Final report hollywood cluster

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1 Hollywood Movie Cluster Analysis Hollywood Movie Cluster Analysis Ravi Kumar Joanna Zwirbulis Aleksey Narko Michał Goszczycki Eray Ersöz Warsaw School of Economics Microeconomics of Competitiveness 237481-0622 (licensed by HBS)

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Transcript of Final report hollywood cluster

Page 1: Final report hollywood cluster

1 Hollywood Movie Cluster Analysis

Hollywood Movie Cluster

Analysis

Ravi Kumar

Joanna Zwirbulis

Aleksey Narko

Michał Goszczycki

Eray Ersöz

Warsaw School of Economics

Microeconomics of Competitiveness

237481-0622 (licensed by HBS)

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I. Cluster Environment: US, California and LA

1. The United States economy and overall business environment

The United States is considered to be the largest economy in the world with a GDP at purchasing power of

15.68 trillion and growth approximately 2.2% annually. The GDP growth rate has been changing significantly

mainly due to the crisis that started in the U.S in years 2008-2009 and resulted in a enormous decline of GDP

to negative 8.3% in 2009. However, the analysis of the GDP growth provided by the U.S Bureau Analysis of

the Economy, suggests that the economy in the United States is gradually improving and in 2013 GDP growth

rate expanded at the rate of 4.1%.1

GDP is comprised of three main sectors: services, industry and agriculture. The United States has one of the

most diversified and most technologically advanced economies in the world. 40% of GDP is created by

finance, insurance, real estate, rental, leasing, health care, social assistance, professional, business and

educational services. Retail and wholesale trade account for another 12% of wealth, while the government

related services involve 13%. Utilities, transportation, warehousing and information account for 10% of the

GDP and manufacturing, mining, and construction constitute 17% of the output. Agriculture fuels only 1.5%

of the U.S. GDP, yet due to the use of advanced technologies, the United States is a net exporter of food.

1 Trading Economics. U.S Bureau of Economic Analysis. United States GDP Growth Rate. Available at http://www.tradingeconomics.com/united-states/gdp-growth

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(U.S. Bureau of Economic Analysis)2

According to Global Competitiveness Index the U.S. is ranked 5th globally in years 2013-2014 and 7th

in years 2012-2013. 3The US market counts nearly 317 million consumers, which makes it one of the largest

markets in the world. Even though US population contains only 4% of the entire world population, it’s GDP

accounts for 26% of the world’s total economic output. The United States dominates in wealth. One third of

the world's millionaires and 40% of the world’s billionaires live in the United States, making it the wealthiest

nation in the world.4 Being one of the richest and largest countries in terms of population, places the U.S.

market in a very dominant position.

In order to analyze the US economy, it is also necessary to mention it’s key sectors such as consumers,

businesses, government, trade, labor and inflation. Even though they are all playing a significant role in US

economy, consumer spending is a sector, which seem to have a major importance when speaking of the United

States and it’s historical and current situation. Consumer spending makes up 70% of all spending in the US

economy so an improvement in the economic and financial well - being of the households contributes to gains

in the broader economy. According to Economic Forecast Industry Outlook 2013-1014 consumer spending

on durable goods, especially cars and trucks over each of the past three years continued to grow by

approximately 6%. Speaking of consumer spending in the US, it is also relevant to refer to Rostow’s Stages

of Growth Model. According to the American economist, the 5th stage of growth model, called “the age of

high mass consumption” perfectly summarizes the economy and the population of the United States and

indirectly explains it’s competitive advantage in entertainment industries such as Hollywood movies.

According to Rostow’s model, this type of economy is consumer oriented and dominated by services.

Furthermore, there is a widespread and normative consumption of high-value consumer goods (e.g.

automobiles) and typically consumers have disposable income, beyond all basic needs, for additional goods.

Here, a country's economy flourishes in a capitalist system and is characterized by mass production and

consumption. Historically, the United States is said to have reached the stage of high mass consumption first,

followed by other western European nations, and then Japan in the 1950s.

The U.S’s economy is considered to be the largest manufacturer in the world, producing a fifth of the

2 US. Bureau of Economic Analysis. Available at: http://www.bea.gov/ 3 Global Competitiveness Report 2012- 2013. Available at: http://reports.weforum.org/global-competitiveness-report-2012-2013/ Global Competitiveness Report 2013-2014. Available at: http://reports.weforum.org/the-global-competitiveness-report-2013-2014/ 4 10 Largest Economies in the World. Available at: http://www.celebritynetworth.com/articles/entertainment-articles/the-10-largest-economies-in-the-world/

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entire world's manufacturing output. The largest manufacturing industries by revenue consist of steel,

petroleum, aerospace, automobiles, telecommunications, chemicals, electronics, food processing, consumer

goods, lumber, and mining. It is 3rd biggest oil producer and the second biggest natural gas producer. The U.S.

exports totals $1.612 trillion and its imports equals $2.357 trillion. United States is also regarded to be one of

the most influential and biggest financial markets in the world. More than half of the currency reserves around

the world have been overwhelmingly invested in the U.S. dollar, as opposed to the euro. More than one-fourth

of the 500 largest firms around the world have their main headquarters in the United States.

The American economy is a free-market, private enterprise system that has only limited government

intervention in areas such as health care, transportation, and retirement. American companies are among the

most productive and competitive in the world. In 1998, 9 of the 10 most profitable companies in the world

were American (even the non-U.S. exception, Germany's Daimler-Chrysler, has a substantial part of its

operations in the United States). Unlike their Japanese or Western European counterparts, American

corporations have considerable freedom of operation and little government control over issues of product

development, plant openings or closures, and employment. The United States also has a clear edge over the

rest of the world in many high-tech industries, including computers, aerospace, and military equipment. In

the Global Competitiveness Report 2013-2014, the U.S. ranks as 7th best innovative market on the global

scale. It is very strong in capacity for innovation (5th), companies spending on R&D (5th) and University-

industry collaboration in R&D (3rd), availability of scientists and engineers (6th). 5

Despite its impressive advantages, the American economy faces a number of problems. Due to the

financial crisis and the recession that hit the US market in 2008, the U.S. economy is still trying to recover,

and in fact recovers very slowly. The areas that are still suffering include mostly: budget deficits, growing

gap of inequality of wealth within the Americans, high unemployment rates, ineffective government, etc. 6

Despite signs of recovery and growth the US has not returned to pre-crisis labor-market performance. Despite

rising employment growth and falling unemployment, the U.S., whose labor force of 155.6 million is the

world‘s third largest behind China and India, is still estimated to have 7.3% unemployment according to data

from August 2013. The unemployment varies by state, however it is estimated that approximately 300,000 or

more new jobs a month need to be created to bring unemployment down with the speed desired.

5 Global Competitiveness Report 2013-2014. Available at: http://reports.weforum.org/the-global-competitiveness-report-2013-2014/ 6 What the Current Economic Outlook Means for American Families. Economic Outlook for 2013. Business&Money. January 16th 2013.

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Source: http://www.bls.gov/opub/ted/2013/ted_20130403.htm

Budget problems remain the most significant concerns to faster growth of the United States. Despite

the fiscal cliff deal that reduced deficit almost $1.1 trillion last year, it had very small impact on recovery.

Deficit still needs to be reduced by approximately $300 billion a year. This, however, means further spending

cuts and tax hikes that will be a drag on the economy. The public debt constantly increases and in October

2013, reached the level of $17 trillion.

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2. The US Diamond Analysis

To explain the national environment and competitive advantage of the United States, we use Porter’s

Diamond. It consists of four main attributes, such as Factor and Demand Conditions, Supporting Industries

and Firm Strategy & Rivalry that all together reflect the country’s strengths and weaknesses in comparison to

other nations. The diamond helps to understand the framework for businesses creation and clusters

development in the United States. However, it also summarizes the flows that impact the competitive

advantage of the country. The numbers in the parenthesis explain the global rankings in the Competitiveness

Report.

Firm Strategy & Rivalry

Factor Conditions

Supporting Industries

Demand Conditions

Intense local competition (14th )

Total Tax rates/ % Profits (101th)

Leader in the market size (1st)

Innovation (7th)

Business sophistication (6th)

Cluster Development (6th)

Infrastructure (15th)

Geographical condition (climate and topography)

Labor market efficiency (4th)

Buyer sophistication(9th)

Ease of doing business (4th)

Financial market development (10th)

Availability of research and training services (9th)

Institutions (35th)

Macroeconomic environment (117th)

Budget deficits/ General debt (140th)

Availability of the latest

technology (6th)

Economic Freedom (10th)

Inefficient government & bureaucracy

Strong Innovation & R&D

High mass consumption

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3. California Business Environment

With $2.0 trillion GSP and income per capita of $44 000 California has the most

powerful state economy in the US and 8th largest economy in the world behind Brazil

and in front of Italy (by Gross Product Comparison). State economic performance is

based on the growth rate of 3, 5% in 2012, which is the 5th best in the country, the

largest employment growth since 1990 of 3.3% and high innovativeness, ranking 4th

in science and technology, 1st in the number of patents granted in 2010 and 3rd in

start-ups among the 50 states. The cluster base of the state is also one of the most

powerful in the US (Appendix 1).

In spite of the fact that California has a very powerful economy it is still experiencing

problems. Some of them are:

Barriers to doing business. Small Business & Entrepreneurship Council organization

ranked California 45th among 50 states considering entrepreneur-friendly business

environment. Approximately 254 business decided to leave California in 2011, which

represents a 26% increase compared to 2010. The reasons for this are not only taxes,

but also regulatory restrictions, legal costs, and energy expenses.7

High unemployment rate. 48 out of 50 states of the US have a lower unemployment

rate than the “Golden State” with its official 8,9%8

Problems with law system discouraging businesses from locating in the state.

Negative Migration. People and companies, due to different issues tend to leave the

state. In 2011 for every 100 people who moved in to California 120 moved out. The

reasons for migration are mostly high costs of living and rent as well as high taxes.9

Controversies around state budget. With Jerry Brown- , the California’s longest

serving governor at the top, “Golden State” budget is showing 1, 1 billion surplus in

2013. However, this figures are very controversial, due to the fact of the “Wall of

Debt” around 27 billion, which is not included in the budget.10

7 Cochran,S., California Business Climate in the Eye of the Beholder., Available from: news.yahoo.com 8 Morgan,H., Fix California and the country will follow., Available from: forbes.com 9 Kolko,J., Trulia Trends, Why Do People Leave California?, Available from: trends.truliablog.com 10 Del Beccaro, T., Jerry Brown Stands Atop California’s Collapsing House of Cards. Available from:forbes.com

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4. Los Angeles Economic Environment

Los Angeles City is the most populous city in California and second when it comes to

the country ratings. With a population of 3.85 million people in 2011 the city is

governed by a mayor-council system with 15 districts and occupies the area of 1200

square kilometers. Los Angeles is a very multiethnic city and one out of two cities in

U.S. without a majority population. People from 140 are calling the city as their home

including: Hispanic or Latino (of any race) 48.5% , white, non-Hispanic 28.7%,

Asian/Pacific Islander -11.4%, African-American - 9.6%, American Indian/Others-

1.8%. About 75% of the population has a high school diploma, while 28% holds a

bachelor's degree or more. Los Angeles is the largest manufacturing sector in US with

more than 430 000 workers in 2008 - more manufacturing jobs than the state of

Michigan. The city has the nation’s largest customs district in the country including

the ports of Long Beach and Los Angeles, Port Hueneme, and Los Angeles

International Airport. This allows the city to benefit from trade and tourism and host

more than 6 million international tourists yearly.11 Comparing the economy of the

world’s top 20 countries; the five-county area of Los Angeles ranks at No. 16 and Los

Angeles County itself ranks at No. 21. Los Angeles has a great support infrastructure

for doing business, including different entrepreneurial trainings at UCLA and USC

(University of Southern California) as well as a good network of small business

development centers. Los Angeles county payroll employment numbered 3,856,800

in 2010 with an annual average wage of $53,143.12 Main clusters of the county

include: Entertainment, Hospitality and Tourism, Business services, Distribution

Services and Education. The main clusters in terms of employment and their national

ranking are presented in Appendix 2.

11The Kyser Center for Economic Research, 20 Reasons to locate your business in Los Angeles county. Available from: chooselacounty.com 12 Discover Los Angeles., Facts about Los Angeles., Available from:discoverlosangeles.com

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II. Motion Picture Industry

Nowadays almost everyone is watching movies. It is one of the greatest providers of

entertainment for people of different ages all over the world. According to the

Entertainment Economy Institute it is estimated that consumers spend around

5, 5% of household income on entertainment which is close to 5, 9% spent on

healthcare.13 At the time when other means of entertainment appear very quickly, people

are still spending a considerable amount of their time on watching films at home, buy

DVDs, watch in the internet, go to the cinemas, and buy toys for their kids from favorite

cartoons, soundtracks and all kinds of merchandise. At the beginning of the 20th century

Hollywood merged with the city of Los Angeles and soon after that the motion picture or

film industry started to emerge. While Hollywood, municipality of Los Angeles is still

the biggest center of motion picture industry not only in the US, but all over the world,

there are other big players at that arena, such as Hong Kong and India in Asia and

Germany, Spain, Italy and France in Europe.

1. Short History of Motion Picture industry.

History of cinematography dates back to antiquity and human interest in communicating

with shadows and light. The first camera, ever projected, was camera obscura- sunlight,

passing through a small hole, projected an inverted image on the wall of a darkened

room. It was done long time ago by Aristotle. Later, in 1545 first drawing of the camera

was drawn by Gemma Frisius. The occurrence of camera obscura has led to the

development of the first photographic cameras. During this time it was simply the light,

coming inside of the box and strucking a sensitive solution on a glass, metal, or paper

base. The first practical photographic system was created in 1837 by Nicephone Niepce

and Louis Jacques. It was recording sharp, simple images on silverized copper plates. In

1872 the first recorded attempt of the motion picture photography was made by

Eadweard Muybridge. Californian Governor Leland Stanford hired him to win a bet and

prove that there are moments during the horse race when the animal has all of its feet off

13 Milnes,A.K., The Big Picture: Economic and Workforce Trends in Entertainment. Available from: www.entertainmentecon.org

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the ground. Muybridge installed 24 cameras up in a row along a racetrack and was

making photos one by one to prove that the governor is right. At the end of 19th century

first primitive motion pictures started to appear. They were created by brothers Lumiere

in France and Thomas Edison in the United States. They usually emphasized only the

movement such as men playing cards, street vendor selling his wares or waves crashing

at the ocean. At the very beginning it was a simple motion reproduction, however in 1903

Edwin Porter has created a first “story-telling movie "The Great Train Robbery". Many

of this time motion picture creators wanted to produce even more complicated movies in

spite of one-reelers and limited storytelling cuts, however the industry was controlled by

the owners, resistant to any changes, who owned the machinery, patents and distribution

channels. Therefore many dissidents left the East and moved as far as they could - to Los

Angeles. After the First World War many powerful European countries such as UK,

France and Germany started to develop their own motion picture industries. After the

Second World War Asian players appeared in the motion picture production. These were

Hong Kong and India, with its Bollywood production with movies, mostly produced for

domestic purposes.

The popularity of movies continued to increase with the appearance of sound in the

motion pictures. Since then the industry was changing rapidly. In 1945-1948 90 million

tickets were sold to the cinemas each week, however in 1960s this number dropped by

half. The reasons for this were the changes in the industry such as the appearance of TV

sets, innovations (such as wide screen cinemas and 3d movies in 1950s), emphasis on

blockbusters and formulas (since 1950s segmented or niche movies started to be

created)14. Despite all the changes in the industry and many decades since the appearance

of the first motion picture the key point hasn’t changed – the superiority of Hollywood

and US in the movie production sector.

14 The History of Motion Pictures. Available from: faculty.washington.edu/baldasty/JAN13.htm

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2. The motion picture industry market and value chain

The way of the movie starting from the idea to the final consumer is very long and

complicated, even a small movie-project consists of several steps. Many of them are

different depending on the type of movie being created,which can be seen from the

example of Canal+ Advertisement at Appendix 3.

The value chain of today’s movie industry is much more complicated compared to what it

was at the early stage when motion pictures used to have a fairly simple business model.

Whole process of movie planning, budgeting, pre and postproduction as well as

distribution is kept by the studios behind the closed doors. Nevertheless, any film goes

through almost identical value chain as any other consumer product.

Whole process of movie creation starts with production.15 This stage is divided into 4

parts. Development – finding an idea continuing with the process of writing a script and

finally pitching it. The idea can be taken by the project producer from the play, book,

film, true story or an original one. Stage of pre-production which consists of developing,

planning and visualizing the idea. During this stage budget for the movie is being

prepared, members of the crew are hired and the schedule is made. This process

continues with production which includes: working with cast and locations, reviewing the

footage and shooting the scenes and finishes with post production when the film is being

edited, and music, titles and special effects are added.

15 Jehoshua.E.,Elberse,A., Leenders Mark A.A.M., The Motion Picture Industry: Critical Issues in Practice, Current Research, and New Research Directions. Marketing Science., Vol. 25, No. 6, November–December 2006, pp. 638–661

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Next is the Distribution phase16. At this point the distribution studio is signing a

licensing agreement with the distribution firm. Distribution company decides how many

copies of the motion picture to make and takes the finished product to the theatres,

television, home video, internet and other venues for final consumers to watch it.

Another level of the value chain is exhibition which is basically the issue of where, why,

and how people have come together to show and watch films. There is a comment about

this process:” Theatrical exhibition is the major factor in persuading the public what they

want to see, even if that public never sets foot inside a motion picture theater.

And how well and how long a picture plays in theaters has everything to do with its

value in other markets" (Daniels, Leedy and Sills, 1998, p. 34).

Exhibition is also about time, when the movie is shown at the cinemas or appears for the

first time in the Internet. It is about the techniques and technologies used to show the

movie to the customer: 2dimensional, IMAX or 3d.

The last stage of the motion picture value chain is consumption of the final product after

the theatrical release. Most of the movies, even the most popular ones, would hardly be

able to bring back the money invested in the previous stages of value chain only from the

first market. Distribution of the films on DVD and CD, broadcasting and Merchandising

nowadays provide more revenues than theatrical releases. Some sequels like Batman,

Harry Potter or Star Wars can easily raise millions to the studios long after the movie

release dates. However, in most of the cases studios are licensing the characters to t-

shirts, toys, cups or other merchandise manufacturers for fees and percentage of retailers

even before the movie is shown. Therefore, in such examples, as the ones mentioned

above, as much as 40% of the motion picture merchandise is sold before the movie

release. The amount of revenues are getting from merchandise can be sky high. In the

case of the Lord of the Rings Trilogy the merchandise is said to have attracted more than

1.2 billion dollars.17

16 Motion Picture Association of America. The Economic Impact of the Motion Picture & Television Industry on the United States.April 2009. Available from: mpaa.org 17 The Merchandising process., Advamag Inc., Available from internet encyclopedia: filmreference.com

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3. The US motion picture industry domination.

Although France was a dominant player at the motion picture industry market before the

1st World War, it lost its share later on, while US was gaining power and was able to get

an influential position at the European market. In 2007 the industry was responsible for

2,5 million jobs in US and 41 billion dollars in wages as well as 13$ billion in income

and sales taxes. United States and Canada were the absolute leaders when it comes to the

markets of the box office with 10,8$ billion, five times more than the closest competitor-

China and one third of the whole amount. During the period of 2005-2009 US produced

half the number of movies produced in Nigeria and India separately (around 554),

however much more money was invested in the production of the motion pictures

compared to the competitors. The most powerful motion picture distributors which

include Dreamworks, Paramount Pictures and Walt Disney Pictures are also originating

from the United States.18

III. Analysis of LA motion Picture Industry Cluster

For almost a century, the Los Angeles was the biggest market of the world motion picture

production. Before starting to analyze cluster, let’s have a look at a short history of

Hollywood and its performance over recent years.

History of Hollywood

From 1910, movie companies started to move from the New York area to Hollywood

because of weather. In Hollywood, it was better to make outdoor shootings. And also

labor costs was cheaper in California at that time than on the East Coast. Also there was

another reason, Tomas Edison, who held the patents on the movie equipment of these

years, employed a large group of lawyers to enforce these patent rights, and California

was almost out of reach for them in the times before air travel. The producers had set up

and elaborate system to hide either hide the equipment before the lawyers came by train

or move quickly into Mexico.

From 1927 until 1948, it was the “Golden Age of Hollywood” which were the years end

of silent film. Major Studios which located in Los Angeles controlled the whole value

chain film production to exhibition and consumption.

18 Statistic Brain. Motion Picture Industry Statistics. Available from: www.statisticbrain.com/motion-picture-industry-statistics/

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The first Academy Award ceremony was held in 1929. The studios themselves owned

most of the movie theaters around the country, so they could country so they could

control every aspect from promoting and scheduling to ticketing. This system came to a

sudden stop in 1948: The landmark Anti - trust decision in the case “United States versus

Paramount Pictures” forced studios to sell their theaters and broke up the vertical

integration. .19

Not only the legal decision, but also technological progress challenged the studio system:

From the 1950s on, home television spread at a very high speed around the country.

Reluctant at first, studios recognized that the additional outlet did not threaten the motion

picture industry, but offered additional revenue. However, the quality of movies produced

during the 1960s was considered lower than in previous decades. The studios overcame

this crisis from the 1970s on, when the “New Hollywood” era brought about what was

soon called “post-classical cinema”: The companies developed a mix of culturally

influential blockbusters and high-quality independent movies that fascinated the audience

worldwide.

This time of relative comfort was soon to be finished, with the 1980s and newly available

technologies such as VHS, which made household ownership of entire movies possible

for the first time. Again, after certain difficulties, the industry managed to embrace this

change and learned from its mistakes by actively pursuing the next step, the use of digital

technology. The cluster expanded and approached its current shape, going far beyond

studio and distribution companies to a broad range of supporting and related industries,

especially in the technical fields. At the same time, certain activities were relocated:

while conceptual work and post-production was still mostly done in the Los Angeles

area, shooting often took place in locations all over the world, from Canada to the United

Kingdom, New Zealand and Eastern Europe. However, the studio companies could not

escape the concentration process in the media business: large media conglomerates now

own most of them.

19 Motion Picture Assosiation of America, Available from: http://www.mpaa.org/about/history

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Description and mapping of the cluster

The Motion Pictures Production and Distribution cluster has linkages with a variety of

other clusters. Some clusters have direct linkages at the factor input level, e.g. sound

recording, specialized training programs etc, while others are linked on the demand side

e.g. home entertainment, theatrical venues. A number of clusters are linked relatively

indirectly e.g. IT, tourism, fashion, publishing and personal services like spa, fitness etc.

The Cluster Map above identifies the value chain as well as linkages with supporting

industries. The LA economic area has the advantage that the entire value chain and its

supporting clusters are present in this area, or very close in the case of IT (Silicon

Valley).

1. Profile of the Entertainment Industry in Los Angeles

Definitions of the entertainment industry vary depending on the area of focus, but in Los

Angeles the entertainment industry invariably begins with motion picture production and

a handful of other industry segments that have a long-standing presence in the area.

Added to these are a number of related industries. For the purpose of this study, the

entertainment industry has been defined to include the following: Motion Picture &

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Video-Related Sectors, Sound Production & Related Sectors, Radio, Television & Cable

Sectors, Live Entertainment Sectors, and both the artistic talent and the business side of

the industry.

Many of the companies and individuals who are the driving force behind creative content,

production, and distribution call Los Angeles County their home. The entertainment

industry is big business in Los Angeles. In 2011, over 13,000 establishments generated

161,862 jobs and over $18.9 billion in payroll. Among these are globally recognized

companies such as Paramount, Warner Bros., NBC Universal, and MTV.

Within the industry, the largest concentration of activity may be found in the Motion

Picture and Video Related Sectors. This sector accounted for the lion’s share of industry

employment with 117,841 jobs last year and payroll totaling $11.3 billion.

Establishments in this sector tended to be relatively fewer in number but larger in size.

The average annual wage for this sector was $96,000, slightly below the average for the

entertainment industry as a whole. 20The other sectors of the entertainment industry were

considerably smaller in terms of employment, annual payroll, and, with the exception of

Agents and Managers, the number of establishments. Average annual wages across

20 CollegeGrad.,Motion Picture and Video Industries, Available from: http://www.collegegrad.com/industries/infor02.shtml

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different sectors varied widely, from $103,000 in Sound Production to $261,200 for

Agents, Managers, and Independent Artists.

With 161,862 wage and salary workers, industry employment was equivalent to 4.8% of

Los Angeles County’s 3.3 million private sector workforce in 2011. Total employment in

the entertainment industry was 16.9% higher in 2011 than it was in 2001, but fell 8.5%

shy of peak employment in 2004 when 176,830 worked in the industry. While part of the

decline in recent years may be attributed to the Great Recession, runaway production was

also a likely contributing factor as motion picture and video production alone lost over

16,100 jobs from 2004 to 2011. In addition to wage and salary employees, the

entertainment industry is noted for its reliance on free-lance talent. Freelance artists,

writers, lighting, sound, and other production professionals, as well as agents and

managers provide the industry a diversified labor pool. These individuals who are

generally self-employed and have no employees numbered 85,032 in 2010, the most

recent year for which information is available. 21

This segment of the labor pool has grown consistently over the past 10 years. Actors,

writers, and other professionals in the entertainment industry are represented by an array

of labor unions and guilds. The most notable is the Screen Actors Guild-American

Federation of Radio and Television Artists (SAG-AFTRA), which resulted from the

21 CollegeGrad.,Motion Picture and Video Industries, Available from: http://www.collegegrad.com/industries/infor02.shtml

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merger of those two entities earlier in 2012. Nationally, this organization alone represents

over 160,000 actors, announcers, broadcasters, journalists, dancers, DJs, news writers,

news editors, program hosts, puppeteers, recording artists, singers, stunt performers,

voiceover artists and other media professionals nationally. Similarly, the International

Alliance of Theatrical Stage Employees (IATSE) counts over 100,000 members in its

ranks nationally. Other organizations include the Writers Guild of America, the Directors

Guild of America, and the Teamsters, to name a few. Finally, several companies in the

entertainment industry that are “household names” are located in Los Angeles County.

These include Paramount, Warner Bros., Sony, NBC Universal, Walt Disney, ABC,

CBS, and Fox. Most of these companies are located in Burbank, Universal City, Culver

City, Santa Monica, and West L.A. Paramount is the only one of the six major studios

that still calls Hollywood its home. However, Hollywood houses numerous independent

studies, including: Sunset/Gower and Bronson Studies, Raleigh Studios, RED Studios,

and Prospect Studios. As for the rest of the entertainment industry, local network and

independent television and radio stations are located in several parts of Los Angeles

(City), as well as Glendale and Burbank, while live entertainment venues are scattered

throughout Los Angeles County, with the largest facilities including Staples Center in

downtown Los Angeles and the Hollywood Bowl in Hollywood. 22

2. Economic Impact

Analysis of employment, wages, and the number of firms for a given industry within Los

Angeles County offers only a partial assessment of that industry’s presence and economic

impact on the county economy. An economic contribution analysis goes beyond the

industry itself and describes that portion of the county economy that can be attributed to

an industry.

The table used to determine the value of the industry’s contribution includes

employment, labor income and the value of output. Employment includes full-time, part-

time, permanent and seasonal employees and the self-employed, and is measured on a

job-count basis regardless of the number of hours worked. Labor income includes all

income received by both payroll employees and the self-employed, including wages and

benefits such as health insurance and pension plan contributions. Output is the value of

22 Cluster Mapping., Entertainment Cluster, Available from: www.clustermapping.us

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19 Hollywood Movie Cluster Analysis

the goods and services produced. For most industries, this is simply the revenues

generated through sales; for others, in particular retail industries, output is the value of

the services supplied.

The total impacts include direct, indirect and induced effects. Direct employment refers

to the personnel hired by firms in the industry, including rank and file employees,

administrative, management, maintenance, retail, food service, parking attendants and so

on. Direct output is the value of the services provided by each business firm or entity.

Indirect effects are those which stem from the employment and output in the industry’s

supply chain. Induced effects are those generated by the household spending of

employees whose wages are sustained by both direct and indirect spending.

The entertainment industry accounted for 585,800 total jobs (including direct, indirect,

and induced) in 2011, of which there were 246,900 direct jobs (wage and salary workers

plus self-employed), 118,900 indirect jobs, and 219,970 induced jobs. Associated with

these jobs is labor income of $43.3 billion, while the industry output amounted to $121.2

billion, both of which are measured in 2011 dollars. In addition, the industry generated

$5.6 billion in state and local taxes. When placed in the context of the Los Angeles

County as a whole, Entertainment Industry-related employment of 585,800 jobs is

equivalent to 17.6% of the County’s 3.3 million private non-farm wage and salary jobs in

2011. The industry also generates over $120 billion annually in output, with $47 billion

in value added that is directly related to the entertainment industry (the balance

attributable to indirect and induced effects). The industry’s direct value added impact of

$47 billion is equivalent to 8.4% of Los Angeles County’s estimated annual Gross

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County Product ($558 billion) in 2011. Spending by these businesses and their workers

also yields nearly $6 billion annually in state and local taxes. 23

3. Major Hollywood Movie Studios

In the North American, Western, and global markets, the major film studios, often simply

known as the majors, are commonly regarded as the six diversified media conglomerates

whose various movie production and distribution subsidiaries command approximately

90 percent of the U.S. and Canadian box office.

Most of today’s companies have their own distribution networks that concentrate on

arthouse pictures or genre films.

The Historic M-G-M Studios (Now Sony Pictures Studios)

The vast studios of Metro Goldwyn Mayer (M-G-M) were actually located in humble

Culver City, some seven miles southwest of Hollywood & Vine, closer to Marina Del

Rey than to Hollywood. The studios were born in 1915 as Triangle Pictures. The first

building on the lot (the huge edifice fronting Washington Street, with its classical

colonnades) was built before M-G-M even owned the lot. The studio became Metro

Goldwyn Mayer in 1924. M-G-M was the most powerful studio in Hollywood, renown

for the glossy, bright, technicolor style of its films, complete with lavish wardrobes, high

priced sets, and an unbeatable stable of superstars. in 1985 to 1994, Sony Pictures

recently invested $100 million to refurbish the historic studio and help restore some of

the luster to the lot. They repainted every building, restored the original ironwork gates

on Washington Boulevard, built new walls, added nostalgic Art Deco touches and false

fronts on Main Street, and put up huge, hand-painted murals of old movie posters. Studio

buildings have been named after film luminaries such as Frank Capra, Cary Grant,

Spencer Tracy and Katharine Hepburn. The much needed facelift has made the old M-G-

M lot one of the most attractive in Hollywood. And considering that Sony wrote off $2.7

billion in losses in 1994, that was quite a laudable accomplishment. 24

In September of 2004, MGM announced that it would merge with Sony Corp. of

America. In short, Sony bought MGM for $5 billion. Sony acquired MGM mainly in

23 CollegeGrad.,Motion Picture and Video Industries, Available from: http://www.collegegrad.com/industries/infor02.shtml 24 Wikipedia., Major Film Studio, Available from: http://en.wikipedia.org/wiki/Major_film_studio

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order to get the company's library of films, which is believed to be its most valuable

asset. It constituted the biggest library of color movies in the world, including franchises

such as "James Bond", the "Pink Panther" and "Rocky". 25

Paramount Studios

Most of the major motion picture studios have fled Hollywood for spots like Burbank or

Culver City. There is only one big name movie studio still actually located in Hollywood:

the huge Paramount Studios. It also happens to be the longest continually operating

studio in Hollywood. And Paramount is also one of the few studios that admit the public

on regular guided tours of the studio's back lot.

Paramount Studios began in 1913 in a rented horse barn near Sunset & Vine, and moved

to its current location on Gower Street in 1926, into an existing studio which had been

built in 1917.

In 2005, Paramount bought out the DreamWorks studio, which became a unit of

Paramount, and as a result has had additional successes with DreamWorks productions

such as "Transformers" and "Shrek the Third".

Paramount is a huge, sprawling studio, covering an area almost as big as Disneyland. At

peak season, the studio employees over 5,000 people. Just driving around the outside of

the studio walls will give you an indication of the studio's vast size. A tall water tower

with the blue Paramount mountain logo still looms over the lot, a throwback to the days

when the studio had its own fire department and hospital.

Warner Bros Studios

Warner Brothers, one of Hollywood's most famous studios, was founded in 1923 by four

actual brothers: Jack, Sam, Harry & Albert Warner. The siblings never seemed to get

along with each other, but Warner Bros Studios managed to produce some of the most

memorable movies in the history of Hollywood, including the world's first "talkie" with

Al Jolson, "The Jazz Singer" (1927), "The Adventures Robin Hood" (1938),

"Casablanca" (1942), "Yankee Doodle Dandy" (1942), "Cool Hand Luke" (1967),

25 Seeing Stars in Hollywood., The Movie Studios, Available from: http://www.seeing-stars.com/Studios/

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22 Hollywood Movie Cluster Analysis

"Deliverance" (1972), "The Exorcist" (1973), "Chariots of Fire" (1981), "Body Heat"

(1981), and the current string of "Batman" films. 26

The first Warner Bros studio (where they made "The Jazz Singer") was located in

Hollywood, on Sunset Boulevard, in what is now KTLA Television studio. In 1928, with

the success of that famous Al Jolson talkie, Warner’s moved to this 110-acre Burbank lot,

in the east San Fernando Valley, and it has been their home now for 70 years. 27

In 2001, the studio broke all records with the opening of "Harry Potter and the Sorcerer's

Stone," based on the popular book about a boy wizard, and in 2011 released the final

"Potter" film ("Deathly Hallows, part 2"). With a $967 million take, "Sorcerer's Stone"

turned out to be the second highest-grossing movie of all time, behind only "Titanic", and

the Potter series has become the biggest movie franchise of all time, with each episode

making close to a billion dollars. At the same time, the studio hit with another hit

franchise, with the hugely successful "Lord of the Rings" trilogy (from its New Line

division). 28

In January of 2000, Warner Bros was purchased by America Online (AOL), in what was

the largest merger in history. AOL bought Time Warner Inc., which also owns CNN and

HBO cable services, and publishes Time, People, Sports Illustrated, Entertainment

Weekly and Fortune magazines. AOL already owned Netscape, Compuserve, and

Moviefone. The cost of the deal was 163 billion dollars.

Universal Studios

Universal Pictures is actually the largest film and television studio in the world, with

9,000 employees and a long and proud history of film-making. In fact, Universal Studios

produced the two of the highest-grossing movies of all time, "E.T.: The Extra Terrestrial"

and "Jurassic Park."

Founded in 1912 by German immigrant Carl Laemmle, Universal Pictures built their

giant hilltop studio in 1915, on the site of a chicken farm. To make a little extra money,

they used to charge tourists 25 cents to watch the actual filming of silent movies, with

26 Seeing Stars in Hollywood., The Movie Studios, Available from: http://www.seeing-stars.com/Studios/ 27 Wikipedia., Major Film Studio, Available from: http://en.wikipedia.org/wiki/Major_film_studio 28 Seeing Stars in Hollywood., The Movie Studios, Available from: http://www.seeing-stars.com/Studios/

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23 Hollywood Movie Cluster Analysis

stars such as Lon Chaney and Rudolph Valentino on the sets. But the carnival barker-

style of the tour guides proved too much of a distraction to the film-makers, and the tours

were discontinued. Five decades later, though, the idea was resurrected with a vengeance.

29

In June of 2000, Universal was purchased by France's Vivendi. Four years later (in 2004),

General Electric/NBC bought out 80% of Universal, and the company was then referred

to as "NBC Universal". Seven years after that, in 2011, NBC-Universal was purchased by

the cable giant, Comcast.

DreamWorks Studios

In December of 2005, DreamWorks was purchased by Paramount Studios for $1.6

billion, effectively ending DreamWorks' 11-year run as an independent studio.

DreamWorks was never able to produce enough films to cover the high cost of being

their own distributors.

The move will allow Paramount to increase the number of films it releases each year.

Spielberg will stay on as a director & producer and Geffen will be chairman. The two

agreed to produce up to six movies this year. In addition, Paramount has the right to

distribute DreamWork's future animated features. To pay for the purchase, Paramount

plans to sell DreamWorks' library of movie titles for as much as $1 billion. 30

IV. Diamond Analysis

Like every other successful cluster there various points which come and work together to

have a successful and sustainable performance. Particularly for the LA motion picture

cluster it’s the collective inputs of favorable conditions like geographical and

economical; availability of a market with huge demand and support from government and

supporting industries.

With changing world and economic dynamics the cluster has faced some tough times. In

this part of the report we will discuss and analyze the LA motion picture cluster based on

the Porter’s Diamond Analysis.

29 Wikipedia., Major Film Studio, Available from: http://en.wikipedia.org/wiki/Major_film_studio 30 Seeing Stars in Hollywood., The Movie Studios, Available from: http://www.seeing-stars.com/Studios/

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24 Hollywood Movie Cluster Analysis

Following is a graphical representation of Porter’s diamond model in the context of LA

motion Picture Industry

Taking a look at the individual points on the diamond and their effect on the cluster as

whole:

1. Factor Conditions: Los Angeles being a part on California offers a variety of favorable

conditions ranging from economic conditions to geographical conditions.

It’s worth mentioning that California has a very diverse geographical features, featuring

close proximity to ocean, desert, mountains and and a busy urban life. And the most

important factor is the weather conditions in California which is not harsh at all and

facilitates a yearlong movie production..

The human factor is probably the most important asset of this cluster. Over the last five to

six decades LA has become the central attraction for film making talent across the world.

There is a large pool of talent ranging from actors to writers, from directors to stuntmen

and the strength of human capital is very much evident from the number of talent

Demand Conditions

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25 Hollywood Movie Cluster Analysis

agencies registered in LA and number of personals signed with these agencies.

Entertainment is the largest traded industry cluster in Los Angeles county, with 159.000

employees in 2010.31

Another important factor in film making is the capital investment required. Being the #1

international trade center in the US (as LA district handled $387 billion in two-way trade

(2011)32, provides enough financial services to support the cluster.

The demerits of factor conditions in LA is the rising prices of real estate and wages

across all sectors, which increases the overall movie making cost.

2. Context for strategy and rivalry: In the film industry a major film studio is a

production and distribution company which controls the every aspect of films from

production to distribution and finally the box office revenue through it small subsidiaries,

they are often called majors. They are commonly regarded as the six diversified media

conglomerates or the “Big Six”.

Their various movie production and distribution subsidiaries command the major (more

than 90%)33 of the North American box office.

The big six are: Paramount pictures, 20th Century Fox, Universal Pictures, Walt Disney

Pictures, Warner Bros. Pictures and Columbia Pictures.

The decades long competition for biggest share among the big six has shaped the cluster

into being more cooperative this can be seen from the pre-production and post-production

business partnerships among the big six.

But they dominate and influence the market trends in a big way which limits and in fact

diminishes the creative and business freedom of smaller production houses/studioes.

3. Demand Conditions : The demand conditions for LA motion picture industry is not

limited to LA district. Considering the popularity and increase in ease of access to films

the demand conditions are very international.

31, 32 Los Angeles County., The Entertainment Industry and theLos Angeles County Economy.Available

from: www.hollywoodchamber.net

33 Global box office earning. Statistics available from:www.boxofficemojo.com

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26 Hollywood Movie Cluster Analysis

Firstly the domestic market, USA (including Canada) has the biggest box office share in

global market, it accounts for 23.9 Billion USD out of total 34.7 Billion USD34. Secondly

the popularity of American culture and the reputation of Hollywood cuts across

boundaries and reaches every corner of the globe.

Another factor of deep global penetration of American movies is the global acceptance of

English as the international language.

4. Supporting and Related Industries: Movie making is a very intensive process which

involves a lot of support from various different industries like sound recording,

television broadcasting, video games, special/visual effects, computer animation,

photographic equipment and supplies, advertising firms; talent agencies, celebrity

magazines. LA motion picture cluster has good balance of these industries supporting

film making and in turn film making supporting the growth of these industries.

Also, the popularity of Hollywood has given the rise and a market for tourism in LA and

movie based theme parks. It’s the popularity of Hollywood that has turned American

movie awards into global festivals.

5. State government influence: The state government and the federal government offer a

wide array of incentives and aids to facilitate film production and growth of the cluster.

Movie Production incentives (MPI) is a term given to such aids by the government which

mainly includes tax benefits also known as Tax Credits which remove a portion of the

income tax. There are also cash rebates which are paid to small production companies

directly by the state. California and some other states have started ‘fee-free location’

program to encourage production.

The California Film Commission is constant supporting pillar for the growth of the

cluster. Formed in 1985, it works for keeping the film making projects and jobs in the

state of California by using Financial and Tax Incentives.

34 Motion Pictures Association of America, Theatrical Market Statistics 2012. Available from: www.mpaa.org/resources/3037b7a4-58a2-4109-8012-58fca3abdf1b.pdf

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V. Problems facing federal government

Several macroeconomic problems represent a challenge for the federal government. It has

first to tackle the external imbalances and the lack of domestic saving. A persistent trade

deficit could indeed raise some concerns and foreign investors might become more

cautious, which would lead to higher interest rates and a depreciation of the dollar that

would be harmful to investment.

Moreover, higher interest rates would make it harder to achieve fiscal balance, in

particular in the context of an aging population raising the cost of healthcare and social

security. There is thus a risk of “hard landing” that requires careful macroeconomic

policies. At the same time, the US will have to address certain weaknesses of its business

environment, by simplifying and increasing the efficiency of its tax system and by

providing better public education. California is also facing very serious challenges. In

particular, the state is running procyclical budget deficits, which is contradictory to the

principles of sound fiscal policy: while growth is still strong, the expected deficit for

2006 is $6.4 billion.35 California’s business environment also has weaknesses, as it is a

very expensive location to work in: energy prices are still 25% higher than in the rest of

the US and housing prices are booming. Moreover, taxes are quite high: California ranks

only 40th in the State Business Tax Climate Index. This makes it harder for California to

retain businesses within its border 10. Finally, the recent crisis in state politics was

harmful to the confidence of the population in the state’s political leadership and this

confidence has to be restored.

VI. Challenges of the motion picture industry

The global motion picture industry faces a revolution in the way films are conceived,

produced and distributed. The coming of the digital age affects almost all sections of the

global value chain. The demand side is threatened not only by piracy, made easier

through technologies such as DVD Burners and Recorders, Video iPods and Video-on-

Demand. The improving equipment for digital home entertainment, creating a movie

atmosphere in the living room, is quoted as major reason for the recent drop in theater

admissions. A first response by the studios was to shorten the life cycle of movies: If they

35 Feldstein, M. (2005). Rethinking Social Welfare , January 8, 2005, Published: American Economic Review, March 2005.

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don’t generate sufficient revenue, even movies with high budgets disappear from the

theaters one or two weeks after their release. While releases on VHS in the early 1990s

were scheduled on average nine months after the theatrical release, successful movies are

now available on DVD less than three months later. If a studio wants to have a certain

control over the entire value chain, large investments are required as the number of media

channels is constantly increasing from cable television over the Internet to mobile

communication devices. In the blockbuster segment, movie production is already

dominated by digital compositing and motion capture, where all parts of the image are

digitally reconstructed, including the movements of actors. 70 percent of all shots in the

2004 release “The Lord of the Rings: The Return of the Kings” were not filmed by

camera at all, but produced on a computer. While the price of advanced digital processing

and production is decreasing, the hunt for even more special effects requires high

investments and close cooperation with computer companies, which have an increasing

influence on the motion picture industry. The integration of both industries is also visible

in the area of content: Video games turned movies (or the other way round) is a safe bet

given the importance of teenagers in box office revenues. The next step is digital

projection in movie theaters, Again, the studio companies might lose control over one

part of the value chain: At present, they can control distribution by the number of

physical film rolls they send out around the world and charge high rental films. Under

digital projection, the original film can be copied in a matter of minutes. A prerequisite

for digital movie theaters is a switch from traditional to digital film cameras. While this

technology does not provide the same quality yet, experts consider it to be just a matter of

a few years until digital imaging catches up with the traditional film roll.

According to a report by the Los Angeles County Economic Development Corporation ,

the biggest threat to the LA motion picture cluster is runaway production. The movie

production business is very lucrative as a means to create substantial jobs directly and

indirectly. For this reason, more and more US states are offering incentives to promote

film making in their areas. Moreover countries like Canada, Australia, New Zealand etc

are also very actively marketing their countries as a prime location. According to the

LAEDC study, production expenditure in Louisiana increased from $12 million in 2002

to $330 million in 2004 after adoption of its incentive package. According to the LAEDC

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study in 2004 only 39% of the movies were produced exclusively or partially in

California, whereas 61% were shot either in other states or foreign countries.36

VII. Recommendations

Increasing cooperation among the studios in the cluster is one of the solutions to the

serious problems that might come up. These are among others the current prices that

make production of movies more favorable to do in other places in the world and the

availability of digital technology. The studios should also concentrate more on work with

theaters companies in order to enhance the movie aging experience.

The role of the institutions overseeing the cluster should finally be improved as The

Hollywood cluster is in need of such structures which are able to provide strategies for

revitalizing the cluster. To achieve this a decent amount of technological research and

market data is needed. Also the studios admit a need of triad fairs on which the studios

could exchange their experiences with competitors, supporting and related industries as

well as the policymakers.37 This would allow for the creation of a long-lasting vision that

will be shared among the players in the cluster.

36 Feldstein, M. (2006)., The Effect of Efficiency and Growth, Published: National Association for Business Economists. 37 Waterman, D. (2005). Hollywood’s Road to Riches. Cambridge (MA): Harvard University Press.

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Appendix 1

Appendix 2

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Appendix 3. Canal+ Advertisements