Business | Schumpeter

Creative capitalism

Other industries have a lot to learn from Hollywood

THE main building on Disney’s studio lot has seven huge replicas of Snow White’s dwarfs holding up its roof, a reminder of how Hollywood does not take itself too seriously. Nor do many outsiders. Film is an eccentric business, filled with egos and excess. For most of their history, studios have had neither the stunning returns of startups nor the steady profits of mature firms. They are famed for blowing vast sums on high-profile turkeys. “Heaven’s Gate”, an extravagant flop in 1980, crushed United Artists, the studio Charlie Chaplin and other stars founded in 1919.

Few business-school professors would ever think to walk the red carpet and use Hollywood as a case study. However, it is time they tuned in to Tinseltown. One reason is that other industries are coming to resemble the film business in some ways. In today’s knowledge-based economy, bosses are having to spend more time managing flighty “stars”. Food and consumer-goods makers are, as the studios have already done, seeking to focus more on a narrower range of “blockbusters”; and in industries from electronics to carmaking, the pace of product and brand launches is increasing, so Hollywood’s ability to create a buzz rapidly about a new film may offer valuable lessons.

Furthermore, movie-making is an American success story. It is one of the few remaining industries in which the country’s grip on the global market is as strong as it has ever been. China’s Chollywood and India’s Bollywood do not make films that people in other countries line up to see. America’s film and television industry reckons its exports are worth around $16 billion a year.

Every company that employs creative people must think about how to harness their strengths for commercial gain without strangling their free-spiritedness. Hollywood has a century’s experience in this. Studios recruit a fresh creative team for each film, leaving its members to work intensely together with a minimum of interference, stepping in only when things are clearly going wrong. This gives team members a feeling of control and pride in their project; and to cap it all, everyone has their contribution duly acknowledged in the closing credits.

Such teamwork is rare in other businesses, argues Mark Young of the University of Southern California’s Marshall School of Business. People work hard and collaborate well in the movie business in part because they have little job stability. Many are freelancers, who will not get hired for the next film unless they prove themselves on the current one. The tough lesson from Hollywood, then, is that job insecurity can lead to greater productivity, as long as workers believe in what they are doing and have their achievements recognised.

Hollywood is a land of retakes. Everyone understands that constant revisions improve the product. In a recent book, “Creativity, Inc.”, Ed Catmull, the founder of Pixar and president of Disney Animation, argues that every film starts out as an “ugly baby”, growing through countless changes into a graceful adult. “Up”, Pixar’s hit film from 2009 about a widower who travels around the world with the help of balloons, began with a completely different premise. It was reworked drastically on the advice of the “Braintrust”, an internal group set up to give frank feedback. Mobile-app firms can also be adept at adjusting products in response to internal and external feedback, and makers of consumer goods are learning to tweak their products and packaging in response to reviews. But in many businesses, bosses still tend to spurn constructive criticism.

Like Hollywood, California’s other world-beating industrial cluster, Silicon Valley, has overcome the fear of failure. Films are like tech startups in that flops are tolerated because they are so common, even when the initial idea seemed promising. In both cases, the value of failure as a learning experience is well understood. So in this part of American life, there are second, and third, acts. Studio heads sometimes roll when a film flops, but executives, directors and other talent can find redemption.

Perhaps Hollywood’s most remarkable skill is in launching brands that achieve global prominence in a matter of days. Each film is a separate product that needs its own marketing, and the stakes are incredibly high: if it has not gained sufficient momentum by its opening weekend, it may sink without trace. Studios spend vast sums on promotional campaigns, often as much as they spend on producing the film itself. Businesses that are sceptical about the value of marketing, and about the possibilities for creating consumer awareness rapidly, should look closely at how Hollywood manages to come up with new brands on a near-weekly basis. The key is to treat the marketing as a core part of the project, rather than as an afterthought.

Sunrise Boulevard

For all the film industry’s reputation as a licence to lose money, the media conglomerates that own the big studios nowadays run them more professionally, and keep a closer eye on profitability. Three of the six Hollywood “majors” are now managed by business-school graduates. Film companies no longer have extravagant numbers of projects in development, and focus more on action-packed “franchise” films featuring comic-book characters, which sell well abroad and lend themselves to sequels. Learning from Silicon Valley, Hollywood is relying more on outside financing, which means sharing the profits from hits but also protects against crippling losses when a film flops.

No one likes to talk about age in Hollywood, but it has enjoyed remarkable longevity. The studios have survived the threats from new technologies like television and the internet, and “pivoted” repeatedly to adjust their output to audiences’ shifting tastes. Few businesses have refreshed their product line-ups so often. And few have restructured so thoroughly: studios have evolved from being vertically integrated groups that owned cinemas and kept actors on the payroll to become asset-light, flexible renters of talent. In the 102 years since the founding of Universal Pictures, the oldest of the majors, Hollywood may have provided plenty of “how not to” examples for business—but it has plenty of positive ones too.

This article appeared in the Business section of the print edition under the headline "Creative capitalism"

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