and 1985, but its initial performance was shaky and proved disappointing for partners CBS and HBO. By the end of 1984, it had released only twelve films. These included three solid hits, The Natural, The Muppets Take Manhattan, and Places in the Heart, but in its first year of operation Tri-Star gained only a 5 percent share of the domestic theatrical market.53 Many Tri-Star films did poorly at the box office (poor performers in 1984 included Supergirl, Meatballs Part II, Flashpoint, Runaway, and Silent Night, Deadly Night), diminishing their value in the television markets. In response, CBS sold its shares in the company to Columbia in 1985, and the next year, Time, Inc., sold Columbia half of its interest in Tri-Star.

Despite the short-lived partnership among Columbia, HBO, and CBS, the Tri-Star venture had a special, emblematic importance in the developing Hollywood of the 1980s. To grasp this, we first need to look at the tangled business transactions on which Tri-Star rested. An intricate set of financing arrangements enabled Tri-Star to start up with over $400 million in available financing.54 The three partners contributed $200 million, with an additional $200 million line of credit obtained through several banks. HBO's investments were the largest among the partners, with the cable service pledged to cover 25 percent of the production cost of each Tri-Star film to a total investment of $50 million (in addition to the $67 million HBO pledged as its partners share in the venture). HBO would then pay license fees for exclusive cable presentation of Tri-Star films. CBS would pay $2 million for each film it licensed for broadcast from Tri-Star, with a commitment to take fifteen films. CBS would be able to show each film twice over a forty-four-month period after the HBO distribution window closed. Furthermore, home video affiliates of the partners (RCA/Columbia and CBS/Fox Video) contributed $5 million for worldwide distribution of Tri-Star pictures in this format.

These intricate financing arrangements provide a striking illustration of the partnerships and players emerging as a result of growing ancillary markets and the evolving status of film as software for a variety of media outlets. Hollywood's new major was a joint venture between established firms specializing in pay cable, broadcast television, and theatrical film production and distribution. As such, Tri-Star could guarantee that its product would derive revenue from these three vital distribution venues, all now contained in-house. Furthermore, Tri-Star could raise production capital through the prebuys engineered with HBO, CBS, and the home video affiliates. Most significantly, Tri-Star represented an undeniable vertical integration of resources and markets, with the production of feature films by the company for distribution across theatrical, pay-cable, and broadcast television outlets that its partners owned.

In this regard, the formation of Tri-Star heralds the inexorable movement throughout the decade toward greater concentrations of media ownership and control of interlocking markets. By the time Tri-Star was formed, other high-profile mergers and acquisitions had occurred (Marvin Davis's 1981 purchase of Fox, TransAmerica's 1981 sale of UA to MGM, Coca-Cola's 1982 purchase of Columbia). But Tri-Star's heterogeneous makeup was the most explicit demonstration thus far in the decade (and many more were yet to come) of the industry's growing concentration as it pursued synergies in filmed entertainment markets. Lastly with its integration of film production and exhibition (on cable and broadcast television), the formation of Tri-Star anticipated the tsunami of production-exhibition combinations that occurred in mid-decade as the majors went on a theater-buying spree. Tri-Star was a significant break with the decadesold split of production from exhibition in the film industry.

In light of this and especially because HBO was such a commanding presence in pay cable, it is notable that the Justice Department saw no potential in the arrangement for the parties involved to act in restraint of trade. On the contrary, Justice reasoned that Tri-Star "may increase competition among motion picture producers and distributors by creating a new competitor in the industry."55 Justice pointed out that the Universal-Paramount plan to buy ownership of Showtime and The Movie Channel had been nixed because of the potential dangers of collusion in production and distribution if three Hollywood majors (Universal, Paramount, and Warners, the co-owners of The Movie Channel) owned two pay-cable services. By contrast, Tri-Star involved only one major and one pay-cable programmer and therefore according to Justice, represented fewer opportunities for collusion. With Tri-Star, the ancillary, nontheatrical markets (i.e., cable and broadcast television) had combined with a Hollywood major to create a new studio and earned Justice's blessing in the bargain.

In addition to the industry's efforts to gain hegemony over the cable distribution of Hollywood film, a second benchmark event emblemized the emerging new Hollywood of the 1980s. Whereas the creation of Tri-Star added to the industry in a way that showed the arrival of new interests and markets in the film business, this event was more negative and involved the destruction of a venerable Hollywood name, United Artists, a film company of historic significance. The fate of United Artists, sold by its parent company Transamerica in 1981 to MGM, demonstrated how deadly the inflationary climate could be for film companies that did not control their production costs, and it was the official kick-off in the frenzy of film studio mergers and acquisitions. Tri-Star represents the positive components of industry transformation in the early eighties, demonstrating what could be created by the new forces at play. The extinction of United Artists, by contrast, showed the costs of that transformation, what could be lost if management foolishly supported a prohibitively expensive film that possessed little potential for marketing across the ancillary outlets.

The Death of United Artists

Despite long-simmering tensions between United Artists and its parent Transamerica (tensions that led a group of UA executives to leave the company and form Orion Pictures in 1978), the end for United Artists came largely from its ruinous production of Heaven's Gate (1980). This Western swelled from its originally projected cost of $7.5 million to $35 million, and it grossed just $1.3 million in its first weekend of national release.56 Production of Heaven's Gate was a chronicle of studio waste and of failure to control a runaway production. The film's escalating budget was symptomatic of this inflationary period in Hollywood history and of the industry's willingness to chase big-budget dreams of blockbuster success right to and over the edge of the precipice, as UA did. It also showed the danger of what can happen when a studio assumes great financial risk for a production, and it was the endgame for unrestrained auteurism. But, despite all of this and UA's fate, it would not bring down the curtain on high-stakes production gambles by the industry.

In 1978, director Michael Cimino was flush with the anticipated success of The Deer Hunter, which, prior to its release, the Hollywood grapevine had already pegged as a big and important film. The picture dealt with the experiences of three friends from a Pennsylvania steel town who fought in the Vietnam War, and the industry's high expectations for the film were rewarded. It won five Academy Awards, for best director and best picture as well as sound, editing and supporting actor awards. Before The Deer Hunter, Cimino was a relative unknown, with limited experience as a filmmaker. He had directed only one other film, Thunderbolt and Lightfoot (1974), a Clint Eastwood vehicle, and he had coscripted a few pictures. Before that, he was directing TV commercials in New York.

Despite this relative lack of experience, Cimino's potential success with The Deer Hunter was enough to attract the attention of United Artists, which feared that he might become unapproachable once Deer Hunter opened to the expected acclaim. Cimino's sudden cachet demonstrates a fundamental irrationality in the film business. Then as now, the industry has willingly courted ambitious filmmakers and financed their expensive visions. But filmmakers with a proven track record offer some collateral. By contrast, when the industry throws money at previously unknown directors who have an overnight success, it is trusting that this success is a sure-fire sign of a director's blockbuster potential. A more rational alternative would be to avoid the heady romanticism of lavishly courting relatively unproven filmmakers. But UA was not about to be cautious. Blockbuster filmmaking was not about caution, and UA wanted an epic blockbuster of its own and a picture that would win it some Academy Awards. Cimino seemed like a good bet despite the battles he was then having with Universal over the length at which The Deer Hunter would be released. Universal wanted a two-hour picture. Cimino fought for and got his 183-minute cut. The resolution of this conflict with Universal augured poorly for UA's relations with the director, and UA quickly found itself pulled in opposing directions by Cimino's artistic demands and by sound fiscal policy. As he did with Universal, Cimino would prevail in his battles with UA, to UA's lasting detriment.

The project Cimino proposed to UA hardly seemed like the stuff from which blockbusters are made. His script was based on the Johnson County War in 1892, a range war between the Wyoming Stock Growers' Association of large cattle ranchers and the settlers and small ranchers who flocked to Wyoming after passage of the Homestead Act, which promised land to any who lived on it and worked it for seven years. This conflict had been the basis for George Stevens's classic Shane (1953), but Westerns were no longer popular. In fact, they were box-office poison. Science fiction and horror were in vogue, leaving the Western behind in its own dust. Belonging to a genre moviegoers now regarded as passé, Heaven's Gate would have to compete the year of its release with such popular science fiction films as The Empire Strikes Back and potential horror winners like The Shining, Friday the 13th, and Dressed to Kill. These were terrible odds. Furthermore, Cimino's tale was resoundingly downbeat. The script climaxed with a bloody massacre of settlers by killers hired by the Stock Growers' Association. By story's end, all of its protagonists were dead. In light of this, UA's story department wisely advised caution: "If it is a project we want to do because of Mike Cimino's involvement, we should approach it with expectations of a major rewrite. If it were not for Cimino, I would pass."57

But UA forged ahead, despite already having one runaway production in Apocalypse Now (1979), helmed by Francis Ford Coppola, a director having difficulties with his material and his locations. Cimino would revise the story, sparing one of its protagonists (Averill, played by Kris Kristofferson) and adding a prologue showing Averill as an idealistic, spirited young man at the 1870 Harvard commencement. An epilogue showed him as a melancholy old man in 1900 ruminating on the past, on those events that made up the body of the film. The revisions, especially the prologue and epilogue, made the film seem less like a Western (to the delight of UA executives) and more like the ambitious, arty picture they wanted.

As the start of production drew near, terrible frictions began to develop between Cimino and his UA producers. In the draft agreement for his first contract, Cimino asked that, should the picture go overbudget and the production fail to meet its scheduled release date, none of the additional expenditures be held against his production company.58 In effect, he was asking for an unlimited budget and for UA to surrender its power to veto budget expenditures. He also asked for $2,000 in weekly allowances, irrespective of where he was living or working at the time, said expense to be retroactive to the picture's original deal date. These expenditures would be in addition to the $500,000 UA was paying him to direct the picture. Cimino's draft agreement also announced, to the surprise of UA executives, that he expected the film to be no shorter than two and a half hours. He also demanded that his name appear as part of the film's title: "Mr. Cimino's presentation credit shall be in the form 'Michael Cimino's "Heaven's Gate'" (or in such other form as [Cimino] may designate); Mr. Cimino's name in such credit shall be presented in the same size as the title, including all artwork titles, and on a separate line above the title, and shall appear in the form just indicated on theater marquees (United Artists to require such treatment in its agreements with exhibitors)."59 Cimino made these demands on the basis of having directed only two films, one of which had involved Clint Eastwood, a star who typically exerted the controlling authority on the productions in which he appeared. Thus it was The Deer Hunter that gave Cimino the artistic clout to cow UA with these outsized demands. Believing that Cimino, more than the picture or its players, was their star, UA acceded to his remarkable terms. The novice director had won the dangerous privilege of working without budgetary restraint, and UA handed over to Cimino its most fundamental authority as funding agent to supervise production and to hold a filmmaker within a contractually limited schedule and budget. It was auteurism run amok and a recipe for disaster.

On location in Kalispell, Montana, Cimino immediately fell behind schedule while exposing incredible amounts of film. During the first six days of shooting, Cimino fell five days behind. To get a minute and a half of usable footage, he shot nearly sixty thousand feet, processing all of it and incurring nearly $1 million in lab expenses. Filming less than a page of script per day, by week two he shot another sixty thousand feet of film. In twelve days of production, Cimino fell ten days behind. He shot an average of ten thousand feet per day (nearly the length of a two-hour movie) and spent almost $200,000 a day to do it. At this rate, the picture would wind up costing, with marketing expenses, $50 million, a staggering sum at that time for a single production. Cimino ultimately shot 1.5 million feet of film and printed 1.3 million feet, nearly 220 hours of footage, or the equivalent of over one hundred feature films.60 Steven Bach, a UA senior vice president who has chronicled the Heaven's Gate disaster, placed that $50 million in context:

It was not merely that the figure represented half of 1979's total production budget but that in consequence, other pictures would not be made, their financing diverted instead to Montana; distribution would, as a further consequence, have fewer pictures to distribute in 1980 and 1981; and finally, UA's overall odds at the box office would be dramatically reduced with fewer dice to roll. Heaven's Gate could consume the company.61

Where was the money going, and what was Cimino filming so obsessively? The answer: period detail. Heaven's Gate is a film of breathtaking pictorial beauty, achieved by master cinematographer Vilmos Zsigmond using meticulously detailed period locations, costumes, and props, that is yoked to a slender yet opaque narrative line. The accumulated weight of the period detail overburdened the narrative, which was poorly plotted, erratically developed, and full of confusion. Despite all of this, UA supported Cimino's expensive vision. Francis Coppola had not yet taken his post-Apocalypse Now career fall, and the director-as-superstar still possessed considerable vogue. This cachet is strikingly illustrated by an Eastman Kodak advertisement in Variety profiling Cimino during the Kalispell, Montana, shoot and suggesting that a director is justified in expending huge resources to pursue his artistic vision.

Cimino presented UA executives with an early cut of the picture on 26 June 1980. Incredibly, this was their first opportunity to see what the company had paid for, and the picture ran an unreleasable five hours and twenty-five minutes. Prior to the screening, Cimino promised to trim it by fifteen minutes. After pressure from UA to shorten the film, his initial fine cut ran three hours and thirty-nine minutes, and the picture opened in New York on 21 November at this length. The review in the New York Times was savage. Vincent Canby proclaimed, "'Heaven's Gate' is something quite rare in movies these days—an unqualified disaster."62 In its review of the picture, Variety sounded a distinct anti-auteur note and publicly questioned UA's management of the production. "The balance of director Michael Cimino's newest film is so confusing, so overlong at three and a half hours and so ponderous that it fails to work at almost every level, all credit to the stunning photography notwithstanding. The trade must marvel that directors now have such power that no one, in the endless months since work on the picture began, was able to impose some structure and sense."63

By 1983, for UA's $35 million production cost and $6 million advertising campaign, Heaven's Gate had returned only $1.5 million.64 This disastrous return, augmented by UA's decision to withdraw the film on 25 November 1981 from distribution in order to prepare a shorter version, accompanied and contributed to a sharp downturn in UA's revenues for 1980. This decline precipitated owner Transamerica's harsh actions. In the first nine months of 1980, a period preceding the Heaven's Gate release, UA's domestic rentals dropped 32 percent from the comparable period in 1979.65 UA's year-end revenues (derived from television, video, product licensing, and music-publishing activities in addition to its distribution of theatrical films) were $425 million ($306 million from film distribution), down from $469 million in 1979, a loss that resulted from the company's write-off of Cimino's film. As Transamerica Corp. explained to its shareholders, "United Artists' earnings decline was due primarily to a fourth-quarter loss resulting from the establishment of a reserve against the company's investment in the motion picture Heaven's Gate."66

Reaction from parent Transamerica was swift. Film distribution provided a tiny share of Transamerica's revenues. Its entire entertainment sector contributed only 10 percent of the company's overall 1980 revenue of $4 billion. With only a small investment in film operations and the ensuing damage to these already faltering operations by Heaven's Gate, Transamerica decided to discontinue its entertainment sector, concluding that its investments in the film industry were not cost effective. As Transamerica explained to its shareholders, "The decision to sell United Artists was an outgrowth of our increased focus in 1981 on long-range strategic planning. United Artists is an excellent company, but given the changes taking place and the major investments required to stay competitive in the entertainment business we felt we should concentrate on growth opportunities in our other businesses."67

As noted earlier, UA's decision coincided with MGM's plans for a major expansion in the 1980s. Noting the explosion of box-office revenues that blockbuster films could generate—"grosses the industry never thought possible a decade ago," according to MGM president Frank Rosenfelt—the studio planned to increase film production levels throughout 1980 and 1981, releasing a new film every two months.68 As part of this expansion, and realizing that Transamerica wanted out of the picture business, MGM and owner Kirk Kerkorian bought UA from Transamerica for $380 million. (MGM had a decade-old relationship with UA wherein the latter company acted as distributor for MGM pictures. MGM would now get its own distribution arm.) This was the opening act in the decade's lengthy MGM/UA saga (covered in ch. 2), which saw the once-mighty MGM progressively stripped of its assets as it was promiscuously passed from owner to owner. Variety noted the historic significance of the UA sale: "The traditional structure of the major companies has been dented. For all intents and purposes, United Artists has disappeared as a major, self-contained production and distribution company."69

The Heaven's Gate debacle pointed to the absolute need for the majors, in an inflationary climate, to institute tight production controls, especially over ambitious directors who did not have proven box-office track records and who were not working in solidly profitable genres, such as science fiction. Filmmakers like Steven Spielberg, John Landis, or Sydney Pollack would be entrusted with major production budgets because of their flair for handling popular material, but such highly regarded auteurs of the 1970s as Martin Scorsese, Robert Altman, and Arthur Penn would experience a difficult period marked by chronic funding problems. Moreover, UA's fate showed how important it was for studios to seek outside funding for expensive films rather than risk Transamerica's error in betting the house on a single, internally funded production. Thus, production financing shifted by mid-decade toward greater emphasis on limited partnerships and equity offerings.70 Columbia, for example, relied on Delphi Film Associates II and III to secure funding for itself and Tri-Star. Delphi III committed to fund through public stock offerings a maximum of $4.5 million of the production cost of each Tri-Star film.71

Despite these consequences, Heaven's Gate did not prompt the industry to reign in production costs, which continued to spiral upward. As we have seen, many of the factors contributing to this situation were difficult for the industry to control or influence. But, granting this point, the majors showed little inclination to scale production at lower cost points. In September 1982, shortly after the failure of Heaven's Gate and the sell-off of UA, Hollywood embarked on what Variety termed a "spending spree," with twenty films in production or about to be released, each costing over $20 million.72 Indicative of the shift in mode of financing that was underway, each of these pictures used sources of outside funding or was an independent production picked up by a major for distribution. In 1981, Columbia's ten domestic releases had an average budget of $7.5 million. By contrast, Columbia's upcoming releases through February 1983 included six pictures (out of fourteen) costing $25 million or more; these included Tootsie at $30 million and The Toy at $25 million. MGM/UA had the James Bond thriller Octopussy ready (at $30 million), and Fox had High Road to China (a $20 million bomb) and Revenge of the Jedi (fully financed at $32 million by Lucas Film, Ltd.).

Making this an ominous trend, expensive pictures were tepid box-office performers in the early 1980s. In 1980 and 1981, the domestic rentals from big-budget films declined, on average, making these problematic investments without substantial returns from ancillary markets. Between 1976 and 1982, only 30 percent of films costing over $15 million earned back their negative cost from the domestic theatrical market.73 By mid-decade, nearly half of such pictures were earning rentals approaching their negative cost.74 This was not a good rate of return (because of all the claimants to gross receipts), and it indicated that studios faced great difficulties in realizing profits from the productions they funded. The industry, though, would not or could not change its ways. Other big-budget bombs for the business lay ahead, such as Ishtar (1987) and The Bonfire of the Vanities (1990). Hollywood continued to chase expensive blockbusters, even though the theatrical market was insufficient to cover expenses for high-budget filmmaking. In this context, the ancillaries were very seductive. By mid-decade the industry was earning more from the ancillary markets than from theatrical, and it counted on these to augment revenue shortfalls from theatrical.

These factors point to the crux of UA's quandary with Heaven's Gate. The production was inconsistent with the direction in which the industry was now moving. The film was funded with internal UA capital, and the dreary Western saga possessed little appeal in alternative, nontheatrical outlets, even had they been available in a significant way. But they weren't. The explosion of ancillary markets, and their full potential for exploitation, had not yet occurred when the film was released. As a result, the film's box-office failure was unrecuperable, and it wiped out United Artists. Henceforth, it would be corporate suicide to fund an expensive production that lacked the potential for generating multiple revenue streams across the range of entertainment markets. The death of United Artists certified this principle.

By withdrawing from its theatrical film operations, Transamerica decided to concentrate on its financial services segment, its big moneymaking area. Its decision made Transamerica a definite outlier among the industry's parent corporations. Transamerica moved out of the entertainment sector at a time when existing industry parents were salivating over the new markets and when other, outside companies were looking to get in. The UA sell-off was an opening act in the industry's prolonged process of corporate reconfiguration. In a game of corporate musical chairs, everyone swapped partners and parents, and new players gained entry to the business. The nontheatrical distribution venues promised a huge pot of gold by decade's end. The race was on.

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The Industry at the Dawn of the Decade

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