by Tim Wu
Unfortunately, as it developed in the late 1970s, cable became wedded to the idea of niche marketing—of milking every audience segment with targeted advertising. It didn’t have to be that way: cable television was never free as broadcast was, and could, in theory, have developed a model to support itself on fees alone (just as HBO did, and continues to do). Instead, it mostly developed in the cast of its founding mogul, driven by the incessant need to raise revenues and attract attention. And thus after Turner, cable gained both its enduring viability and its tendency toward pandering and crassness that have become its hallmark, giving the very word a whiff of the down market.
To understand how much difference the circumstances of creation can make, consider the contrasting example of the Internet. Cable was born commercial, while the Internet was born with no revenue model, or any need of one. Its funding came in research grants, making it, for a long time, the information media equivalent of a public park. And while today it can be used to make money, the network, being quite purely open, can still easily carry content that makes no financial sense, from personal blogs to sites like Wikipedia. Oddly enough, that’s how many of the most lucrative Internet firms got their start.
Cable, on the other hand, with limited exceptions, has for its entire history been driven by a constant appetite for cash and for content that could deliver a sufficient audience to yield a return on capital. The scale needn’t be vast; so long as there is someone with consumer needs and a credit card prepared to watch Blue Crush at 3 a.m., the model can work. But even with 1000+ channels, you could never just put on programming heedless of whether there was an audience. Cable operators carry channels because they believe their subscribers want them, and subscribers pay for the system. Even among a thousand choices, a channel with no viewers is a deadweight an operator can ill afford. That difference, along with certain structural ones, is still what distinguishes cable from the Internet today.
For all its shortcomings, there is no denying that cable shook up the way Americans get information and forever changed the face of television radically. As an object lesson in the way information networks can develop, it gives us occasion to consider what we truly want from our news and entertainment, as opposed to what sort of content we might be prepared to sustain, however passively, with our fleeting attention. For cable offered choices really only in the commercial range—enough, however, to suggest what a truly open medium could deliver to the nation, for better and for worse.
CHAPTER 17
Mass Production of the Spirit
On November 19, 1980, the hottest ticket in New York was the premiere of Heaven’s Gate. Michael Cimino, acclaimed director of The Deer Hunter, had spent years and more than $35 million (over $100 million in today’s dollars) on this masterpiece, his take on the American Western. Rising stars Jeff Bridges and Christopher Walken were featured, as well as a giant supporting cast and extensive period sets. Everything seemed set for a major triumph, yet in the rush to the premiere, almost no one, including its producers, had actually seen the film in final cut.
Cimino’s effort followed in the footsteps of Francis Ford Coppola’s Apocalypse Now. A hard-won triumph, that epic of Vietnam had creative romance about it: a masterpiece and a box office success that almost didn’t get finished. Heaven’s Gate was another director-driven vision, a symbol, even a high-water mark, of the second open era in American filmmaking that lasted from the late 1960s through the 1970s. This period brought Hollywood as close as it has ever come to fulfilling the ideal articulated by W. W. Hodkinson in the 1910s: directors enjoyed a new level of independence from studio preoccupations, and when those deemed blessed with inspiration asked for something, they got it. No studio embodied the spirit of New Hollywood more than United Artists, the only major independent to survive the purges of the 1920s, whose entire approach depended on finding and funding directors with a certain vision. In the 1970s, United Artists became the leading platform for new directors with big ideas, including not only Coppola and Cimino, but also Woody Allen, Martin Scorsese, and others.1
At the New York premiere, things got off to a bad start. The audience was oddly unresponsive during the first half of the film. Stephen Bach, a United Artists executive, later wrote that they were “either speechless with awe or comatose with boredom.” During the intermission Cimino entered a subdued reception room and found that the glasses full of champagne had gone untouched. Bach relates the director’s conversation with his publicist:
“Why aren’t they drinking the champagne?”
“Because they hate the movie, Michael.”2
The critics were brutal, particularly Vincent Canby of The New York Times. “ ‘Heaven’s Gate,’ ” he wrote, “is something quite rare in movies these days—an unqualified disaster.” It “fails so completely,” wrote Canby, “that you might suspect Mr. Cimino sold his soul to obtain the success of The Deer Hunter and the Devil has just come around to collect.”3
Indeed, Heaven’s Gate would be ever after remembered as perhaps the greatest single bomb in film history, but not just in a financial sense. True, the film would fail to make much money, but that’s not so unusual. This failure was deeper. Fairly or not, it would be understood as an indictment of United Artists’ approach to filmmaking, the approach that had become emblematic of the art in the 1970s, based on prizing the independence of directors and glorifying artistic innovation. Heaven’s Gate was the auteur film from hell and led directly to the financial collapse of United Artists and its subsequent sale to MGM, marking the beginning of the end for the second open age of film.
The fall of United Artists in the early 1980s and the second closing of the film industry represents a turn in the Cycle and the beginning of a new order that lasts to this day. This moment saw the triumph of a rival approach to production coinciding with the rise of the media conglomerate. Its greatest champion was a man named Steven Ross, a onetime funeral home director who pioneered a new way of organizing the entertainment industry. Unlike a freestanding firm like United Artists, Ross’s firm, Warner Communications (today, Time Warner Inc.), held dozens of media concerns and other properties under a single roof. This vision would spread throughout the 1980s and 1990s to become the dominant industrial organization for movies, music, magazines, newspapers, book publishing—all forms of content once called “leisure.”
There is no understanding communications, or the American and global culture industry, without understanding the conglomerate. Yet this industrial form, born originally to assist in creative accounting on the part of public corporations, remains surprisingly difficult to characterize, let alone justify. It is a hydra-headed creature whose operations and advantages have mystified lawyers and economists alike. As a 1981 paper in the Bell Journal of Economics put it: “Despite extensive research, the motives for conglomerate mergers are still largely unknown.”4
Nonetheless, the conglomerate is the dominant organizational form for information industries of the late twentieth and early twenty-first centuries; here and abroad it is inseparable from the production of the lion’s share of culture. Like the integrated Hollywood studio that preceded it, the conglomerate can be the worst enemy or the best friend of the cultural economy. With its hefty capitalization, it offers the information industries financial stability, and potentially a great freedom to explore risky projects. Yet despite that promise, the conglomerate can as easily become a hidebound, stifling master, obsessed with maximizing the revenue potential and flow of its intellectual property. At its worst, such an organization can carry the logic of mass cultural production to any extreme of banality as long as it seems financially feasible, approaching what Aldous Huxley predicted in 1927: a machine that applies “all the resources of science … in order that imbecility may flourish.…”5
DEFUSING BOMBS
The fact that a single big failure, Heaven’s Gate, could take down an entire film studio made it starkly obvious that all the studios needed better ways of protecting themselves against disast
er. As we shall see, defense against financial meltdowns was perhaps the driving reason for the rise of the media conglomerate. But the implications are broader than that: the shape and tenor of our current entertainment world are largely owing to the imperatives of risk management in a world where failure had become catastrophically expensive.
A few basic points about entertainment economics will make this clearer. The fundamental fact in the business is a high level of uncertainty as to the success of any given product, and a giant disparity between the rewards that come to those that succeed modestly, as against the real hits. Another way of saying this is that the entertainment industry is the classic, indeed definitive, example of what economists call a “hit-driven” industry.6
In such a context, a few hits will outperform the rest, sometimes by several orders of magnitude. The difference between number one and number twenty on any entertainment media chart is well captured by Wired magazine editor Chris Anderson in his book The Long Tail (itself a hit). While the book is famous for celebrating Internet business models, what Anderson also shows, using actual industry data, is that a relatively small number of hits account for the bulk of the revenue in those businesses. Hence the peculiar distribution of demand, as pictured below, which typically confounds and frustrates management consultants. In practical terms, to take book publishing as an example, this means that the seven Harry Potter books outperformed many thousands of other books combined. Likewise, in film, a giant blockbuster can outearn the combined receipts of hundreds of independent films, and so on.* 7
The second peculiarity is that the hits are not so easy to predict. Sometimes a film comes out of nowhere and makes a killing, like the original Rocky; produced by a then unknown independent filmmaker (Sylvester Stallone) on a tiny budget, it became the top grossing film of 1976. On the other hand the big, obvious bets not infrequently do pay off, whether owing to classic mastery of craft, as with Apocalypse Now, or breakthrough technical wizardry and unsuspected thematic resonance, as with Avatar. But there is no long, expensive film that is so obvious a bet as not to be risky. The real fly in the ointment is those films like Heaven’s Gate, or Ishtar, which, for whatever reasons, despite famous directors and actors and large budgets, prove complete financial failures. The megastinker can be as hard to forecast as the runaway hit. Even in the cases of Titanic and Avatar, the two top grossing films in history, many industry watchers predicted a financial bloodbath.
Demand in the entertainment industry
We might well ask why success in entertainment is so hard to predict. It’s a tricky question, though one can start to answer it by looking to the nature of the demand. With any given entertainment product—as compared with, say, socks or beer—one is faced with selling something people don’t ultimately need; they have to want it. They have to be inclined to invest time and money—ninety minutes with a film, twenty-five dollars for a book—without certainty of satisfaction or desired effect. To be sure, there are times when the desire for entertainment seems like a need—for instance, on a long flight. Yet even then the need is not unique; just about any decent film will do to pass the time. The upshot is that every book, film, or TV show launches amid the unsettling awareness that it could be a total and absolute flop. As the film industry economist Arthur S. De Vany writes, “every actor, writer, director and studio executive knows that their fame and success is fragile and they face the imminent threat of failure with each film they make.”8
That uncertainty and variable demand at the heart of the entertainment industry has led to a wide range of countermeasures. As we shall see, the structure of the entertainment industries makes no sense apart from an understanding of the ways they manage risk. These range from the obvious—for instance, betting on well-known stars or directors (more typically the former) and the sequel (rerunning a past success in the hope that lightning will strike twice)—to somewhat esoteric systems of financial management and joint accounting aimed at diffusing success and failure over a broad balance sheet. All of these techniques have in common the way they end up altering the face of both American and global popular culture.
STRATEGY 1: CONGLOMERATIZATION
If unpredictability of success and failure was the chief problem in the entertainment industry, by the 1970s, a man named Steven Ross had the answer. As CEO of a company called Kinney National Service, Ross acquired the suffering Warner Bros.–Seven Brothers film and recording business for $400 million in 1969, and was on his way to becoming a player in entertainment. In two years, Kinney would be renamed Warner Communications, Inc., and over the next decade Ross would become the very first exemplar of a new archetype: the big media mogul, a breed apart from the studio heads and others who had preceded him in entertainment’s corner office. He was the first pure businessman, a figure who bought and sold business properties, as opposed to a producer or exhibitor who’d hit it big. As such he thought about risk in entirely new ways. Ross is no longer a household name, but remains a pivotal figure, not merely on account of the corporate structure he pioneered, but also because his firm and his person would serve as the role model for other firms and their chiefs, among them Disney’s Michael Eisner and Barry Diller at Paramount and Twentieth Century–Fox. Ross perfected the accounting practices that anchored the conglomerate, giving enough freedom to keep everyone happy, and the grand affect that would have made a Roman emperor seem mean.9
To be sure, as long as there’s been a film business, the necessity to contain inherent risk has figured in the equation; even the old industry’s modus operandi can be understood in relation to this imperative. The Edison cartel of 1908, for instance, fixed prices aggressively to make sure that, across the industry, costs would never exceed revenues. Likewise, the cartel’s enforcement of a certain homogeneity of product—simple plots, short films, no stars, and a ban on most imports—had the effect of ensuring that one film was as good as (or as bad as) another; by making all their offerings “fungible,” as an economist would put it, the cartel sought to iron out the discrepancy between the hits and flops, making the fate of any one film that much more predictable.
The vertical integration of the studios that arose in the 1920s with Paramount and the rest can also be understood as an attempt to minimize risk to their investments. By owning every single part of the production and exhibition process, from the actors down to the seats in the theaters, the studios were able not only to control costs, but also to guarantee the size of their audiences, to some extent. It didn’t always work, of course, but it did achieve a certain stability for the industry.
In contrast, Ross’s answer to the problem of entertainment failures was far more imaginative: he hedged the Warner Bros. film studio volatility with the steady revenues that came from unrelated businesses. Through the 1970s and 1980s, his acquisitions in the name of cash flow also included, at times, cleaning services, DC Comics, the Franklin Mint, Mad magazine, Garden State National Bank, the Atari video game company, and the New York Cosmos soccer team. Obviously, not every choice fit the rubric of “communications,” but it was all in the name of “synergy.”
There were, in fact, two forms of balance achieved by this weird portfolio. One, of course, was among various media. As we’ve said, record albums, television shows, and books are all subject to the vicissitudes of “hit-driven” industries. Collecting a group of media companies together is a means of sharing the risks and benefits across platforms, a bestselling novel helping to even out a movie dud to achieve something like a stable stream of revenue. But for real defense against Heaven’s Gate–magnitude bombs, Ross’s trick was to hedge the uncertainty of entertainment products as a whole with much more reliable sources of income. Under the Warner Communications umbrella sheltered not only films and music but parking lots, rental cars, and funeral parlors (his former métier).
What Ross was first to do with office cleaning and other services would be translated to the scale of heavy industry in the General Electric–Universal Studios merger of 2004.* Only
now it was not the media mogul acquiring a pizza parlor but an industrial mogul, Jeff Immelt, buying a film studio. Universal would enjoy as much of a hedge as any entertainment firm could hope for. By 2008, GE had annual revenues of over $183 billion, while Universal had income of $5 billion, less than 3 percent of the total. With a holding company of that size, the prospect of losing millions on a single film, while not pleasant, is no existential threat. Here was the ultimate defense against even the biggest movie bomb: a corporate structure so titanic that the fate of a $200 million film can be a relatively minor concern.10
The conglomerate structure looked like a real boon to entertainment and culture. The capacity to absorb heavy losses could, in theory, provide breathing room for creative experimentation, a way to do the worthy, if riskier, projects. The profits from GE lightbulbs alone could keep dozens of great directors working indefinitely, or fund thousands of Sundance-style films. In fact, one could fantasize about the film studios supported by a tiny internal tax on lightbulbs, a sort of alternative to government funding of the arts. By defusing the bomb, the conglomerate held out the promise of ushering in a golden age of film and other entertainment subsidized by American corporate profit from other sectors.
In the 1970s, when the model was first deployed, with Ross and others, such as Gulf & Western, beginning to combine film studios with more staid businesses, conglomerates created exactly this stabilizing, creativity-enhancing effect. Like the independent studios, they tended to fund the more speculative and interesting films of auteur directors. As long as they broke even or didn’t lose too much money, the conglomerate accepted the subpar return on capital. But this forbearance would not last indefinitely, and as one might fear, it was not long before the conglomerates would come to scrutinize their film divisions with the same green eyeshade they used for all their other products.