by Tim Wu
Sex, Lies, and Videotape was the test case of a third risk management strategy developed in the late 1980s and early 1990s, one that depended not on production but on discovering diamonds in the rough: films already in the can. The concept the Weinsteins pioneered looked primarily to film festivals—particularly Robert Redfford’s Sundance Film Festival in Utah, and for foreign productions, the Cannes and Toronto festivals—as a test market and hunting ground. Through leveraging, low-budget undervalued films would realize a very handsome rate of return on capital; but the festival approach was hardly as important an innovation in financial terms as the others we have discussed. Its true importance was rather in becoming perhaps the best means for foreign and artistically innovative film to reach a large audience.
The Miramax bet on Sex, Lies, and Videotape paid off, as the film made over $25 million in the United States alone. Of course, the Weinstein brothers were far from the first to turn low-budget efforts into gold. As we’ve already seen, it was a common operating move in the 1970s, when studios first funded productions by unknown independent filmmakers like Sylvester Stallone and Francis Ford Coppola. In fact, by the standard of Rocky or The Godfather, the success of Sex, Lies, and Videotape was quite modest. But since the failure of United Artists in the early 1980s and the rise of the media conglomerate, big investments in new directors had become increasingly rare.
The Weinsteins brought the model back, albeit with a twist. As we’ve said, they relied not so much on their own judgment, but on the collective judgment of critics, audiences, and industry insiders at the festivals. The institution of the festival—once the only exhibition chance for the potential art-house film, of which many were made but few were chosen—slowly evolved into something of a filter or wholesale market. Firms like Miramax, and its imitators like Sony Film Classics and Fine Line, began to see that by buying low and selling high, exposure to independent film could be profitable again.
There is a certain genius to the approach, which might be said to depend on the wisdom of crowds over the judgment of a single producer. Given the quarry, there may be no other realistic way of hunting for it: nearly ten thousand independent films are produced in the United States every year, and thousands more are made abroad. As with any other commodity, most are average or below average, but some will be brilliant; among that smaller cohort, an even smaller portion will have potential for popularity with the public. To find them oneself is to look for the needle in the haystack. The film festival, by happy accident of engineering, is a remarkably effective filter, with several layers of selection by festival staff, thinning the herd before the festival critics and filmgoers pronounce judgment. The process, obviously, isn’t foolproof; audiences in Sundance, Cannes, and Toronto are not a perfect proxy for the real world. But the festivals do deliver enough information to justify relatively small bets on films that have already been made and, to some extent, tested.
Consider the classic example of a film that broke through the Sundance model, Kevin Smith’s Clerks. The film portraying the life of a convenience store clerk and his friends was made on a budget of $27,000 and was shot, in black-and-white, in the very convenience store then employing Smith. Miramax was at first uncertain about the film’s investment potential. At Sundance, however, it proved a huge hit, and so the Weinsteins decided to buy it, paying $227,000. In theatrical release, it went on to make over $3 million—not a large number by blockbuster standards, but a great return on capital. Later, Miramax would invest more in Smith’s Chasing Amy, with even greater returns. The success of the follow-up of course meant further rental and residual revenues from Clerks. And meanwhile, in terms of cultural capital, Kevin Smith had been minted as an auteur, a bard of New Jersey culture.
The technique pioneered by Miramax in the 1990s was successful enough that within a few years, the media conglomerates began to adopt the model. Disney took the most direct route: it simply bought Miramax, while others built new boutique operations based on the same model: Sony Pictures Classics, Paramount Classics, and Fox Searchlight, among others. But as we have said, the primary benefit of this approach was artistic rather than financial. As with so many small-scale methods, once taken up by a conglomerate, the pressure was on for what in network engineering is called scalability. There are only so many films made for $20,000 that can be turned into a multi-million-dollar box office result. As a consequence, a certain amount of, as it were, ersatz Indie product has been marketed: pictures that resemble quirky successes without quite having a unique soul of their own.
THE MEDIA CONGLOMERATE IN THE TWENTY-FIRST CENTURY
By the year 2000, the form of the media conglomerate had reached its maturity and logical perfection. What had started as an impulse to group media concerns with other types of businesses had by virtue of the intellectual property revolution reconfigured the landscape of information industries exclusive of telecommunications. The homogeneous giant enterprises that dominated the first half of this book had, by the 1990s, given way to a gang of octopuses owning properties diversified mainly across media industries, typically holding a film studio, cable networks, broadcast networks, publishing operations, perhaps a few theme parks. The conglomerates added a management layer above the media firms, unifying their efforts by little more than a common name and the fact that, in some loose sense, they all trafficked in information.
Disney, once dedicated to its core brands (Mickey Mouse, Donald Duck, Snow White, and the rest), turned itself into a true media conglomerate, with completely unaffiliated holdings such as ABC, ESPN, and Miramax fulfilling an imperial dream of Michael Eisner while creating in Roy Disney’s eyes a “rapacious, soulless” abomination, though in the long run a quite profitable one. General Electric, the industrial conglomerate founded by Thomas Edison, having sold off RCA in 1930 bought back NBC and its associated properties in 1986, launching CNBC in 1989. It would later take over Universal Studios, joining Disney and Time Warner as one of the three players with holdings in every major entertainment sector: films, characters, television stations, publishers, theme parks, and recording labels. Meanwhile, Gulf & Western, another 1960s conglomerate that had started in 1934 as the Michigan Bumper Company, bought Paramount, remaking itself in the image of Warner Communications as Paramount Communications, an effort that would founder, resulting in the company’s sale to Viacom in 1994. In 1989, Sony bought Columbia Pictures and CBS Records, trying to create the first Japanese version of a Ross-style media/industrial conglomerate, with mixed results.
We have seen that size now and again attracts the notice of the federal government, and one might well wonder whether the Justice Department or FCC, noticing these new giants walking the earth, might have considered breaking them up. Once upon a time, the government had indeed been vigilant about discouraging, if not blocking, cross-industry ownership, but by the 1980s and 1990s, with the rise of antiregulatory sentiment, those days were over. Some restrictions did apply, as related to, say, acquiring concentrated holdings in a particular medium in one market. But as the conglomerates mainly sought holdings in unrelated markets—for instance, magazines and film—resulting in no price fixing or monopolies in any particular market, no Sherman Act alarms were sounded. The conglomerates therefore grew unmolested, with minimal oversight, through the 1990s, until they owned nearly everything. The only exception, as we shall see, was the world of the Internet and computing; but that seemed only a matter of time.
As a coda, let us consider one story of a better life through the corporate chemistry of the conglomerate, a twenty-first-century entertainment parable that avoided tragedy, indeed has a happy ending, thanks to creative risk management. Released in 2007 by Universal Studios, Evan Almighty concerns a man with a Noah complex: he is driven to build an Ark to save the world’s animals from a coming flood. Like many a prudent production of its time, the film was a sequel; it was developed to get another bite of the apple that was Bruce Almighty, the highly profitable film starring Jim Carrey as a man given God’s powers fo
r a week. Evan starred Steve Carell, a sensible choice since he was by then a bankable star, having succeeded with The 40-Year-Old Virgin and, on television, with The Office. The script was written and rewritten by numerous writers, minimizing the risk of relying on the judgment of a single author. While the film, unfortunately, had no protectable intellectual property of which Universal could take possession, it was at least based, however loosely, on the Bible, a proven bestseller even if its copyright had lapsed. Based on these precautions, the studio ultimately invested $175 million in the production, making it, at the time, the most expensive comedy ever.
Unfortunately, the film had all the right ingredients but one: it wasn’t any good. The influential critic Richard Roeper excoriated it as “a paper-thin alleged comedy with a laugh drought of biblical proportions, and a condescendingly simplistic spiritual message.”17 On Rotten Tomatoes, a popular website aggregating reviews, the film garnered an embarrassing 8 percent positive response. Despite an extensive marketing campaign, and a national opening on 5,200 screens, Evan Almighty made just $30 million or so its first weekend, pitiful by blockbuster standards. For all of these reasons, it would find distinction on Rolling Stone’s list of the worst films of 2007, and many other lists of notable bombs.
Yet here is the miracle: the bomb went off, but it did no damage. There was no collapse of Universal Studios, and few lasting consequences for anyone involved with the project. Life went on basically as before at Universal, and more important, at General Electric. The failure of Evan Almighty, a bona fide disaster for Universal, was but a rounding error in the performance of General Electric, with revenues of $168 billion that year.
The immediate failure, in short, went unpunished. Even more remarkable, over time, through DVD sales and foreign box office, Evan Almighty actually came close to the break-even point, this even though no one had anything good to say about it. Had it been the type of film that lent itself to merchandising and licensing income, it is possible that Evan Almighty could have made a healthy profit despite the fact of being, as a film, unequivocally lousy.
It is instructive, and rather disheartening, to compare the failures of Evan Almighty in 2007 and Heaven’s Gate in 1980. As a consequence of Heaven’s Gate, Michael Cimino was effectively exiled, never allowed to make another major film, and the director-centered system he and others of his stature had embodied was severely discredited. In contrast, despite the failure of Evan Almighty, the system that produces films like it carries on unperturbed, because in financial terms there was little real damage. Evan Almighty, in this sense, is proof of how secure the studio structure now is. Mediocrity safely begets mediocrity: behold the true miracle of the modern entertainment industry.
* In his book Anderson also pointed out that contrary to popular belief, there was as much revenue available in the “tail” as the “head” of customer demand; that is, a business could do well offering a great variety of less popular products instead of just a few highly popular ones.
* The fact that Thomas Edison’s General Electric now owns Carl Laemmle’s Universal Studios is an irony appreciated only by film historians. It is the revenge of the Edison Trust, one century later.
* Strictly speaking, Hollywood’s reliance on star-centered films was pioneered by Adolph Zukor in 1912 with Queen Elizabeth and continued with Mary Pickford; it was based on this strategy that Zukor called his production studios “Famous Players.”
* Lawyers generally argue the opposite: that using a brand name too much destroys its value, because it makes the underlying trademark generic (as when one asks for a Kleenex or a Xerox, instead of a tissue or a photocopy), and therefore unprotectable as a matter of law. This helps explain why lawyers often don’t get along with marketing people, as the latter always favor maximum exposure of the brand.
* As Judge Hand put the point, “If Twelfth Night were copyrighted, it is quite possible that a second comer might so closely imitate Sir Toby Belch or Malvolio as to infringe, but it would not be enough that for one of his characters he cast a riotous knight who kept wassail to the discomfort of the household, or a vain and foppish steward who became amorous of his mistress.” Nichols v. Universal Pictures Corp., 45 F. 2d 119, 121 (2d. Cir. 1930).
CHAPTER 18
The Return of AT&T
In 2002 President George W. Bush signed an executive order authorizing the National Security Agency to monitor telephone conversations and Internet transactions of American citizens without a court warrant.1 The order was secret, as was its implementation, and even today the breadth of the domestic spying remains unknown. However, one thing was clear: the NSA could not have fulfilled the order alone. It needed help, most of all from the nation’s telephone companies.
Four years later, in December 2005, the warrantless wiretap order was leaked to The New York Times. Senator Arlen Specter summoned Edward Whitacre, CEO of AT&T, to appear before the Senate Judiciary Committee.2 In the Judiciary Committee’s hearing room, with unusual intensity in his voice, Chairman Specter, a former prosecutor, questioned Whitacre precisely and slowly:
“Does AT&T provide customer information to any law enforcement agency?”
“We follow the law, Senator,” answered Whitacre.
“That is not an answer, Mr. Whitacre. You know that.”
“That’s all I’m going to say, is we follow the law. It is an answer. I’m telling you we don’t violate the law. We follow the law.”
“No, that is a legal conclusion, Mr. Whitacre,” said Specter, with evident rising anger. “You may be right or you may be wrong, but I’m asking you for a factual matter. Does your company provide information to the federal government or any law enforcement agency, information about customers?”
“If it’s legal and we’re requested to do so, of course we do.”
“Have you?”
“Senator, all I’m going to say is we follow the law.”
“That’s not an answer. That’s not an answer. It’s an evasion.”
“It is an answer.”
Whitacre’s testimony in 2006 marked the first major public appearance of the resurrected AT&T. It was a moment that dramatized how much had changed since 1984: twenty-two years after the breakup, the Bell system was, in a word, back, and working closely once again with the U.S. government.
The inheritor of the great mantle of Theodore Vail, Ed Whitacre was a very different sort of man, and though he had ambitions similar to his predecessor’s, his new AT&T was a different kind of company. Vail had been an idealist who believed earnestly in Bell’s obligation to serve the country as a public utility and build the greatest phone system in the world. “We recognize a ‘responsibility’ and ‘accountability’ to the public on our part,” wrote Vail in 1911.3 By contrast, Whitacre was the product of a different corporate culture, whose credo was to maximize returns and minimize oversight. When a reporter asked Whitacre his vision for AT&T, he listed his top three priorities as follows: “I like to be the best. I like for our stock price to be the highest. I like for our employees to be the highest paid.”
Whitacre’s AT&T was a beneficiary of federal communications policy in the early twenty-first century, and a powerful reflection of the corporate ethos of that era. In the name of competition, it sought monopoly and power. Under the banner of libertarianism and small government, it manipulated regulatory regimes to eliminate competition. But it would be unfair to say that the benefits of the relationship flowed entirely one way. As Whitacre’s testimony makes devastatingly clear, even while leaving it unspoken, AT&T found ways to be of use to the administration.
WHITACRE TAKES THINGS IN HAND
Edward Whitacre, Jr., the chief rebuilder of the AT&T system, is a man whose appearance makes a lasting impression. He is enormously tall, with a slow gait, an even slower way of speaking, and a textbook Texan drawl. As a former FCC staffer put it, “he was extremely intimidating, always polite, but you had the feeling that if you messed with him he would kill you.” Whitacre, despite being head
of a telecommunications company, cultivated a stubborn Luddite affect. He had no computer in his office and refused to use email. “I’m not computer illiterate,” he once told reporters, “but I’m close.”4
In 1999, BusinessWeek put Ed Whitacre on a cover with the headline “The Last Monopolist.”5 The story sought to determine how Whitacre and his Bell company could survive the coming age of what was assumed would be ruthless competition. “Can Whitacre,” asked BusinessWeek, “a monopolist born and bred, survive without his monopoly?”
Whitacre had an answer: Why learn to cope with competition when you can eliminate it? Through the late 1990s and into the new millennium, despite or perhaps thanks to an official federal policy promoting “fierce competition,” Whitacre would strangle nearly all of his competitors, largely reconstituting the Bell system that Theodore Vail had founded. By 2006, his resurrected empire would cover the whole country, excluding parts of the West and Northeast, those ruled by another giant born of reconsolidation, Verizon.
Whitacre, aptly termed “a monopolist born and bred,” was certainly the man for the job. Having joined AT&T in 1963, during its pre-breakup heyday, he had stuck with the firm through the first stirrings of competition in the 1970s, and he would continue to rise through the ranks as Bell was dismembered in the 1980s. In the 1990s, still in Texas, Whitacre took charge as CEO and chairman of Southwestern Bell, then the smallest of the eight Baby Bells created by the breakup.