The Master Switch

by Tim Wu

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

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

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

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

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

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

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

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

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

  STRATEGY 2: INTELLECTUAL PROPERTY DEVELOPMENT

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


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

  Consider the most expensive films of the 2000s:

  2007 Spider-Man III $258,000,000

  2009 Harry Potter and the Half-Blood Prince 250,000,000

  2009 Avatar 237,000,000

  2006 Superman Returns 232,000,000

  2008 Quantum of Solace (James Bond) 230,000,000

  2008 The Chronicles of Narnia: Prince Caspian 225,000,000

  2009 Transformers: Revenge of the Fallen 210,000,000

  2005 King Kong 207,000,000

  2006 X-Men: The Last Stand 204,000,000

  2007 His Dark Materials: The Golden Compass 205,000,000

  2004 Spider-Man II 200,000,000

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

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

  1963 Cleopatra $36,000,000

  1969 Hello, Dolly! 24,000,000

  1965 The Greatest Story Ever Told 20,000,000

  1969 Paint Your Wagon 20,000,000

  1969 Sweet Charity 20,000,000

  1962 Mutiny on the Bounty 19,000,000

  1964 The Fall of the Roman Empire 19,000,000

  1963 55 Days at Peking 17,000,000

  1966 Hawaii 15,000,000

  1960 Spartacus 12,000,000

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

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

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

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

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

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

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

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

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

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

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

  STRATEGY 3: MINE FESTIVALS

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