Hollywood Comes of Age: An All-Star Studio Is Born

Jeffrey Katzenberg, Steven Spielberg and David Geffen, in announcing their dream on Wednesday to build a full-service studio from the ground up, have returned entrepreneurial man agement to big-time entertainment. Significantly, they mortgaged their venture with their reputations and artistic skills. In so doing, the former Disney studio head, film director and the record industry mogul and movie producer together reasserted the primacy of knowledge, managerial guile and creativity over the power of institutional money and corporate bulk.

At the same time, the trio’s studio proposal reflects a broader trend not only in Hollywood but also in other fast-paced, talent-based industries such as biomedical devices and software. Even as new combinations are formed, and sometimes evolve into large companies, a greater proportion of employment has moved to small, even micro businesses. They are the chief providers of services necessary for today’s successful enterprise.

In computers, for example, it was only a decade ago when IBM and a handful of other big companies dominated the market. Today, a broad array of companies, large and small, are more adept in product development and marketing than the old, vertically integrated Big Blue could ever hope to be. In contrast to IBM, the new, fast-growing computer firms heavily rely on networks of subcontractors and a relatively small, cohesive management team to stay ahead in the rapidly changing marketplace.

Originally dominated by a large number of smaller, highly entrepreneurial units, the film industry by the 1930s had become highly concentrated in a handful of big studios. Films were shot at studio locations with actors on long-term contract, then cut and edited by permanent post-production staffs.

Since then, however, this “factory” model of production has been supplanted by a more crafts-oriented, collaborative structure dominated by dense networks of smaller, highly specialized firms. In 1960, just 28% of U.S. films were produced by independent-production companies. By 1991, almost two-thirds were independently produced. In many ways, the Katzenberg-Spielberg-Geffen studio is the culmination of this trend.

Along the way, the structure of the entertainment industry has become more entrepreneurial. For example, in the last 16 years, the number of entertainment-related companies in Southern California has more than tripled; nearly 95,000 of the industry’s total employment are free-lance workers, and firms employing fewer than 10 individuals increasingly are the rule. Indeed, only 19 entertainment-related companies in all California employ as many as 1,000 people, and they are chiefly the remnants of the older studios and larger production companies. The smaller entities that have taken center stage offer a wide gamut of products and services, from manufacturing lights to creating software for digital images, from animation to clothes designing, from set construction to payroll systems.

“Hollywood is not the big studios. It’s a collection of . . . independent producers who come together and actually make the film, project by project,” says Michael Storper, a UCLA economist and expert on the industry’s structure. “Very little filming is actually done by the big studios themselves.”

This means that the large studios, for the foreseeable future, will play the essential role of anchors for the smaller producers and for the region’s entertainment industry. They will provide financing, advertising and distribution for the network of small and mid-sized independents. Only powerful players like Katzenberg, Spielberg and Geffen could ever dream of challenging the hegemony of the majors in these absolutely critical functions.

Southern California’s stake in the continual and healthy development of this highly entrepreneurial Hollywood is enormous. Since World War II, the entertainment complex has grown into perhaps the single most critical industry in the region, an outcome made all the more significant by the headlong retreat of aerospace. Los Angeles County is home to 92% of the people directly or indirectly employed in the state’s entertainment industry, which grew at a 10% to 12% clip from 1991-93.

According to the most recent estimates, the entertainment industry--movies, television, video and commercial production--contributes upward of $15 billion to the region and employs, directly or indirectly, more than 300,000 people in Southern California and accounts for about 7% of all non-governmental jobs in Los Angeles County. Equally important, the film industry is a primary source of high-paying jobs, with wages more than 40% above the statewide average and among the highest in the country. For example, this fall, starting pay for new animators at some studios exceeded that for newly hired business-school graduates at local companies.

In part, the entertainment business is thriving because the region is an ideal--indeed, perhaps the only logical--spawning ground for such ventures as that proposed by Katzenberg, Spielberg and Geffen. Even in this era of the much- hyped “virtual company,” the importance of proximity, personal relationships and access to special skills in crafts-based industries such as entertainment remain critical to success.

These factors help explain why even as other industries have fled Southern California and as other states have tried to woo film and TV production away from the region, the industry’s concentration here has remained--even grown. Currently, about one of every two strictly film-related jobs in the country is in Southern California. That’s more than four times the number of nearest-rival New York, 20 times that of Florida. Almost 90% of the members of the Screen Writers Guild live in Southern California. More than two-thirds of all dramatic series, situation comedies and feature films are produced here.

“Most people in the film business are organized on specific projects--with a lot who free-lance--and you can’t do that in Orlando or Chicago,” says Jonathan Katz, co-founder of two Hollywood firms, prop-maker Cinnabar and Berman-Katz, a specialty-marketing company. “We start a film on Friday and have a team on Monday. You have to have the resources available.”

Accordingly, management challenges differ markedly from those usually discussed at business seminars. For starters, few managers seek to vertically integrate various elements into one consistent operation that can be repeated with little deviation. Instead, the basic challenge lies in harmonizing a highly temporary alliance of creative entities and individuals.

Another factor reinforcing the multiplication of smaller entities is the growing importance of ancillary entertainment products. Many craft-based companies in Hollywood have diversified beyond movies and television, reaping profits from commercials, the development of theme parks, music, multimedia and even the designing of entertainment-oriented shopping malls. The studio proposed by Katzenberg, Spielberg and Geffen would have this multifaceted focus from its beginning.

In launching their new studio, Katzenberg, Spielberg and Geffen may prove particularly well-suited to exploit the new realities emerging in the entertainment marketplace. By finding a more effective way of linking the creative and crafts professionals to financial, distribution and managerial muscle, they could launch a entertainment revolution important not only for Hollywood but for an economic audience around the world.