2
Merger Mania

Early on, the industry's key executives knew that big changes were underway. Shortly after its 1982 purchase of Columbia Pictures, the Coca-Cola Co. stated:

The entertainment business in general and the motion picture business in particular are undergoing significant changes, primarily due to technological developments which have resulted in the availability of alternative forms of leisure time entertainment, including expanded pay and cable television, video cassettes, video discs and video games. During the last several years, revenues from licensing of motion pictures to network television have decreased, while revenues from pay television, video cassettes and video discs have increased. However, the level of theatrical success remains a critical factor in generating revenues in these ancillary markets.¹

Coke's interest in the revenue potential of alternative leisure markets led to its acquisition of Columbia and motivated its willingness to invest significantly in filmed entertainment as an area complementary to its soft drink operations.

Alan J. Hirschfield, former head of Columbia and 20th Century-Fox, emphasized the importance of the 1980s for the Hollywood industry. Speaking in 1990, after the industry had negotiated the absorption of the new delivery systems, seen the restructuring of its relationship with the exhibition sector, fought a series of format wars, and been married to a variety of new corporate partners, he noted, "It's been a period of the most dramatic change in the history of the industry. It's a totally different business from what it was five years ago."² It is not difficult to understand why Hollywood was a tempting target of opportunity for the large entertainment and communications conglomerates that moved in to buy the studios. As table 1.1 has shown, domestic box-office revenue remained robust. The $2.8 billion earned in 1980 had climbed by 1988 to $4.38 billion. In 1989, domestic box office hit $5 billion. But the data on ticket sales showed a somewhat different picture. As explained in the last chapter, national annual ticket sales remained remarkably consistent from year to year, at just above 1 billion.

How one resolves the ambiguities presented by the two sets of data will produce very different portraits of the industry's overall health. On the one hand, the theatrical moviegoing market seemed fully exploited. It had topped out, despite the yearly advances in box-office revenue. The national audience for theatrical motion pictures was no longer expanding. It was stagnant. On the other hand, the robust box office demonstrated that the industry's appeal was stable. Theatrical exhibition continued to perform quite respectably, despite the alternative viewing venues represented by home video and pay cable. Furthermore, to the extent that the economic performance of the major studios was an indicator of the industry's health, nearly all of the studios had one or more outstanding years during the decade. With MGM/UA being a prominent exception because of its debt load and its turbulent history, most of the majors achieved a dominant market share during one or more years of the decade. Table 2.1 shows market share performance by each major over the course of the decade, and chart 2.1 shows each year's market share leader. The most successful majors were Warner Bros. (market share

leader in 1981, 1985, 1989), Paramount (market leader in 1984 and 1986-87), and Disney, by virtue of its spectacular return from the brink of theatrical market extinction (compare its performance in the first and second halves of the decade).

Blockbuster films were generating whopping returns (table 2.2). The Empire Strikes Back (1980), E.T.: The Extra-Terrestrial (1982), Return of the Jedi (1983), Ghostbusters (1984), and Batman (1989) all passed the $100 million mark in theatrical rentals. This set a new benchmark for success, and Variety would remark upon the failure, in other years, for a top film to cross the $100 million line. Of chief importance in understanding why the majors were such attractive buys for larger corporations, then, is this factor: each of the majors (excepting MGM/UA) produced or distributed at least one of the decade's blockbusters.

Each of the majors, therefore, was a proven maker and distributor of the industry's top film in any given year and had the capability of dominating the national moviegoing market. These are similar but separate attributes, because a blockbuster's success did not always guarantee market dominance for its studio distributor. One major might have the year's top film while another had more productions scoring high on the revenue charts and thus secured market dominance. Furthermore, the terms under which the majors secured distribution of big pictures were not always as favorable to the distributor as they might have been. Fox, for example, felt that the distributor/production company splits on revenues from The Empire Strikes Back and Return of the Jedi lessened the profits it might otherwise have secured from distribution of these films.

These factors made it possible for a major to "fail" to have the top film in a given year yet emerge as that year's market share leader. In 1980, Fox had the top film, but Universal had the biggest market share, in part because it distributed four other titles in the top ten (The Jerk, Smokey and the Bandit, Coal Miner's Daughter, and The Blues Brothers). In 1984, Columbia had the top film, but Paramount was the market leader, in part because it had three titles in the top five (Indiana Jones and the Temple of Doom, Beverly Hills Cop, and Terms of Endearment). On several measures, then, all of the majors were associated with the decade's top films, and these films, along with the studios that produced or distributed them, were giant revenue machines that could drive the ancillary markets to produce additional returns. This

is a principal reason why the Hollywood industry became an attractive buy for the multinational communications firms that shopped and purchased with such alacrity during the era. Get a major studio and you got a company that every few years would produce one of these cash monsters. (MGM/UA released very few films during the decade, none of which were top earners. But the company's value would prove to be enormous because of the studios library of classic films.)

Other measures of the industry's robust operations are found in the explosion of new theater screens; 1984 was the second year in a row for the biggest expansion increase in any year since 1948, a remarkable boom in exhibition considered later in this chapter. The expansion of screens was, in significant respect, the result of an increase in film production in the early 1980s and a consequent rise in the total number of titles in distribution. Film production climbed from 1983 to 1987 because of its potential to continue generating revenue downstream in the ancillary markets. More films in distribution required more screens on which to play, even as the window of release into the theatrical market tightened for many titles. As an executive for the General Cinema theater circuit explained, "We need more screens to service the supply from the companies and respond to the public's demand. In part because of home viewing, the [theatrical] runs are shorter, and you go through an awful lot of product because of free and pay tv."³ This expansion of production and distribution was due almost entirely to the proliferation of independent films, that is, films financed or distributed outside the auspices of a major studio. The majors could not underwrite additional production because they had a fixed amount of working capital in any given year, and this was fully committed. The expansion of production and distibution in mid-decade, therefore, occurred largely outside the majors. As chart 2.2 shows, from 1983 to 1987, the number of in-house productions by the studios (Buena Vista [Disney's distribution arm], Columbia, Tri-Star, MGM/UA, Orion, Paramount, 20th Century-Fox, Universal, Warner Bros.) remained relatively constant while the number of independent productions soared. Many of these independent productions, though, failed to secure distribution (table 2.3). Despite this, the number of independent films in release climbed significantly in mid-decade. Thus, a major production boom, fed by the take-off of the ancillary markets, was occurring by the mid-1980s. If the industry was not attracting significantly larger numbers of patrons to its movie theaters, it was putting more product into domestic release as a way of feeding the ancillaries and expanding the total number of venues in which consumers might watch their movies.

These measures indicate why the Hollywood majors were attractive to potential buyers in the communications industry. These buyers understood that big revenues lay in expanding entertainment markets and that the newest growth sectors would be the

information industries. In this regard, what happened in Hollywood in the 1980s was a snapshot of a much larger picture. The energetic merger-and-acquisitions activity that swept through Hollywood was a subset of a bigger wave hitting U.S. industries. In the 1980s, the U.S. economy saw the most sustained period of merger-and-acquisitions activity in history, reaching a total of 31,105 transactions carrying a dollar value of $1.34 trillion. Merger-and-acquisitions activity has always characterized the U.S. economy, but what changed in the eighties was a new corporate willingness to use that activity strategically, to implement long-range business plans, rather than as a tool for use in occasional and exceptional circumstances. As one business analyst summed up this development,

Mergers and acquisitions no longer would be cavalierly handled as hit-or-miss propositions or temporary phenomena cued by short-run economic and financial influences that ultimately fizzled out. The rewards were too lucrative, the techniques too strategically viable, the advantages too compelling for the modem deal-maker to let the ball drop.⁴

To facilitate this strategy and drive merger-and-acquisition activity, a new market infrastructure emerged, consisting of investment bankers, law firms, valuation companies, accountants, and strategic planners whose time and resources were devoted to m&a analysis and forecasting. These substantial new resources encouraged m&a operations, conducted throughout the economy during the eighties, from megafirms down to small businesses.

In this mix, media industries stood out. Measured by the number of merger-and-acquisitions transactions, media was the third most active industry segment from 1980 to 1989 (table 2.4). Measured again by number of transactions, media was the second most attractive U.S. industry for foreign buyers (table 2.5), an attraction that would play out with spectacular results for the Hollywood studios. Furthermore, approximately 30 percent of all m&a transactions involved corporate divestiture of business divisions or subsidiaries.⁵ As we will see, one of the most striking components of Hollywood's trans formation was its participation in the general deconglomeration of U.S. industry that these divestitures indicated.

The m&a activity of the 1980s was tied as well to the emergence and pursuit by corporate powers of global markets. As already mentioned, one sign of this was the high number of foreign buyers for U.S. industries. Since the film industry has historically been a manufacturer whose goods are among leading U.S. exports, the studios who made and

distributed those films would be exquisitely attractive buys for globally ambitious companies. Furthermore, the emerging interface between communications and entertainment added to this allure. Rupert Murdoch, whose Australian-based News Corp. Ltd. bought 20th Century—Fox in 1985, described this strategic shift from businesses geared toward the extraction of raw materials to those that processed information:

We are witnessing the beginning of the transition from the industrial society, in which wealth was created by processing raw materials, to an information society, in which wealth creation will depend on the processing of information. … A golden age will come to those countries which turn this wealth of information into knowledge effectively.

In building such an empire, Murdoch stressed the challenges of mastering a fast-paced information environment in which change occurs overnight and it is possible "to store, transmit and process vast quantities of complicated information cheaply, and in seconds." He continued, "Movies are global media. Our U.S.-based Fox Film Corp. operates in almost 50 countries through either its own offices or local agents and distributors. The development of private television channels as a result of deregulation in many markets is likely to widen the basis for international sales. The same is true for the world-wide market for videocassettes." Because the flow of information is transnational, the planet itself is the market. Accordingly, the real players in the communications industry will be global giants. According to Murdoch, "I am sure that the global top league will basically consist of five or six very large media companies."⁶

Indeed, by decade's end, the News Corp. Ltd., Time, Inc., and Japan's Sony and Matsushita were the giants who swallowed whole film studios and integrated film production and distribution with their other information-based operations. The next portion of this chapter chronicles the wave of mergers and buyouts that transformed the industry. I then consider the boom in theatrical exhibition that accompanied this wave and, in significant part, resulted from it. Finally, I close by briefly considering the media synergies that the new corporate alliances aimed to produce.

The Opening Salvo

Notice was served early on that the Hollywood studios were up for grabs. Flush with cash from his wildcat oil operations, Denver oil executive Marvin Davis bought 20th Century-Fox in 1981 for $725 million. It was a highly leveraged buy (leverage being a function of long-term corporate debt), with Davis paying only $50 million in cash, the remainder coming in the form of bank loans and borrowings from Davis's company TCF Holdings, Inc. Unlike subsequent studio purchases, the Davis buy of Fox did not serve to create an expanded corporate ability to operate in multiple leisure-time markets, and the failure of Davis's efforts to diversify into show business is instructive in this respect.

Davis's primary business was oil. His firm specialized in wildcat wells (i.e., wells in unexplored regions) and had been very successful at finding them and exploiting them. As a result, Davis was constantly looking for ways to use and shelter the flood of dollars produced by his oil operations. Shortly before the Fox purchase, for example, he sold $600 million of oil and gas properties, and he had a history of diverting oil revenues into other, ambitious business operations. Davis purchased a majority share of Denver's ninth largest bank, with assets of $190 million, and he invested millions in various Denver real estate projects, including office and shopping complexes.⁷ The Fox buy was part of this strategy of sheltering oil revenue.

As a corporate move, it was consistent with traditional policies of diversification that American businesses had been pursuing for decades. Efforts to diversify through acquisitions in unrelated markets historically held more failures than successes, however, and Davis's subsequent history with Fox was consistent with this trend. A study of the two hundred largest U.S. industrial firms by McKinsey and Co., a management consulting firm, examined their efforts to diversify from 1972 to 1983. The study found that, of those firms that attempted to change their business portfolios through diversification, most failed (measured by the failure of returns on investment to exceed acquisition costs).⁸ Furthermore, failure was greatest when firms attempted to diversify by means of large, unrelated acquisitions. The trends toward deconglomeration that I examine later in the chapter resulted from the efforts of business to reverse the negative effects of conglomeration and the impulse buying on which it rested. The Davis buy of Fox exemplified the pitfalls of traditional diversification. This is a major point of differentiation with the subsequent marriage of Fox with Rupert Murdoch's News Corp. The Davis effort failed, in part, because the deal carried a huge debt load. It failed as well because there were no synergies between film and the oil industries. Film and oil were fundamentally unrelated and thus made a poor corporate portfolio.

By buying Fox, Davis inherited $426 million in liabilities (Fox profits were down 40 percent in the first half of 1981)⁹, and he sold some of the studio's properties and subsidiaries (a midwestem Coca-Cola bottling company and half interest in the resort operations) to cover some $270 million of this liability. Davis brought former Paramount Pictures chair Barry Diller to head the studio, but despite being the market share leader in 1983, Fox's hit films were infrequent, and in 1984 the studio posted a net loss of $90 million.¹⁰ In this context of debt and sub-par performance, the Fox acquisition was a troubled one for Davis.

His purchase of Fox coincided with the aggressive efforts of Rupert Murdoch's News Corp. to expand its operations and holdings in the United States. In 1982, the News Corp. acquired the Boston Herald, in 1984 the Chicago Sun-Times and New Woman magazine, and in 1985 a slew of aviation and travel magazines. Murdoch and Davis had long known each other, and in April 1985, the News Corp. bought half of Davis's interest in Fox and then bought the remaining half in December. The acquisition of Fox cost Murdoch $575 million. Davis was resigned to the sale in light of Fox's inability to perform at a consistently profitable level during the four years in which he owned the studio. "Our Fox investment was an extremely successful one," he maintained. "While it was not our intention to sell the balance of our interest at this time, we concluded that it made good business sense to accept Rupert Murdoch's offer."¹¹

Beyond Fox's performance problems, another factor prompting Davis's decision to sell may have been his reluctance to expand into diversified media operations, and these would be critical for the success of the new Hollywood. Oil was Davis's primary business, and Fox was, at present, unaffiliated with a parent media company. Like the other studios, it was active in film production and in the licensing of films for broadcast television, cable television, and video markets. But its recorded-music operations were modest, and it had no affiliation with a cable television service provider. It had a nonexclusive arrangement with HBO at a time when Paramount, Universal, and Warner Bros, were angling to merge with Showtime and The Movie Channel. (The Justice Department blocked this deal in 1983.) When Fox subsequently tried to partner with Columbia and ABC-TV to buy 75 percent of Showtime, Columbia backed out and partnered instead with HBO and CBS to start Tri-Star.

In light of the forces affecting the industry, Davis's sole ownership of a stand-alone movie studio was backward looking and out of synch. Murdoch discussed with Davis the prospect of jointly purchasing six Metromedia television stations, but Davis decided not to participate in this historic venture. Murdoch's plans for an expansion into U.S. operations included obtaining an umbrella group of communications companies, while Davis seemed uninterested in expanding media operations beyond Fox. Although Fox's recent performance was disappointing, the studio would be a valuable property at sale to an empire builder like Rupert Murdoch, who understood the linchpin role a movie studio could play in international media markets. Accordingly, Davis decided to sell. Explaining Davis's decision, an entertainment industry analyst with Merrill Lynch pointed to the value of movie studios for burgeoning communications empires: "This might not have been a good deal for him, as little as six months ago, but the integration of media empires has changed the nature of the broadcasting and movie connections."¹² He added that this integration had made the movie companies more valuable.

The Fox buy was merely one piece in Murdoch's furiously expanding U.S. operations. In the year before his purchase of Fox, Murdoch tried to win control of Warner Communications, Inc., but WCI successfully blocked the attempt and repurchased Murdoch's stock shares. Murdoch walked away from the defeat with a profit of $40 million.¹³ Three months after completing its Fox buy, the News Corp. spent $1.8 billion to acquire the six Metromedia television stations, located in New York, Los Angeles, Chicago, Dallas, Washington, D.C., and Houston, six of the ten largest media markets in the country. This was the twenty-second-largest foreign acquisition of U.S. businesses in the eighties.¹⁴ (The News Corp.'s 1988 purchase of Triangle Publications, Inc., pub lisher of TV Guide and other magazines, was the tenth-biggest foreign buy of the decade.) The News Corp. promptly launched Fox, a fourth broadcast television network, as an alternative to ABC, NBC, and CBS.

By mid-decade, its rapid series of newspaper, magazine, filmed-entertainment, and broadcast television purchases established the News Corp. as a model for the information industries. Rather than pursuing the erratic programs of old-line diversification that had resulted in unwieldy behemoths like Gulf and Western, Murdoch targeted key media markets and programming in order to build a focused corporate structure. By mid-decade, the News Corp. operated in five primary business segments: newspaper publishing (in 1986, three major metropolitan newspapers), magazine publishing (fourteen business and six consumer magazines, Elle and New York among them), filmedentertainment operations, and television broadcasting. In 1986, the year after the purchase of Fox Film, the filmed-entertainment segment was the second-biggest revenue generator (after newspapers, which the News Corp. also owned in Europe). The buys of Fox Film and the Metromedia Television stations helped push revenues in the United States ($1.9 billion) far ahead of those generated in the company's other areas of operation, the United Kingdom ($1.1 billion) and Australia ($814 million).¹⁵ The importance of the ancillary markets is dramatically illustrated by a breakdown of News Corp. profits for fiscal 1986. Home video ($46 million) and television ($50 million) generated greater profits than did production and distribution of theatrical film ($43 million).¹⁶

By 1986, then, 20th Century-Fox had been subsumed within the Murdoch media empire. At decades end, looking back on the growth of his empire, Rupert Murdoch summarized the business strategy that guided his media purchases:

If ten years or so ago we had attempted to chart on paper the destiny of our company, we would never have anticipated the 30 very diverse acquisitions we made on four continents, almost all of which arose from unique and unanticipated events. … However, I think a very moderate kind of strategy is emerging. It is building up an international company of record that is able to adapt to new technologies.¹⁷

Coca-Cola and the Pursuit of Synergy

Whereas the initial sale of Fox to Marvin Davis did not position the studio within a leisure-time industry (this not until the Murdoch buy four years later), the purchase of Columbia Pictures by the Coca-Cola Co. on 21 June 1982 for $692 million promptly launched that studio (and Coke) in pursuit of synergies among leisure-time markets and operations. Coke's conviction that synergies could be obtained between movies and soft drinks was problematic from the outset, and its failure to realize the revenue growth it sought from the Columbia purchase demonstrated how elusive the much-vaunted market synergies could be. Coke's experiment at owning a movie studio exemplied the wrong kind of synergies, or, more correctly, it exemplified what happens when a business tries to invent synergies where none really prevail. In their absence, Coke's ill-fated experiment with Columbia stands as another example of old-line corporate diversification. It was clothed in the sexy new garb of strategic synergy. Stripped of this, though, the union of soft drinks and movies was a bad match, an effort to marry dissimilar market segments and products. As Coke would come to realize, and despite its initial enthusiasm, the marriage made for an unsatisfying corporate portfolio.

It also would produce one of the oddest chapters in Hollywood corporate history, namely, the bizarre tenure of David Puttnam as head of Columbia Pictures. Puttnam was appointed president of Columbia with Coke's blessing, and he quickly became the soft drink giant's nemesis. In short order, Puttnam managed to antagonize nearly all of the major Hollywood power brokers and to defy the prevailing norms of Hollywood production. This resulted quickly in his very public ousting from Columbia, and his fate clarified the kinds of films that would and would not be made by Coke's new ward.

The Columbia purchase was an outgrowth of Coke's efforts to reposition itself in the decade and to alter the nature of its business portfolio. In March 1981, the Coca-Cola Co. approved a strategic plan for the 1980s that would guide the firm's decisions about the direction and conduct of its business. Deciding to embark on an aggressive program of business expansion, it sought to pursue growth opportunities beyond its traditional soft drink operations. On 4 March 1981, Coke chairman Roberto C. Goizueta presented "The Strategy for the 1980s" to Coke's board of directors, a document that defined "the future self-definition of The Coca-Cola Company." Goizueta promised that the company would not stray from its traditional areas of strength but would aim through expansion to maximize the returns on shareholder investments. "In choosing new areas of business, each market we enter must have sufficient inherent real growth potential to make entry desirable. It is not our desire to battle continually for share in a stagnant market in these new areas of business. "¹⁸ Coke was proud of its global soft drink markets and was committed to enhancing its international marketing prowess. It proclaimed, "The world is our arena in which to win marketing victories as we must." Movies might provide a powerful new means of winning these victories.

Coca-Cola was the world's largest manufacturer and distributor of soft drink syrups and concentrates, and soft drink products produced the overwhelming majority of Coke's revenues in 1982 (85 percent). The company also operated a food-and-wine business segment (Minute Maid juices, Hi-C, Taylor wines, coffee, and pasta products). Soft drink sales, however, were not growing faster than 10 percent a year, and by entering other business areas, Coke believed it could increase its earnings substantially. "We could have had a happy life without doing it, but it's not very exciting to grow at 10%," Goizueta remarked. Like other conglomerates who bought movie studios in the 1980s, Coke believed that the growth potential of the new distribution media was substantial and that the movie studios were the engines necessary to drive these new media and markets. Without Hollywood, no firm could be a global force in entertainment, and this became Coke's new vision and ambition. Goizueta explained, "You can't be a national force in soft drinks without a syrup plant, and in entertainment, you need a movie company—that's the turbine, the locomotive."¹⁹

But there was a major problem here, and in hindsight it is surprising no one saw it. The link between movies and soft drinks is neither strong nor persuasive. How, except in mainly peripheral and transient ways, could movie production and promotion enhance soft drink sales and vice versa? By contrast, the synergies between publishing, recorded music, and broadcast and cable television that are inherent in a marriage like Time Warner or that between Fox and the News Corp. are more compelling and certainly easier to conceive. These mergers brought together groups of information and entertainment media that could be used to cross-promote each others products (e.g., Batman as book, record, movie, and comic strip). Soft drinks, by contrast, are not a form of media. Thus, it would prove difficult to establish synergies between Coke's soft drink operations and its entertainment business sector. From the start, though, Coke believed that its addition of an entertainment business sector to the company's other segments was a good fit. As it informed its stockholders,

Of all the actions taken in 1982, we view as among the most significant our entry into an exciting new area of inherent profitable growth—entertainment. The acquisition of Columbia emerged from our careful search for a high-growth business that was compatible with the central strengths of the Company…. In Columbia we have an excellent complement to our traditional businesses—an almost ideal fit with what we are—and a perfect partner to join with us in becoming what we want to be.²⁰

Pushing the analogies between movies and soft drinks, Goizueta announced, "We believe that the thirst we quench (with soft drinks) is no greater than the thirst for entertainment."²¹ This, though, was synergy through metaphor and not through market. Continuing, Coke assured its shareholders that its soft drinks have "a commanding position in the home refrigerator. You can also see that Columbia now offers us the potential for an equally commanding position in that other key household center—the television set."²²

Coke moved quickly to define a long range strategy for growth in its entertainment business sector. Film production would be increased beyond the eight pictures Columbia made in 1982 (the studio distributed domestically a total of twenty-one films that year), but risks would be managed by expanding outside financing of production costs. In this respect, Columbia was employing a funding strategy—offering limited partnerships and tax-sheltered investments in production—that was widely used by the majors in the eighties to augment their available production capital and generate resources to invest in a range of productions.

Escalating production costs and existing provisions in the tax code made this an attractive strategy, at least until the Tax Reform Act of 1986 repealed the investment tax credit that entertainment companies had used to attract investors. Annie (1982), Poltergeist (1982), Rocky III (1982), Flashdance (1983), and Who Framed Roger Rabbit (1988) were funded through limited-partnership packages.²³ Disney had great success with its Silver Screen Partners, and Columbia financed a series of pictures with Delphi Film Associates. Outside the majors' orbits, the production, distribution, or both of such prominent independent films as The Trip to Bountiful (1985), Choose Me (1984), and Kiss of the Spider Woman (1985) were funded by Film Dallas, an agency offering limited partnerships for productions occurring in the Dallas, Texas, area (see ch. 6).

With respect to Columbia, its 1982 joint venture with Delphi Film Associates had Delphi pledging $80 million to be raised through public stock offerings. In 1983 and 1984, Columbia again offered limited partnerships through Delphi on terms that would be favorable to investors. Delphi III (1984), for example, offered minimum investment units of $5,000, up to a total of $60 million. All distribution fees (17.5 percent of gross receipts) would be deferred until the limited partners had recovered 100 percent of their share of a film's production costs. In addition, Delphi III partners were to receive 8 percent of gross receipts. Columbia's use of partnership packages was a key means for achieving its goal of an expansion in production. Columbia's president, Frank Vincent, said that the boost in production would increase the film properties over which Columbia/Coke retained complete ownership so as to maximize ancillary profits.²⁴ Moreover, the studio was aggressively targeting these nontheatrical markets. Columbia and RCA had a joint venture—RCA Columbia International Video—for worldwide home video distribution. Columbia had an existing agreement with HBO for the cable presentation of its pictures, and Coke and Columbia moved quickly to strengthen the HBO alliance and to maximize the studio's ability to place more pictures into distribution. In November 1982, five months after Coca-Cola acquired Columbia, the formation of Tri-Star, the new major studio, was announced, created from a partnership among film production (Columbia), pay cable (HBO) and broadcast television (CBS). The new studio would aim to produce and distribute fifteen to twenty films per year, and these would be in addition to the normal load of pictures produced and distributed by Columbia.

Tri-Star is a perfect example of the synergies Coke wished to explore in filmed entertainment because it provided for shared funding of production (and shared risks) and integrated production with exhibition through the provisions for pay-TV and broadcast television screening of its product. Furthermore, the alliance with Coke gave Columbia (and Tri-Star) access to greater levels of funding for the expanded production schedule, this being one of the chief attractions inherent in acquisition by a large parent corporation. Coke's assets were also beneficial to Columbia in marketing and promoting its films. Coke's ability to buy large chunks of air time at volume discounts helped produce an increase of 5 percent in network TV time for Columbia's ads, and the studio and soft drink giant were able to swap air time for each other's products within the blocks they purchased in advance. When ABC aired The Day After, for example, a 1983 TV movie about a nuclear war that destroys the United States, Coke backed out of advertising on the program, and Columbia aired a promo for one of its horror films instead. These benefits and arrangements exemplified Coke's movie business philosophy. According to Coca-Cola president Donald Keough, theatrical film "is a commodity business for the rest of the industry."²⁵ In other words, investment in theatrical film production was a multimarket venture. Columbia's joint projects with RCA, HBO, and CBS provided the pipelines for distributing this commodity (filmed entertainment) through these overlapping markets.

Like other conglomerates attracted to the movie business, though, Coke soon discovered that the business's "inherent growth potential" was erratic and unpredictable. The studio's performance was chronically disappointing for Coke. Throughout the 1980s, Columbia never attained a leading market share position. Its best year was 1984, when it had 16 percent of the market, behind market leader Paramount's 21 percent. Coke acknowledged in its stockholders report that Columbia's performance for 1983, the first full year of performance under its new owner, was "below expectations" and that the majority of profits in the entertainment business sector had been generated by Columbia Pictures Television, mainly through program syndication.²⁶ In subsequent years, too, Columbia Pictures' performance continued to be softer than Coke executives hoped. (Paramount, Warners, and Universal were the best-performing studios through the decade, having the largest theatrical market shares.²⁷) Compounding Coke's dissatisfaction, the studio suffered one of the decade's biggest production and marketing disasters with Ishtar (1987), a Dustin Hoffman-Warren Beatty comedy that nobody wanted to see. It was wastefully expensive to produce, was trashed by critics, and died in theaters. Like Heaven's Gate earlier in the decade, Ishtar's awfulness was widely interpreted as a symptom of poor management by the studio and its executives, though unlike Heaven's Gate it did not lead to a major's demise. Columbia had to place $25 million in reserve to cover Ishtar's losses.

Following the Ishtar debacle, continuing soft performance of Columbia and Tri-Star, and a year-long crisis of management within Columbia, Coke decided to reorganize its entertainment business sector to produce a leaner and more efficient operation. In December 1987, it merged Tri-Star into the entertainment business sector and renamed it Columbia Pictures Entertainment (CPE). Each studio would continue to operate separately with its own executive staff, but they would now be housed under the CPE umbrella. This reorganization was Coke's answer to a horrendous year at Columbia during which studio management veered far from Coke's visions for the new decade. Columbia's troubled internal operations and its disappointing box-office performance were given stark visibility by the fallout from the CPE reorganization—the ouster of Columbia's chair/CEO David Puttnam. Puttnam's reign had been a disaster for the studio. In his brief, one-year tenure as Columbia head, Puttnam's brash statements that most American films and filmmakers were no good had alienated top executives at Coke and a wide array of movie industry producers, directors, and actors. The Puttnam saga is significant and striking because his production policies and attitudes were glaringly out of synch with the performance Coke wanted to see from Columbia. Puttnam took the studio down a road that neither Coke nor the industry as a whole wished to travel. Puttnam's fate dramatically illuminated the constraints operating on film production when it occurs as part of a diversified leisure industry and when a studio chief brazenly ignores some of the industry's fundamental principles.

The David Puttnam Debacle

Puttnam came to Columbia as the British producer of such highly regarded but modestly performing films as Chariots of Fire (1981), Local Hero (1983), and The Killing Fields (1984), and he was deeply ambivalent about working for the Hollywood industry. Worse yet, he publicly projected this ambivalence. He accepted a multimillion-dollar contract but insisted on a three-year cap because he felt that he had sold out to the system by coming to Hollywood. By limiting his involvement, he said, he could salvage his dignity.

In his speeches Puttnam proclaimed high-minded ideals and a commitment to using film to elevate the moral and social sensibilities of the audience. "Artists and those who work with them have a moral responsibility to the audience" was an idea he frequently repeated in speeches. Motion picture artists should "seriously consider restating our commitment to what benefits the rest of the human race."²⁸ Puttnam's idealism accompanied a disdain for the commerce of movies. Incredibly, for a man selected as CEO of a major studio, Puttnam disparaged the commercial context in which filmmaking operates, especially its need to turn a profit. Worse yet, from the standpoint of his employers, Puttnam explicitly declared his hostility to film as a profit-making enterprise. Rambo (1985) had been one of the top, and few, big money-earners for Tri-Star, and Puttnam informed Coke that, had the decision been his, he never would have made the picture. Puttnam quickly put Coke president Donald Keough and chair Roberto Goizueta on notice that seeking big box-office returns would not be his objective as Columbia head (this to Goizueta, who had formulated Coke's 1980s mission statement about investing in business sectors that had major growth potential!). Upon his hire, Puttnam wrote them, "The medium is too powerful and too important an influence on the way we live, the way we see ourselves, to be left solely to the tyranny of the boxoffice or reduced to the sum of the lowest common denominator of public taste."²⁹ It would be difficult to imagine Coke having a bigger nightmare than to hear this from the head of the most important sector of its entertainment business segment.

Instead of making blockbusters, Puttnam wished to pursue smaller-scale filmmaking. In pursuit of this plan, he alienated the industry's powerful talent agencies by proclaiming that henceforth Columbia would develop its productions in-house and would turn down "packages," expensive director-star-script combinations brought to studios by the agencies. This was an impossible policy. No major was equipped in the 1980s to operate as studios of the classical period did, funding all of their own productions and staffing them from a vast array of inhouse talent. Studios sought outside investors precisely because production had become too expensive and risky to fund through existing house capital revenues and lines of credit, and no studio had a stable of talent on long-term contract. Puttnam's plan, therefore, displayed a basic ignorance of the contemporary industry. Furthermore, he committed Columbia's $300 million production and distribution budget to an ill-considered series of low-budget projects (at their worst, these included The Beast [1988], a violenceladen picture about the Afghan-Soviet war, and Me and Him [1989], about a talking penis) and such badly chosen big-budget pictures as The Adventures of Baron Munchausen (1989), which went well over budget. For this film about a nineteenth-century character who was poorly known outside Germany, Columbia failed to secure distribution rights in the vitally important German market!

Puttnam loudly opposed paying the large salaries commanded by the industry's top actors and directors, and his comments in this respect alienated powerhouses Warren Beatty and Dustin Hofman. Accordingly, Columbia's slate of upcoming Puttnam-chosen films lacked the celebrity name recognition that successful marketing generally requires. Worse, Puttnam turned down projects by such top industry figures as producer Ray Stark and director Norman Jewison. One such project became the hit Moonstruck (1987) when Jewison took it to MGM. And worst of all, Puttnam refused to put into production any sequels to Columbia's cash cows, Ghostbusters (1984), the Karate Kid series (1984, 1986, 1989), and Jagged Edge (1985).

Puttnam apparently expected that Coke would acquiesce in these policies. If, on the other hand, Puttnam did not believe that Coke would support him, he was being reckless. "What I was trying to do was a different type of business. Smaller films, smaller risks. Smaller profits but regular profits," he said.³⁰ The risks, though, were not small, and it was Coke that was taking them. Author Charles Kipps, who as a reporter forVariety provided the most penetrating analysis of Puttnam's tenure at Columbia, placed Coke's risk in context:

At twenty-five cents a pop on the wholesale market—about twelve cents profit—the soft drink maker would have to sell over two billion bottles of Coke to offset $270,000,000 should the new lineup of pictures fail at the box office. Add a requisite couple of hundred million for prints and advertising, and Coke might have to ship out four billion units of fizzy caramel-colored liquid to pay for David Puttnam's slate.³¹

To his credit, Puttnam was against making what turned into two of Columbia's biggest embarassments and money-losers, Ishtar and Bill Cosby's Leonard, Part 6 (1987). (He did, however, make decisions that seemed to foredoom Leonard. In a move that prompted cries of cronyism, he assigned the picture to Paul Weiland, a young British director who had little feel for American culture and for the ways Cosby's humor connected with this culture.) On the other hand, the pictures that Puttnam inherited and approved for production and those he brought to the studio proved to have a dismal track record. Variety calculated that the thirty-three pictures associated with Puttnam had negative and advertising costs of $432 million and by midyear 1988 had grossed only $112 million at the box office.³² These pictures included such underperformers as Little Nikita (1988), Old Gringo (1989), and True Believer (1989) as well as such highly regarded films as John Boorman's Hope and Glory (1987) and Bernardo Bertolucci's high-grossing (in relation to production costs) The Last Emperor (1987). Puttnam's most expensive film, The Adventures of Baron Munchausen ($33 million in production and advertising costs), had earned barely $3 million one month into its release. Columbia's losses from the Puttnam's late of pictures approached $300 million.

Puttnam's program of small-scale, inexpensive filmmaking, then, was terribly costly for Columbia. In theory, Puttnam's objectives may have been laudable, but his production choices and the economics of the industry worked against their success. A production cost of under $10 million generally denotes the absence of prominent stars, name directors, and complex post-production work (e.g., special effects), all of which studios view as box-office assets (and all of which Puttnam disdained). In the contemporary industry, the high costs of advertising and distribution, paradoxically, warrant a high production cost if it contains these box-office assets. Furthermore, stars and effects are vital for a film's lifetime earning potential. Stars and effects will continue to generate revenue in ancillary markets while "little" films without these attention-getting features have a harder time. The industry's economics, therefore, gear it toward more expensively budgeted productions than Puttnam preferred to undertake. To make a lot of money, you have to spend a lot of money. Frank Price, Columbia's chair from 1978 to 1983, explained the logic of these factors: "A $20,000,000 picture with names has less risk than a $10,000,000 picture without names. You have tangible aspects—video, foreign, and so on—with major actors and directors. Without them there is a huge risk and you can lose all the money. In fact, you probably will." Producer Martin Ransohoff pointed out, "If you elect to go out and make a seven-to-eight-million dollar movie, which in all likelihood means no major stars or major directors, you could be looking at drastically reduced cable and cassette income."³³ Puttnam's preference for small pictures, then, tended to produce exactly those kinds of films that the studio would be ill equipped to market and sell and that would have a short ancillary life, product that would fail to excite the executives to whom its fate was entrusted. In this way, Puttnam's anti-boxoffice philosophies proved to be self-fulfilling. Columbia could not easily market such low-cost, low-concept films as The Big Picture (1989), Earth Girls are Easy (1989), Rocket Gibraltar (1988), and Things Change (1988). The accumulated losses on these "small" pictures put the studio deeper into the red.

Thus, Puttnam's ouster, and his replacement by Hollywood insider Dawn Steel, was inevitable. His performance was antithetical to the system he had been hired to administer. Significantly for Coke, his tenure at Columbia served to demonstrate the inherent uncertainties of film production, particularly when it flies against the dynamics of industry economics, and Coke had failed to recognize these uncertainties when it acquired Columbia. Even expensive productions with stars and effects may suffer a disappointing fate. In 1988, Columbia Pictures Entertainment found all of its expensive (over $14 million) productions performing poorly at the domestic box office.³⁴ These included Rambo III, Red Heat, Switching Channels, Little Nikita, The Seventh Sign, Sunset, Short Circuit 2, The Blob, and Vibes. (Red Heat and Rambo III, however, starred Arnold Schwarzenegger and Sylvester Stallone respectively, performers with a huge international popularity. Overseas rentals on these pictures were especially strong, ensuring that they would be wins for their distributor, Tri-Star.)

In 1988, after Puttnam's tenure had ended, the erratic nature of the film business continued to plague Coke. Columbia and Tri-Star had not become the strong and growing revenue generators Coke had hoped for. Coke always knew that it was primarily a soft drink company, and at decade's end it renounced its pursuit of filmed entertainment gold and re-embraced its core markets. In November 1989 it sold Columbia Pictures Entertainment to Japan's Sony Corp. for $3.4 billion. For Coke, CPE would henceforth be recorded as a discontinued operation, and in its 1989 10-K report profiling the achievements of "an extraordinary decade," the aborted venture into filmed entertainment received no mention. Instead, Coke announced that its achievements for the 1980s lay in the growth of Coke's market share of global soft drink sales from 38 to 45 percent, and its agenda for the 1990s, more modest than that for the 1980s, was phrased, simply, "to increase our global soft drink leadership."³⁵

Enter Sony

The synergies Coke had hoped to obtain in its buy of Columbia Pictures were more startlingly apparent in the Sony-Columbia marriage. Indeed, Sony's expressed intent was to own software-producing companies that would complement its manufacture of audio and video hardware. The cover of Sony's annual report for 1991 pictured a scene from Columbia's film Awakenings (1990) displayed on a Sony Trinitron HDTV and captioned, "Sony seeks to create synergies between its hardware and software businesses."³⁶ Sony's purchase of Columbia was a vivid example of the era's foreign acquisition of U.S. business giants. This deal was the eighth-largest foreign buy of the decade, and it coincided with an acceleration in the latter 1980s of deals involving offshore buyers. The dollar value of such deals increased 66 percent between 1986 and 1987, from $25 billion to $42 billion. Seeking to expand, foreign firms sought to overcome the limitations of their indigenous European, Australian, or Japanese markets by buying into U.S. industries, and a key factor propelling the growing wave of such deals was the willingness of foreign firms to pay higher prices for targeted businesses than earlier in the decade.³⁷ Sony and Matsushita (which bought MCA/Universal) were criticized by U.S. analysts for paying inflated prices for the studios, but their behavior was consistent with the parameters of offshore buying in those years.

One of the world's largest manufacturers of audio and video equipment, Sony aimed in the late 1980s to become a global hardware-software company. Accordingly, it made a pair of purchases to gain strategic entry into the U.S. entertainment market. Sony became the world's largest record producer when it bought CBS Records, Inc., in January 1988 for $2 billion. With the November 1989 purchase of Columbia Pictures Entertainment, Sony had the music- and image-based operations it believed were essential for the growth of its hardware business, and in 1991 Sony changed the name of CPE to Sony Pictures Entertainment, Inc. As chart 2.3 shows, Sony's global market ambitions were decisively augmented by its Columbia and CBS purchases. In 1991, the U.S. market provided the leading revenue segment of Sony's global businesses.

Sony's entry into the U.S. film market gained it some unexpected alliances with industry giant Time Warner. Because Sony wanted producers Peter Guber and Jon Peters to head Columbia, Sony bought their Guber-Peters Entertainment Co. for $200 million. Guber and Peters, though, were under exclusive contract with Warner Bros., which promptly sued Sony for $1 billion. Under the settlement, Sony and Time Warner became partners in several joint ventures, which symbolized the increasingly interlocking nature of the business. Warners got a 50 percent interest in Columbia House, a unit of CBS Records that produced a huge volume of mail order recorded-music products. Sony and Warners swapped studio properties in Burbank and Culver City, and Warners got cable distribution rights for all Columbia theatrical and TV films.³⁸

By 1991, then, Columbia was tied to a powerful communications industry parent. Sony's filmed entertainment operations (comprising Columbia Pictures, Tri-Star,

Columbia Pictures Television, Merv Griffin Enterprises, and Loews Theatre Management Corp.) generated $1.8 billion in sales, 7 percent of Sony's total. Sony proudly announced that SPE was "well positioned to become a premiere force in global entertainment through the 1990s and beyond."³⁹ Columbia had successfully ridden out the industry transformations of the 1980s to become part of the emerging information industry oligopoly.

Deconglomeration in Hollywood

For most of the majors, the industry's reorganization brought new corporate owners, some of the biggest from overseas, while for others it entailed massive programs of divestiture that set them on a course of deconglomeration. In both cases—foreign acquisition and programs of divestiture—the Hollywood industry participated in the larger patterns of corporate restructuring that were shaping U.S. businesses in the 1980s. In this respect, the forces affecting the Hollywood industry were of a macroeconomic order and were influencing multiple U.S. industry segments. Foreign acquisition of U.S. businesses included the major studios as well as Standard Oil Co. and Shell Oil, Pillsbury Co. (food), Firestone Tire and Rubber (tires), SmithKline Beecham Corp. (pharmaceuticals), Chesebrough-Pond (cosmetics), Farmers Group, Inc. (insurance), Texasgulf, Inc. (minerals), Hilton International Co. (hotels), Ogilvy Group (advertising), First Jersey National Corp. (banking), Telex Corp. (communications equipment), and many others. Similarly, the deconglomeration of Hollywood majors or their parent companies accorded with a general trend throughout large U.S. businesses of divesting unrelated market segments in order to concentrate on related areas of operation and to facilitate ongoing merger-and-acquisition activities. As table 2.6 and chart 2.4 show, corporate divestiture in the U.S. economy climbed sharply from 104 transactions in 1980 to a decade high of 1,419 transactions by 1986. Within the Hollywood industry, the most striking cases of deconglomeration were undertaken by Gulf and Western (Paramount) and Warner Communications, Inc. (Warner Bros.).

Beginning in 1983, Gulf and Western embarked on a major process of corporate streamlining. This completely transformed G&W from an old-line conglomerate, with far-flung businesses, to a powerful communications firm ready and willing to risk a hostile takeover of giant Time, Inc., in an ambitious bid to achieve synergies in the home entertainment arena. The precipitating event was the sudden, unexpected death of Charles Bluhdorn G&W's founder, chairman, and CEO. Bluhdorn, fifty, died 19 February 1983 on a company jet flying to New York from the Dominican Republic, where the company operated a sugar business. Under Bluhdorn, G&W had consisted of a scattered collection of business segments: leisure time, financial services, manufacturing, apparel and home furnishings, consumer and agricultural products, automotive replacement parts, and natural resource and building products. These were nonoverlapping operations, and their disparity held little potential for synergy. Prior to Bluhdorn's passing, G&W recognized that its sprawling corporate structure was disadvantageous and dispersed its resources. Its antiquated structure provided no competitive advantage in the synergistic eighties. Accordingly, from 1980 to 1982, G&W began to redeploy its resources by trimming its corporate structure, strengthening its financial position, and divesting operations that did not fit its evolving corporate profile. With the high inflation of the early eighties, G&W was anxious to shift away from capital-intensive operations, such as zinc mining and paper production, and toward others, such as financial services and leisure-time markets, where it would not have to maintain a heavy-industry infrastructure as a condition for doing business and where the capital invested would ideally generate bigger returns. Before Bluhdorn's death, G&W had defined its long-range strategy thusly:

Gulf & Western has embarked upon a program designed to streamline the Company's overall scope of activities through the disposition of operations that no longer meet G&W's criteria for growth and return on investment. These streamlining efforts also involve the sale of capital-intensive businesses that would require a continuing high level of expenditures for new plants, machinery and equipment without producing a satisfactory return on the capital invested.⁴⁰

Bluhdorn's death accelerated these trends, taking the transformation farther and faster than it may have gone under his continued stewardship. In March 1983, G&W reduced its operating divisions from seven to three. Those remaining were an enlarged leisure-time group (which had Paramount chair Barry Diller as its head), the financial services group, and the consumer and industrial products group.⁴¹ G&W next carried through some major divestitures. It sold its sugar-growing operations in Florida and the Dominican Republic in January 1985. As new CEO Martin S. Davis explained, "Sugar no longer fits in with the company's longterm strategic plan to concentrate principally on higher return consumer-oriented products, financial service and leisure time businesses."⁴² In September 1985, G&W sold its entire consumer and industrial products group, leaving it, at mid-decade, operating in three newly-defined core areas: financial services, publishing and information services, and entertainment.

The financial services group was the next to go, but this did not occur until 1989. G&W delayed divesting this unit because it was generating huge revenues. In 1985, financial produced $1.4 billion, far ahead of the $916 million contributed by entertainment and the $664 million contributed by publishing and information services.⁴³ G&W's decision to sell the financial group, despite its contributions to the company's coffers, underscores the significance of its decision to become a communications firm and its determination to implement this plan. Despite financial's performance, it no longer fit with G&W's evolving design, and its presence in the company confused Wall Street analysts, who believed that it lacked synergy with the entertainment and publishing operations. Wall Street's reaction encouraged the eventual divestiture of financial: the stock was chronically devalued.⁴⁴

In this respect, Wall Street played a major role in helping choreograph and direct the pattern and direction of the period's acquisition and divestiture transactions, penalizing the stock prices of firms that it believed were overly diversified. Merrill Lynch entertainment analyst Harold Vogel explained, "This [selling the financial unit] has been urged upon Davis by the professional investment community. It was an inevitable choice that had to be made." For his part, Davis remarked that the financial operations were "incompatible" with G&W's new communications orientation.⁴⁵ Davis called G&W's transformation a process of deconglomeration. He noted, "This restructuring has resulted in a 'deconglomeration' of Gulf & Western into a more rational and focused enterprise, with a clearer sense of purpose and direction."⁴⁶ Chart 2.5 shows the striking effects of this process by picturing the company's organization before and after the transformation.

G&W offered the most dramatic symbol it could devise of its new identity. It ceased to exist. In June 1989, its official corporate name became Paramount Communications, Inc. (PCI). Gulf and Western, as a corporate moniker, to say nothing of its once far-flung business segments, was no more. PCI's annual report for 1989 listed its business operations as, simply, entertainment and publishing. Within each of these areas, though, the holdings were extensive. Publishing operations were aimed at the textbook, trade, and professional information markets and were conducted by such houses as Simon and Schuster, Prentice Hall, Pocket Books, and Allyn and Bacon. Entertainment included Paramount Pictures, Paramount Home Video, Paramount Television (seven independent broadcast television stations), Famous Players theaters (a 472-screen circuit throughout Canada), Cineamerica (a joint venture with Warner Communications, Inc., operating 466 theaters in the western United States), the USA Network (a joint venture with MCA in ownership of this basic cable television network), and Madison Square Garden (activities included presentation of live events as well as cable television programming).

Through its entertainment division, PCI was producing films and television programs, distributing these throughout the world on film and videotape, and operating exhibition showcases (motion picture theaters, broadcast television stations, and a cable network). Through its purposeful, decade-long transformation, in other words, G&W had converted itself into a global, vertically integrated communications company. With revenues from the entertainment sector in 1989 at $2 billion, it prepared to focus its energies and resources on worldwide expansion. Flush with cash from the sale of its financial group, PCI looked about at its communication competitors. Time was about to execute a merger with Warner Communications that would make it the world's biggest producer of information and home entertainment products. But not if PCI succeeded in taking over Time. Intent on becoming an unrivaled global giant, PCI locked, loaded, and put Time, Inc., in its sights.

The Time Warner Saga

The planned merger of Time and Warner Communications was the outgrowth of a reorganization at WCI during which the company redefined itself as a media-only operation in ways that strengthened its ability to conduct business in synergistically related markets. As with Gulf and Western, an immediate crisis did much to trigger the rapid reinvention of WCI. In mid-decade Warner Communications, Inc., cut its operations and corporate holdings in the wake of tremendous and sudden revenue losses incurred by its Atari video games and home computer division. Several factors had contributed to Atari's slide. In its years of peak earnings, Atari faced little significant competition in the video game business. A WCI executive noted in 1982 that "we've never had very deep, meaningful cartridge competition before."⁴⁷ Atari and Activision were the major game producers in 1981, but by 1982 as many as fifteen companies had entered the field and flooded the market with product. In addition to Atari's loss of its serendipitous market position, the film-related games ("Raiders of the Lost Ark," "E.T.")that it had counted on to be big sellers failed to perform, and a subsequent shift away from production of film-related games failed to correct Atari's slide.

WCI had acquired Atari in 1975 for a mere $28 million, and at the time Atari's revenues were only $39 million. WCI was jubiliant when Atari's earnings skyrocketed, doubling in 1980 and again in 1981. WCI's overall revenues rose more than 50 percent in 1981, to $3.2 billion, and Atari, which earned over $1 billion that year, was the big engine behind this increase. In 1981, the operating income of the consumer electronics division (where Atari was housed) exceeded WCI's entire operating income of 1979. Pleased beyond belief, WCI crowed about Atari's "leadership in the cultural revolution that is video games" and predicted that "Atari's leading position in coin-operated games and the exciting prospects for Atari's home computers indicate that Atari will be a source of significant growth well into the future."⁴⁸

Then the bottom fell out. In December 1982, WCI stunned the investment community with its announcement that Atari's fourth-quarter earnings were projected to be "substantially below expectations." The news triggered a 37 percent drop in Atari's stock in a single week. Things only got worse from there. The news about Atari's 1982 performance was devastating. WCI's Consumer Electronics Division registered a near-complete collapse of its operating income, from $136.5 million in 1981 to $1.2 million in 1982. In the first quarter of 1983, Atari's losses pulled WCI's company-wide revenue down $19 million. Faced with pretax operating losses of $879 million over the previous six quarters, WCI dumped Atari in July 1984. Chair Steve Ross announced, "We have concluded … that we must constructively channel our energies and resources to the balance of WCI's businesses."⁴⁹ (Counterbalancing the Atari debacle for WCI in 1984 was the remarkable good news about the performance of its feature films. Because of the success of Gremlins, Sudden Impact [1983], Police Academy, and Purple Rain, film revenue passed $300 million for the first time in Warner history.)

WCI moved quickly to stop the financial hemorrhage. In August 1984, one month after selling Atari, it fired 250 employees, cutting its corporate staff in half. Facing its huge mountain of debt, in December 1984 WCI renegotiated its line of bank credit and, in the words of one Wall Street analyst, "pledged the company" to secure the new agreement.⁵⁰ As collateral for a $550 million credit line, WCI pledged the stock from its motion picture, recorded-music, and publishing operations. Under provisions of the agreement, WCI could borrow against its credit line in diminishing amounts through January 1987, depending on the size of its outstanding short-term debt. To raise cash and reduce its debt load, WCI commenced a dramatic program of corporate downsizing and reshaping. It sold its peripheral nonmedia businesses in order to concentrate on entertainment and information operations. Jettisoned operations included the Knickerboker Toy Co., the Malibu Grand Prix Corp., the Franklin Mint, Warner/Lauren Cosmetics, Warner Theatre Productions, the Pittsburgh Pirates baseball team, Gadgets restaurant chain, and the New York Cosmos soccer team. By 1987, WCI had eliminated the vestiges of its old-line conglomeration and had become a strict communication and entertainment business with operations in four areas: filmed entertainment, recorded music, cable and broadcasting, and publishing. Its evolved structure would facilitate combination with other media businesses, and WCI and Time, Inc., were soon courting each other as marriage partners.

Each company stood to gain from their proposed union. Since its founding in 1922, Time had become a strangely bifurcated company. Its main line of business was publication of magazines (Time, Fortune, Sports Illustrated, People, and others) and books (Time-Life Books, Book-of-the-Month Club). Time, though, was also heavily involved in cable television operations, through its subsidiary American Television and Communications Corp. (ATC) with 4.4 million subscribers, and in cable programming through its wholly owned subsidiary Home Box Office, Inc. (HBO), with 17 million subscribers. These two areas of operation were roughly equivalent revenue generators for Time. But Time was in a weak strategic position relative to the other communications empires. It owned no copyrighted feature film programming outside of its HBO productions and no recorded-music programming. Thus it was in a poor position to generate products for ancillary film markets.

HBO, as we have seen, had become a powerful force in funding production of Hollywood films, and it had considerable clout in setting the prices that majors would pay for distribution on its premium pay-cable service. But HBO was vulnerable, in turn, to the majors because it did not originate programming for the theatrical market that drove the ancillaries. The attempt to launch Premiere by several of the majors demonstrated HBO's vulnerability to a product cutoff. Time, Inc., therefore, had two areas of operation that, as presently constituted, were non-synergistic and would be poorly competitive with the emerging communications giants. By joining with WCI, however, the new entity would be positioned to operate in the areas of film and television programming (Warner Bros., Warner Bros. Television, Warner Home Video), broadcasting (Warner subsidiary BHC, Inc., operated seven major-market television stations), expanded cable operations (Warner Cable served 1.7 million subscribers), recorded music and music publishing (a host of WCI labels), product licensing of popular film and television characters (WCI's Licensing Corp. of America), and expanded publishing operations (WCI's Warner Books, D.C. Comics, and Mad magazine). The marriage with Warner would help insulate Time from hostile takeover and would make it extraordinarily competitive. But the marriage as planned was not to occur.

A dramatic, three-way battle of media titans began 6 June 1989, when Paramount Communications, Inc., threw a bomb into the cash-free, debt-free merger that Time and Warner Communications had planned for their firms. The merger was to have proceeded on the basis of a stock swap between shareholders of the two companies, and it would have created a media giant unburdened by the heavy debt load that corporate acquisitions typically produce. Merging on a debt-free basis was extremely important for Time and WCI, but Paramount's hostile intervention quickly scuttled this possibility. On 6 June, two weeks before Time and Warner shareholders were to vote on the deal, PCI announced its bid to buy Time for $175 a share, or $10.7 billion. (Time's stock had been selling for $125 before this. Paramount's extraordinary bid illustrates the general willingness of firms in the late eighties to pay inflated prices for mergers and acquisitions.) Using a brilliant strategy, PCI argued that Time had put itself into play as a company for sale when it agreed to merge with Warner. Paramount's reasoning was based on the terms of the proposed stock swap, which would have given Warner shareholders 62 percent of Time's shares. PCI argued that this amounted to a "change of control" of Time, and legal precedent had established that, under such conditions, management is obligated to get the highest price for its shareholders.⁵¹ Paramount's inflated bid for Time's shares was a maneuver to compel Time's board of directors to honor this principle, that is, to proceed in the way that would best benefit its shareholders. A buyout rather than a merger would bring a better price.

PCI's bid for Time, and the legal strategy on which it was based, raised ominous issues for corporate administration. If a company planned to merge, did it thereby become vulnerable to a hostile takeover? Would planned mergers henceforth carry this risk? According to many corporate lawyers, a win by Paramount would introduce "an era in which any company that announces a merger also announces that it is up for sale."⁵² Furthermore, with all of the merger activity then ongoing in the Hollywood industry and nationwide, and the emergence of ever-bigger combines, PCI's grab for Time threatened everyone. As Variety noted, "PCI's preemptive blow against Time/Warner served notice that any one of them could be the next target for domestic predators, or be forced into defensive alliances out of mutual convenience or for self-protection. All of show business is now in play."⁵³

Time rejected Paramount's offer and filed suit to block its takeover ploy. On 16 June, Time and Warner took defensive steps by completing a stock swap under which Time got 9 percent of Warner stock and Warner shareholders got 11 percent of Time. Furthermore, Time announced a major revision of the planned merger. It would now buy WCI outright. PCI's move had changed the terms of the deal, killing the merger and forcing Time to pay for an acquisition. Paramount then commenced a bidding war by raising its offer to $200 a share ($12.2 billion), and, joined by dissident Time shareholders who wanted the best price, it filed suit to stop Time's buy of Warners.

Time's board had opened itself to legal attack because it did not ask for shareholder approval to pursue its revised deal (the buy) of Warners. It acted unilaterally and, by rejecting Paramount's offer, it was arguably failing to obtain the best deal for its shareholders. In respect of its action, the behavior of Time's board raised an important legal question about the management of a company's assets. Who runs the firm, the managers or the shareholders? If it is the shareholders, then Time's board was accountable to them and would be constrained from acting in ways that would alter corporate structure or assets without getting shareholder approval. Writing in Barrons, lawyer Benjamin J. Stein suggested that, in the Time-Paramount battle, "the real fight is far more basic. It is between the managers of Time and the shareholders of Time," and he noted ironically that "Martin Davis of Paramount got a 50% better deal for the stockholders of Time than their own directors did."⁵⁴

These issues were resolved by the Delaware Chancery Court's 14 July ruling blocking Paramount's bid for Time and backing Time's board in its decision to acquire Warner without shareholder approval. The judge's ruling effectively said that the board of directors runs the company: "The corporation law does not operate on the theory that directors, in exercising their power to manage the firm, are obligated to follow the wishes of a majority of shares. In fact, directors, not shareholders, are charged with the duty to manage the firm."⁵⁵ The court found that because Time's directors were pursuing a long-range strategic goal, they were managing the firm in accordance with their perception of its best interest. This decision accorded with the decade's accelerating merger-and-acquisition activities, and it granted corporate managers considerable latitude to pursue m&a ventures unemcumbered by shareholder constraints.

The Time-Warner union now proceeded unhindered to produce an impressive media colossus. In answer to criticism of the new firm's size, Time and Warner justified the combination as a counterthrust to foreign control of American media companies. Besides the buys by Sony, Matsushita, and the News Corp. of Hollywood studios, broadcasting, and record companies, West Germany's Bertelsmann AG had purchased RCA Records and book publisher Doubleday, Inc., in 1986. France's Hachette bought Grollier, Inc., in 1988, the world's biggest publisher of encyclopedias, and the News Corp's 50 percent ownership of Elle magazine to make it sole owner of Elle. And in 1990, Italy's Giancarlo Parretti would maneuver to buy MGM/UA. In this era of foreign entry into U.S. communications and entertainment industries, the Time-Warner combination had a built-in patriotic appeal. Time and Warner chairmen J. Richard Munro and Steven J. Ross said that their plan would "create a combined American entity with the resources to compete globally with anyone in our industry." A major WCI stockholder concurred, emphasizing the importance of keeping the ownership of American communications companies in America and the need for the federal government to back mergers of U.S. firms to provide a hedge against acquisitions by foreign owners: "U.S. companies need megamergers to create critical mass. Congress has got to wake up and allow U.S. companies to accomplish that. We've already made it easier for foreigners by debasing our currency. You can't stop Americans from buying American under rules that don't work anymore." The sheer size of Time Warner, in this context, was an asset because it promised an invulnerability to foreign acquisition. An executive with the Capital Group, an investor in both Time and WCI, said approvingly, "I think the [Time Warner] merger is brilliant because it creates the biggest, best-positioned, most powerful entertainment media company in the world. The way the industry is trending is toward large, global, vertically integrated companies."⁵⁶

How did Time Warner look as a result of the merger? In 1989, the company reported revenues of $10.8 billion.⁵⁷ The company's principal lines of business were book and magazine publishing, production and distribution of filmed entertainment and television programming, production and distribution of recorded music and music publishing, operation of cable television systems, and the distribution of cable TV programming. The company published D.C. Comics, Time, Fortune, Sports Illustrated, People, Money, Life, and Sports Illustrated for Kids, as well as numerous regional magazines. Book-publishing operations included Time-Life Books, Book-of-the-Month Club with over 3 million members, Warner Books, and Little, Brown and Company. The recorded-Music and music-publishing area included the record labels held by WCI (see ch. 1); and its music-publishing business operated worldwide, with most of its revenues derived from overseas.

The filmed-entertainment area, which generated revenues of $2.7 billion for 1989, consisted of the production and distribution operations of Warner Bros., Inc., and Lorimar Telepictures Corp. In 1989, Warners distributed nineteen films worldwide, including Batman, 1989's biggest domestic winner and the highest-grossing film in Warners' history. Warners also had the number three film that year, Lethal Weapon 2, and it was the major with the biggest share of the domestic market in 1989. Like all the majors, Warners licensed its films to broadcast and pay-cable television, and it had licensing deals in place to total $977 million by year's end. Warner Home Video had a library of over 1,800 pictures available on videocassette and over 350 on videodisc. Eleven Warner Home Video releases in 1989 sold over 150,000 copies each. Warner Bros, also had extensive holdings in exhibition. In a joint venture with Paramount Communications, Warners held a 50 percent interest in 373 theaters in the eastern and western United States. Warners opened three multiplex cinemas in England and planned to construct others in Germany, Denmark, Australia, and the Soviet Union, the first in that country. In addition, it planned to open a movie theme park in Brisbane, Australia.

Time Warner had extensive cable television operations. Its cable systems consisted of the ATC Corp., serving 4 million subscribers in thirty-three states, and Warner Cable, serving 1.7 million subscribers in twenty-two states. Time Warner also offered cable programming via HBO (17 million subscribers) and Cinemax (6 million subscribers). HBO also owned a videocassette distribution subsidiary, HBO Video. In 1988, HBO formed a limited partnership with Cinema Plus to finance feature films, for which HBO would then control exclusive home video and pay television rights. Time Warner also held an 18 percent interest in Turner Broadcasting System, Inc., which included CNN, TNT, Headline News, and a broadcast television station (WTBS) carried on many cable systems; a 17 percent interest in Hasbro Toys; and, through WCI, a 25 percent interest in Atari, which had generated spectacular earnings for WCI before crashing.

The corporate philosophy behind this array of enterprises is instructive. By combining, Time and Warner achieved market synergies far beyond what either possessed alone. In its documentation for shareholders, Time Warner emphasized that the overriding factor behind the decision to unite was the need to compete in international markets and to participate in the globalization of media industries. Time Warner explicitly cited this factor as the fundamental rationale for the corporate marriage: "Time Inc. and Warner Communications Inc. came independently to the same fundamental conclusion: globalization was rapidly evolving from a prophecy to a fact of life. No serious competitor could hope for any long-term success unless, building on a secure home base, it achieved a major presence in all of the world's important markets." The stakes of media competition were now planetary, and the new entity would be good for America's participation in the these markets. "For America, Time Warner ensures a powerful presence among the international giants competing against each other across the planet." Time Warner's rhetoric went even farther by attaching political ideals to its marriage of businesses. It tied the globalization of media markets to the political transformation of Eastern Europe and the Soviet Union. Greater political freedoms, it claimed, would coincide with newly opened markets, and Time Warner, through its products, would thereby contribute to the spread of freedom and democracy:

The concrete certainties that seemed permanently to imprison that part of the planet have cracked and crumbled. We are witnessing a deep stirring in the world, an aching to share in the democratic freedoms that America enjoys in such abundance, in the options we have in small matters as well as great, and in the diversity of choices we have about what we view or listen to or read. Time-Warner welcomes the role it can play in helping to offer people all over the world a new diversity of thought and expression.

Time Warner closed its discussion of globalization by announcing, none too modestly, that "a new era in human history has begun," one in which "the world is our audience."⁵⁸ The new era, it said, would be defined by a concurrent evolution of political and media systems; through Time Warner, America had taken a commanding lead in the race to divide planetary markets, despite the incursions of foreign capital into homegrown industries.

Another Big Buy from the East

The Time Warner union, and its patriotic appeal to the ideal of American ownership of American industries, did not stop foreign buyers from knocking on the doors of U.S. corporate suites. Japan, in particular, had been a steady buyer of American businesses, a development that seemed to cause more anxieties for domestic observers than did the larger number of purchases carried out by European firms. Among countries whose companies were leading buyers of U.S. firms in the 1980s, Japan was actually in tenth place (England and Canada were the top two foreign buyers).⁵⁹ But continuing Japanese buys of U.S. firms had triggered a xenophobic reaction that corresponding buys from Canadian and European firms had not. In addition to Columbia and CBS Records, Japan had acquired Firestone Tire and Rubber, the Intercontinental Hotel Group, CIT Group Holdings, Inc., Gould, Inc., PACE Industries, Westin Hotels and Resorts, Tiffany's, Citicorp, and Pebble Beach. In addition to these, a Japanese firm was poised to make another inroad into Hollywood.

As the eighties ended, MCA, Universal's parent corporation, was a relatively small player in what had emerged by then as a transnational media business. Relative to the industry's evolution in the eighties, MCA stood in a weakened and diminished state. Time Warner was larger, and PCI had greater capital reserves (so much, in fact, that it took an $80 million loss in its bid to acquire Time, Inc.).⁶⁰ Columbia was allied with Sony, and Fox was a subsidiary of the News Corp. MCA needed access to more capital to compete in the higher-stakes game that the business had become, and MCA chair Lew Wasserman was convinced that the company could not prosper unless it was allied with a larger enterprise.

In September 1990, MCA began talks with Matsushita Electric Industrial Co., the world's largest television manufacturer (under the brand names Panasonic, Technics, and Quasar) and the world's twelfth-largest corporation. Sony was only one-quarter the size of Matsushita, whose nickname in Japan was "Maneshita," or copycat. The nickname derived from Matsushita's reputation for introducing new products only after competitors had tested the market, as Sony had in the case of buying an American film studio. Matsushitas major product lines included VCRs and television receivers as well as consumer audio products (CD players, DAT recorders). But it also manufactured a wide array of information and communications equipment (personal computers, CRT display devices, plain-paper copiers, mobile telephones, pagers, CATV systems, optical-fiber LAN information systems), home appliances (refrigerators, air conditioners, microwave ovens), electronic components (microcomputer chips, integrated circuits, capacitors, resistors), a range of batteries (manganese, alkaline, lithium, solar, etc.), and assorted other products (bicycles, cameras, water purifiers, prerecorded tapes and discs). Matsushita operated 127 companies in thirty-eight countries, and its overseas markets represented nearly half of its net sales income in 1990 and 1991. Matsushita's expansion into the North American (as well as European and Southeast Asian markets) was part of its plan to "to promote sound and well-balanced global business development."⁶¹ MCA was an attractive buy and would help Matsushita advance its plans for global expansion because of the strategic importance of Hollywood films in world entertainment markets. In 1989, MCA reported the highest revenues, operating income, and earnings per share in the company's history (1989 revenues were $3.4 billion).⁶² Besides, now that Fox, Columbia, Warners, and MGM (covered later in the chapter) had been snapped up by other buyers, there were few Hollywood majors left for the pickings.

Like the Sony-Columbia buy, the Matsushita-MCA alliance represented a marriage of hardware and software, and it would give Matsushita a new presence in the arena of entertainment programming. Manufacture of video equipment contributed 27 percent of Matsushitas 1990 revenue of $44 billion. Revenues from movies and television programming were 51 percent of MCA's 1989 revenue of $3.4 billion.⁶³ Thus, the film-related hardware and software components contributed large segments of each company's annual revenues, and in November 1990, Matsushita and MCA agreed to a deal under which the Japanese colossus purchased MCA for $6 billion, making it the most expensive foreign acquisition ever of a Hollywood major and another example of the willingness of foreign buyers to pay inflated prices for their acquisitions.

Outliers: MGM/UA and Disney

Relative to the major studios, the position of MGM/UA in the industry during the 1980s was a marginal one. Its film production and distribution activities and corresponding market share were minimal, and its corporate history during this period was exceptionally turbulent. Despite these factors, MGM/UA eventually attracted a foreign buyer, and the studio joined the other majors who found overseas parents. But until this point and for most of the period the company's fate was uncertain, as majority shareholder Kirk Kerkorian sought repeatedly to sell portions of the firm. As a result, MGM/UA and its executives operated under a continuing threat of dismemberment. Because of these anxieties, the company had difficulty retaining top executive personnel.

MGM/UA had a few hits during the decade, such as Moonstruck and Rain Man (1988), but many of its releases were given only limited distribution, harming the revenues they might otherwise have generated. MGM/UA domestic market shares consistently ranked near the bottom among the majors (table 2.1). Buoyed by the success of Rocky III in 1982 and by War Games and Octopussy in 1983, MGM/UA had a 10-11 percent market share during those years, but in 1986 and 1987, it dropped to a dismal 4 percent of the domestic market.⁶⁴ Furthermore, unlike Columbia, Warners, or Paramount during the decade, MGM/UA made little effort to gain leverage within the ancillary markets. It did not aggressively expand into the new technologies of cable and pay TV or diversify into other leisure-time markets. Beset by crippling internal troubles, MGM/UA remained a minor player in the industry and stayed largely outside the sweeping changes in the film business.

As noted in the previous chapter, things had looked different for a brief period at the beginning of the decade. MGM planned for a major expansion of film production that would signal a comeback for the company, but after its 1981-82 pictures performed poorly, the company cut back on production and tended mostly to distribute pickups (i.e., films that had been funded and produced elsewhere and would therefore require little capital investment). However, although its diminished production activities made MGM/UA more of a mini-major, the studio had an extremely alluring asset—its vast library of classic films, including not just MGM product but also films from Warner Bros., UA, and RKO. At a time when the ancillary markets were creating an insatiable demand for film product, the MGM/UA library was a gold mine of material. As MGM/UA was progressively dismembered in the 1980s, the film library remained the prize that investors sought. Because it had not expanded into new distribution technologies and because its production activities were curtailed, MGM/UA offered investors little promise of future corporate potential. However, its past glories, existing in the film library, were a great treasure.

As noted, owner Kirk Kerkorian tried relentlessly to sell portions of MGM/UA to various investors. Until the 1990 purchase by Pathé, the major deal, and the one that had the biggest impact on the company, was the purchase negotiated with Ted Turner in 1985 whereby Turner bought MGM/UA for $1.4 billion, with an immediate sell-back to Kerkorian of UA for $480 million. Turner's broadcasting system was strapped for product. His superstation, WTBS, was running sports shows and old movies and television shows. The majors had hiked the licensing fees on film product (those generated hefty revenues for the studios), and the increase was expected to slash into the station's profits. Turner noted the imperative to protect WTBS. "It's an extremely valuable asset, but its future is clouded." Owning a library of classic films would offer just the protection Turner wanted. MGM/UA's library would provide an outstanding bank of programming in perpetuity. As Turner exclaimed after the deal, "We've got 35% of the great films of all time. We've got Spencer Tracy and Jimmy Cagney working for us from the grave."⁶⁵

Turner financed the deal through the accumulation of junk bonds sold by Drexel Bumham Lambert, whose point man in Los Angeles was Michael Milken. (Milken was a financier specializing in such bonds, and he helped fund many of the decade's corporate raiders. His activities came to symbolize the Wall Street excesses of the period, and in 1990 he was convicted of six felony charges involving fradulent junk bond activities. Sentenced to ten years, he served only two, and his ties to Turner endured. Although banned for life from stock market activities, he advised Turner on his 1996 merger of Turner Broadcasting System with Time Warner. Milken earned $50 million for his advice.)⁶⁶ When the deal appeared to be threatened by Turner's difficulties raising the requisite funds, MGM/UA willingly accepted a series of scaled-down offers. It was a remarkable demonstration of the studio's difficulty in attracting buyers. Turner's initial offer, made 7 August 1985, had been $1.45 billion, or $29 a share for the company. Drexel couldn't raise the money, so on 2 October MGM/UA accepted $25 a share ($200 million less). Again Drexel was unable to raise the money, and in January 1986 MGM/UA accepted Turner's third offer of $20 per share ($450 million below the original asking price).⁶⁷ On 25 March 1986, Turner Broadcasting Systems got MGM/UA, with a concurrent sell-back of UA (a theatrical-distribution arm of little use to Turner) to Kerkorian.

But Turner didn't keep MGM for long. He acquired a mountain of debt totaling $1.75 billion, and he'd paid a much higher price for MGM than many industry observers felt it was worth. As a condition of the financing, he had promised to reduce his debt by $600 million by September 1986. He therefore sold back to Kerkorian for $300 million MGM's movie, television, and videocassette production and distribution operations. For $190 million, Lorimar Telepictures, a subsidiary of Warner Bros., bought the MGM studio lot in Culver City and MGM's film processing lab.⁶⁸ MGM had now been broken apart into its various components.

Turner sold all of the studio operations he had purchased, but he kept 3,650 films from the MGM/UA library, which had been his real target from the start. (An unintended effect of the deal bolstered a Turner competitor, American Movie Classics, a cable television showcase for commercial-free old Hollywood films. Just before the Kerkorian-Tumer deal was finalized, AMC bought cable rights to 1,450 MGM and UA films. Kerkorian and Turner had to repurchase these rights for $50 million, money that AMC used to expand its service by adding more titles to its programming library. AMC grew from 300,000 subscribers in 1984, when it was still marketing itself to users at two dollars per subscriber, to 7 million homes by the end of 1987, when AMC was whole-saling its service to cable system operators at twenty cents per system subscriber.)⁶⁹

Following the Turner deal, MGM/UA, now shorn of substantial assets, languished on a series of auction blocks, attracting occasional investor interest but no successful deals. On 11 July 1988, MGM/UA announced that Kerkorian would sell a 25 percent interest in the company to a production firm headed by Jon Peters and Peter Guber and industrialist Burt Sugarman and would entertain bids for United Artists. But Guber-Peters-Barris, as the firm was called, withdrew from the $100 million deal. Determined to make MGM/UA a more attractive buy, in January 1989 Kerkorian spent $180 million from his Tracinda Corp. to pay off MGM/UA's bank debt, announcing that he would now entertain bids only for United Artists. One was quickly forthcoming from Australia's Qintex Entertainment, a division of the Qintex Group, which promised to buy UA for $800 million. Qintex, though, failed to secure financing, and the deal fell through. Talks with other potential buyers—the News Corp., Sony, Warners, cable operator Tele-Communications, Inc., and the theater chain United Artists Communications—came to naught.

Then, in November 1990, after protracted attempts to obtain financing, Italy's Pathé Communications Corp. (chaired by Italian investor Giancarlo Parretti) succeeded in a $1.3 billion acquisition of MGM/UA. Pathé was primarily a film producer and exhibitor of low-budget films aimed at the home video market. Beginning in 1989, though, it aimed to become a larger player in the lucrative film entertainment business. It bought Cannon Pictures, a producer-distributor of low-budget action pictures (Kickboxer [1989], Death Warrant [1990], Delta Force II [1990]), and it formed Pathé Entertainment to produce quality pictures in the $14 million budget range. Its initial releases included the Tom Selleck vehicle Quigley Down Under (1990) and The Russia House (1990) with Sean Connery and Michelle Pfeiffer. In addition to its production and distribution activities, Pathé Communications was the largest exhibitor (462 screens) in the United Kingdom and the Netherlands and a co-operator of 48 screens in Scandinavia.⁷⁰ This was the third purchase of a Hollywood studio by an overseas firm, following Fox-News Corp. and Sony-Columbia (Matsushita-MCA was yet to come).

Like Turner before him, Giancarlo Parretti had considerable difficulties raising the funds to acquire MGM/UA. In the end, MGM's film library was the key to Pathé's ability to obtain financing, and the terms of the deal demonstrated the interlocking nature of the film industry oligopoly that had emerged at decade's end. Pathé raised funding by selling rights to titles in the film library. Time Warner paid $125 million for worldwide home video rights to the UA film library (over 950 titles) and the Cannon library (Pathé bought the Cannon Group film company several years previously). Turner Broadcasting Service paid $200 million for exclusive television rights in the United States for films from the UA library as well as MGM/UA films from 1986-89, including Rain Man, A Fish Called Wanda, Rocky I-IV and the first sixteen James Bond movies.

Once again, MGM/UA was being serviced by its prior decades of film production. This was a striking demonstration of the power of ancillary markets to rejuvenate the assets of production and distribution companies by extending the revenue life of motion pictures. MGM/UA was now, belatedly, a part of the international communications industry, though ownership by parent Pathé guaranteed it minor status among such titans as Sony-Columbia and Matsushita-MCA. With MGM/UA's purchase by Pathé and the MCA-Matsushita buy, Hollywood had become a media production center (along with music and publishing) driving the international home entertainment industry.

Disney

The Walt Disney Co. was an anomaly among the Hollywood majors in the 1980s. Because it was already a hugely successful and powerful international company, it rode out the merger wave. Disney was neither purchased by a parent communications firm during the 1980s nor turned into one (as was Paramount Communications, Inc.). In this respect, Disney did not participate in the merger-and-acquisitions mania. (At least not during the 1980s—as I noted in the introduction, Disney bought Capital Cities/ABC for $19 billion in 1995, thereby gaining a major broadcast television network.) Instead of merging with a larger company, Disney fought off hostile takeover attempts early in the decade, and it emerged from years of relative obscurity to become a film producer and distributor on a par with the other majors.⁷¹

In this regard, Disney's is a story of spectacular corporate success. In four years, it transformed its film entertainment operations so effectively that it rose from the bottom of the domestic market to the very top. From 1984 to decade's end, Disney saw a tremendous explosion in its film entertainment revenues (chart 2.6) and an accompanying rise in its share of the domestic film market (chart 2.7). In 1986, its share of this market jumped to 10 percent from the paltry 3-4 percent it had held since 1979, and it increased to 14 percent in 1987. In 1988, Disney led the majors with a market share of 20 percent, largely because of the spectacular success of Who Framed Roger Rabbit, the year's number one film. Disney had returned as a force in film entertainment.

The market success achieved in 1986 (a year in which the company changed its name from Walt Disney Productions to the Walt Disney Co.) resulted from key management changes and a new strategic plan instituted in 1984. (Important facets of the new Disney strategy had been conceived earlier, under Ron Millers tenure as CEO from March 1983 to September 1984. These included the launching of the Touchstone label for theatrical film; the production of Splash [1984], Disney's first big hit of the eighties; and a commitment to putting the Disney classics on video in order to exploit this market. The new management team of 1984 benefited from these initiatives that were already underway.) The year 1983 had been a terrible one for Disney's films. Revenues were down 18 percent, and the division posted a $33 million operating loss.⁷² Disney's 1983 releases, Tex, Trenchcoat, and Something Wicked This Way Comes, performed poorly, and the company had to write down a sizable loss on these pictures. Worse, at a time when the other majors were seeing big revenues from licensing their films to cable television, Disney was withholding its product in order to launch the Disney Channel on pay cable. By 1983, then, motion picture revenue was far below where it should have been, given the company's prestigious name and its library of film material.

In 1984, the new management team, headed by Frank G. Wells (president and chief operating officer), Michael Eisner (chairman and CEO) and Jeffrey Katzenberg (president of motion pictures and television) determined to return the company to prominence as a leader in film entertainment by increasing production and by exploiting the hitherto-underutilized ancillary markets. As Eisner and Wells explained to shareholders, "Increased motion picture production is an urgent priority with the aim of achieving parity with other major Hollywood studios and improving fundamental earnings in filmed entertainment."⁷³ Their goals included production of ten to twelve Touchstone features and three or four family films each year. Disney created Touchstone in 1983 to produce and distribute a more adult caliber of film than was possible under its existing corporate name. Its family pictures were failing to attract a broad or diverse audience, and the Disney name was synonymous for many moviegoers with bland and dull filmmaking. Because of these problems, the company's revenues could not be increased without expanding the demographics for its pictures. Touchstone enabled Disney to surreptitously market nontraditional (for Disney) product to nontraditional audiences.

The management team's new goals also included accelerating the production timetable for animated features by using computer assists to release a new animated feature every eighteen months. The studio also aimed to be a major supplier of programming for network television and the syndicated and pay-cable markets. Film revenues were up in 1984 because of the success of Splash, with Tom Hanks and Daryl Hannah, but Wells-Eisner-Katzenburg knew it would be at least two or three years before the effects of their plan could be assessed. To increase production and meet the plan's goals, Disney followed the industry norm by using limited partnerships to finance filmmaking and reduce and diversify its financial risk. In 1984, Disney raised $193 million through Silver Screen Partners II, which held a public stock offering and attracted twenty-eight thousand investors, making it the largest limited film partnership to that time. In 1986, Silver Screen III raised $300 million to fund films into 1988.⁷⁴

Under Wells-Eisner-Katzenberg, the company continued to innovate and expand its operations. In 1985, Disney created and staffed pay-television and domestic syndication departments and licensed seven pictures for pay-cable presentation. After an absence of more than two years, Disney returned to network television with the NBC hit "Golden Girls" and, on Saturday mornings, "The Adventures of the Gummy Bears" (NBC) and "The Wuzzles" (CBS). Disney's home video releases were beginning to pay off, with revenues in the home video market increasing 46 percent over 1984. In 1986 Disney signed with Showtime/The Movie Channel, giving it exclusive pay-TV rights to all of Touchstone's feature releases over the next five years.

This proved to be a good deal for Showtime/The Movie Channel because in 1986 the features commenced under Wells-Eisner-Katzenburg came on line and began winning Disney whopping increases in market share. In 1986, these included Down and Out in Beverly Hills, released in January, Ruthless People (summer release), and The Color of Money (fall release). In 1987, they included Outrageous Fortune, Tin Men, Stakeout, and the year's fourth highest renting picture, Three Men and a Baby. In a canny strategy, Disney released these films during off-season points to minimize competition with the other majors' pictures. Disney's distribution unit, Buena Vista, released Outrageous Fortune and Down and Out in Beverly Hills in consecutive Januaries, bypassing the Thanksgiving/Christmas season, when there is typically a glut of product in the nation's theaters. Again bypassing this season, Disney released The Color of Money in October and Three Men and a Baby early November.

In 1988, Disney's filmed-entertainment products had the greatest year in the company's history, and Disney added a third production arm, Hollywood Pictures, to its Disney (Buena Vista) and Touchstone lineup. Who Framed Roger Rabbit was the biggest film of the year, and Disney had three more films in top ten: Good Morning, Vietnam; Three Men and a Baby (continuing its run); and Cocktail. In 1989, Disney retained its strong market position with Honey, I Shrunk the Kids; Dead Poets Society; Turner and Hooch; and The Little Mermaid. In production during 1989 were more winners scheduled for release in 1990. These included Pretty Woman and Arachniphobia.

The eighties, then, became a dramatically successful decade for Disney films. Although Paramount and Warners performed more consistently as market leaders during the period, no studio achieved such a remarkable turnaround in its fortunes as did Disney. Furthermore, Disney achieved this without merging into the communications industry. By decade's end, however, it was supplementing its international theme park and filmed-entertainment operations with tentative moves into the communications sector. In 1988, Disney ventured into television broadcasting by acquiring station KHJ in Los Angeles, and it formed a joint venture with Rupert Murdoch's News International to carry Touchstone movies on Murdoch's European-based Sky Television. Disney soon abandoned the venture, but, as its Capital Cities/ABC purchase demonstrates, it did not abandoned its plans to acquire a television distribution system.

Disney's success, though, brought to it the economic contradictions that tormented the industry as a whole. Disney's market presence in theatrical film, and its ancillary exploitation, placed it on a par with the other majors, and it found itself mired in the same problems they faced. Rising production costs were a condition of doing business, and they imposed a severe drag on profits. Disney sank nearly $50 million into its production of Dick Tracy in 1990 and spent nearly that much again promoting the picture. The film generated poor box office in relation to its costs. In reaction to this overspending, Jeffrey Katzenberg issued a notorious twenty-eight-page memo castigating the waste of blockbuster filmmaking and urging a more sensible and scaled-back approach to budgeting productions. "It seems that, like lemmings, we are all racing faster and faster into the sea, each of us trying to outrun and outspend and outeam the other in a mad sprint toward the mirage of making the next blockbuster."⁷⁵ Disney's success as a major replicated for it the industry's inescapable funding and production problems. The industry was locked into a pattern of capital-intensive filmmaking and distribution. The stars and effects that sold in the ancillaries and generated media coverage during theatrical release had become terribly, irrevocably costly. The escalation of production costs threatened the entire industry, and new revenue streams from the ancillaries merely delayed the day of reckoning without solving the fundamental problem.

The Boom in Exhibition

The industry's remarkable economic transformation extended to the exhibition sector and precipitated historic changes there. These changes were manifest in two areas: a large national increase in the number of theater screens and the size of the dominant theater circuits, and the dramatic reentry of the major studios into exhibition operations. Although admissions remained flat, by 1983 a wave of theater construction was underway across the country, fed by the expanding production and distribution activities of the majors. Contrary to the prophets of doom who predicted that video and cable would kill the movie theater, exhibition circuits were flush with the excitement and energy of a rejuvenated industry. Theater construction was up 14 percent in 1983, and by mid-decade exhibition was seeing the biggest yearly increases in total screens since the late 1940s.⁷⁶ From 1980 to 1989, the nation's screen total jumped from 17,590 to 23,132 (table 2.7). The nation's largest theater circuits were adding sizeable numbers of screens to their holdings (charts 2.8–11). Racing Cineplex-Odeon, a rapidly expanding Canadian-based circuit that had entered the U.S. market in 1985, United Artists Communications, Inc., the nation's number two circuit by size, jumped from 1,063 screens in 1984 to 1,595 screens in 1986. By 1988 it had 2,677 screens. American Multi-Cinema jumped from 736 screens in 1983 to 1,614 in 1988.

Much of this activity was confined to multiplexes (i.e., multiscreen theaters) located in shopping centers. In this regard, the expansion of screens was tied to the real estate boom of the eighties, specifically the construction and leasing of retail and office space.

This tie was especially important in light of the common practice by exhibition companies of renting existing properties rather than financing their construction from scratch. For many real estate developers, exhibition companies were another form of commercial tenant renting business space. Leasing and furbishing a five-screen multiplex might involve a cost to the exhibitor of only $750,000, much less expensive than it would be to build one.⁷⁷ Furthermore, real estate developers liked to have exhibitors in the mix of shopping center tenants because the theaters would bring in customers that other businesses could then attract. Movie theaters made good anchors for retail shopping malls. In 1983, 10,000 screens were located in only 400 locations.⁷⁸ The 2,677 screens UATC operated in 1988 were found in just 686 locations. General Cinema Corporation's 1,400 screens in 1988 were found in just 321 locations.

Multiplex pioneer Nat Taylor, a Toronto exhibitor, recalled that during the 1940s and 1950s, an era of stand-alone theaters, the idea of a multiplex would have seemed bizarre. "Nobody in those days could conceive of the idea that you could put two theaters in one location."⁷⁹ But Taylor and other exhibitors realized that with multiple screens, overflow business from the popular films would feed the slower attractions. By the 1980s, multiplexes were the dominant exhibition showcase. Making multiplexes adjuncts of shopping centers and malls, or placing them in shopping districts, ensured a steady flow of patrons into the theaters. The downside of multiplexing, though, was a reduction in the size of the auditorium, so that while there were more screens, there were also fewer seats relative to the big houses of decades past. The nation's 17,689 indoor theaters in 1948 had a seating capacity of 12 million, while the 14,977 indoor theaters in 1982 could seat only 5 million.⁸⁰ At its worst, the multiplexing trend produced screens the size of postage stamps in tiny auditoriums where the soundtrack of the film playing in an adjoining theater mixed with the one patrons were viewing in another.

But the expansion of exhibition in the 1980s had another effect that ran counter to the predominant multiplexing trend of smaller and inferior auditoriums. It helped produce an upgrade in the caliber and quality of presentation at many locations. For the canny exhibitor, improving presentation could be an effective marketing strategy, given the unsatisfactory conditions that prevailed at many multiplexes. High-class screening facilities would attract patrons. Typifying the fruits of this approach was Canada-based Cineplex-Odeon and its aggressive entry into the U.S. market in 1985.⁸¹ In just a few years, through a careful but rapid series of theater buys, Cineplex expanded its holdings to become the second-largest circuit in the United States. It was yet another foreign company to gain sizable entry into the U.S. film industry.

In 1981, Cineplex operated 124 screens in Canada, and by 1984 its holdings had expanded to 439 screens. In 1985, launching its plan to base itself in the principal U.S. markets, it bought the Plitt circuit, the fourth-largest U.S. chain with 605 screens, for $130 million ($65 million for the circuit plus assumption of its $65 million debt). Its screen total now topped 1,000, and in 1986, after MCA bought a half interest in Cineplex, the circuit voraciously purchased a series of U.S. chains. In April, it bought the Septum circuit (49 screens, Georgia-based) for $11 million; in May, the Essaness circuit (41 screens in Chicago) for $15 million; in July the Neighborhood circuit (75 screens in Maryland and Virginia); in September, the RKO Century Warner Theaters (93 screens in Manhattan, New York, and New Jersey) for $180 million; and in December, Sterling Recreation (114 screens in Washington State) for $45 million. By the end of this spree in 1986, Cineplex had 1,510 screens in the United States and Canada, making it the number two circuit, behind UA Communications. In June 1987, Cineplex bought the Walter Reade Organization from Columbia Pictures (11 screens in Manhattan) for $32 million, and in December it bought the Washington D.C.-based Circle chain (75 screens) for $51 million.

From the start of Cineplex's dramatic and rapid expansion into the U.S. market, CEO Garth Drabinsky believed that the window of opportunity for multiplex growth was small because it was tied to the expansion of retail malls and would probably extend only through the end of the decade. "We see in the markets we're in that we are very much coming to an end of that expansion… " He added, "A very peculiar opportunity from 1978 to today may be drawing to a close—not as many shopping centers—we're reaching the end of an age. We got in at the middle and have taken advantage of it."⁸² (Contrary to his prediction, though, the expansion of theater screens continued through the 1990s, rising by more than 20 percent to a 1996 screen total of 29,690.)⁸³

Although Cineplex's startling growth was tied to the wave of multiplex expansion, Drabinsky was determined to offer a striking alternative to multiplex film presentation. Where many multiplexes offered a barren, boxlike environment for film viewing, Cineplex specialized in luxurious facilities. Cineplex flagship theaters harkened back to the age of the movie palace, and they were designed at great expense to give moviegoers a memorable and exciting experience. Drabinsky spoke of his sadness at seeing the ruination of once great moviehouses:

When we went through New York City and purchased RKO and went into Brooklyn on Flatbush Avenue, we drove by theater after theater after theater, all boarded up and converted to bingo halls and gospel halls. Those fabulous theaters had been closed with total reckless abandon. It was heart-rending; it was a very unfortunate thing and never again will a wave of this type of theater be built in North America. They can't be built because of the cost.⁸⁴

Drabinsky noted that Cineplex would try, in its way, to reignite the excitement of seeing a movie in a luxurious theater. Drabinsky was prepared to spend lavishly in order to upgrade the theater experience at Cineplex locations. Cineplex's architects and engineers and their support staff installed new seats, screens, projection, sound systems, and carpets. They also retained and refurbished existing special features in given theaters, such as ceiling frescoes at the Fairfax Cinema in Los Angeles and a wall mural and wall-mounted lights and fixtures at the Gordon theater, also in Los Angeles. They commissioned sculptures and paintings and added cappucino and pastry bars to upgrade the standard concession fare. As historian Douglas Gomery noted, "They added creature comforts not seen since the Golden Age of the movie palace."⁸⁵ But all of this, including Cineplex's appetite for expansion, did not come cheap. Drabinsky's aggressive move into U.S. markets produced a gigantic national theater circuit and a mountain of debt. With the company facing a $757 million debt load, its largest investors, MCA and Charles R. Bronfman, forced Drabinsky to resign as president and CEO in 1989. Prior to his resignation, Drabinsky battled with MCA and Bronfman for control of the company but lost. His replacement, Allen Karp, instituted aggressive cost-cutting measures aimed at reducing corporate debt. But the turnaround would be slow. In 1990, Cineplex's revenues were in the red for $178 million.⁸⁶

The Majors Return to Exhibition

Cineplex's spectacular growth, and its ambitious renovation of existing theaters coupled with the construction of new facilities, emblemized the robust expansion of exhibition during the decade. Cineplex began as an independent exhibition chain, but by decade's end MCA had purchased a 30 percent interest in the company, with Cineplex thereby acquiring important backing from a major Hollywood studio and distributor. MCA's buy into Cineplex was part of a historic realignment, commenced in mid-decade, between the production/distribution and exhibition sectors of the business.

Nothing so vividly demonstrated the importance of exhibition in the ancillary eighties as the wholesale return of the Hollywood majors to theater operations. In 1986 and 1987, Tri-Star (and parent Columbia Pictures Entertainment), Gulf and Western, MCA, and Warners all purchased major theater chains, marking their explicit return to classic vertical integration of production, distribution, and exhibition. Under the 1948 consent decrees, the studios had been forced to divest their theater operations. Since that time, the majors had been unable to reenter theatrical exhibition on a major scale. Despite this restriction, though, Hollywood's mergers and acquisitions had created substantial vertical integration (e.g., the production/distribution/exhibition interests represented in Tri-Star or in the News Corp.'s union of Fox and Metromedia television). Thus the wave of theater purchases by the major studios occurred in a context already marked by a return of vertical integration to the industry. Given the green light by a permissive Justice Department, the majors now added theaters to their existing collection of delivery systems for motion pictures.

If the majors' theater buys seemed to violate the spirit of the 1948 consent decrees, they did not violate their legal foundation. This is a significant point, given the choruses of amazement that greeted these acquisitions. The consent decrees, accepted by the majors Paramount, Fox, Warner, MGM, and RKO (but not the minors United Artists, Universal, and Columbia, which at the time owned no theaters), were the outcome of an antitrust suit that began in 1938 under which the government charged the five majors and three minors with restrictive trade practices.⁸⁷ These included price fixing, stipulating the length of runs (known as "clearances"), and block-booking films to exhibitors. These restrictive practices were the heart of the government's case and its main points of contention, while the theaters owned by the majors merely provided a means for implementing these practices.

When the case reached the Supreme Court, the court refused to find that theater ownership by the majors was illegal in itself. Assessments about legality would depend on the trade practices that accompanied, or were intended to be accomplished by, such ownership. Furthermore, while the case was still in district court, Paramount and RKO (which no longer exists) negotiated a consent judgment under which they received more favorable terms than Warners, Fox, and MGM, all of whom settled later. As a result, Paramount (along with the three minors because they then had no studios) remained free to acquire theaters, whereas the decrees negotiated by the other three majors (Warners, Fox, and MGM) stipulated that they seek court approval before engaging in exhibition. Thus, in the 1980s, Gulf and Western (Paramount), MCA (Universal), and Columbia were able to purchase theater chains outright, while Warners had to await court approval before it could do so. In all cases, however, the purchases were scrutinized by the Justice Department to determine whether they would facilitate restrictive trade practices. These buys were readily greenlighted by the government, except in the case of Warners which had to accept certain restrictions on its proposed exhibition partnership with Gulf and Western. (Fox stayed away from theater acquisitions.) The majors thus were able to reenter exhibition because, except in the case of Warners and Fox, there were no explicit restrictions against it, merely provisions against certain trade practices.

Why they chose to reenter exhibition is a matter for some debate. The majors apparently perceived that tangible benefits would come their way from doing so. These were mainly to derive from revising the negotiated business arrangements that typically prevailed between distributor and exhibitor. Under these arrangements, distributors had to negotiate the terms of payment from exhibitors leasing their films. These terms involved a split of box-office proceeds (typically a 90/10 distributor/exhibitor split) against a guaranteed minimum for the distributor. The minimum, termed a "floor," might be negotiated at an eight-week run with 70 percent of box-office for three weeks, 60 percent for two weeks, 50 percent for two weeks, 40 percent for one week, and 35 percent thereafter.⁸⁸ The distributor would collect revenues according to whichever formula (split or floor) produced the higher return, but these revenues were subject to change on a weekly basis, with the lion's share gradually shifting to the exhibitor the longer a film stayed in release. The majors apparently felt that owning theaters would simplify these arrangements and enable them to keep more of the revenues deriving from box office.

The majors saw another revenue benefit to such ownership. Distributors have always taken the bulk of box-office monies, so much so that exhibitors rely heavily on concession revenues for maintaining house profits. But exhibitors remit to distributors monthly or bimonthly, and this enabled them to maintain a "float" with distributor revenues that could accrue significant short-term interest. General Cinema Corp. acknowledged using the benefits of the float to finance its operations.⁸⁹ By owning theaters, the majors would eliminate revenues lost to the distributor by exhibitor floats. All revenues and interest would stay in-house.

In addition to these perceived financial advantages, the studio distributors apparently felt that major film releases could be strategically showcased in theaters to improve their ancillary business. Studio distributors believed they would have greater control over play dates, maintenance of theater quality, and more favorable rentals from exhibition. Finally, a herd mentality was apparent. Major studio distributors bought theaters because other majors were buying theaters. The majors rode a merger-and-acquisitions bandwagon during the eighties, and they jumped on because everyone else was jumping on.

The rush into exhibition occurred rapidly. In the span of two years, 1986 and 1987, the majors had, as Variety noted, returned to their pretelevision origins as vertically integrated producer-distributor-exhibitors.⁹⁰ (We have seen, though, that they had already integrated these areas before the wave of theater buys.) In January 1986, MCA purchased a 50 percent interest in Cineplex-Oden for $159 million (Cineplex had 1,056 screens at the time), funds and corporate resources that Cineplex then used for its buying spree. In June, Gulf and Western bought the Trans-Lux circuit (24 screens in New York and Connecticut) for $15 million and in October purchased Mann Theaters (360 screens) for $220 million. Paramount already owned Canada's Famous Players circuit (469 screens) and co-owned (with Universal) 76 screens in Europe. In December, Gulf and Western bought Festival Enterprises (101 screens) for $50 million. In October 1986, Tri-Star bought the Loew's chain of 230 screens for $300 million, and in 1988 Columbia Pictures Entertainment (which then contained Tri-Star) added the 317-screen USA Cinemas circuit to Loews holdings for $165 million.

Warner Bros. was slower than the other majors to enter exhibition, but in July 1987 it raised $500 million from a stock float and earmarked the funds for exhibition. In September a federal court ruling cleared Warners for entry into exhibition. Five months later, Warners agreed with Gulf and Western to buy a 50 percent interest in G&W's 472 U.S. screens for $150 million and become G&W's partner in their operation. This fit with G&W's desire to explore alternatives to full ownership in order to limit liabilities in the exhibition sector. The marriage, though, had to await an analysis by the Justice Department and a federal court ruling on the partnership's potential for trade infractions as specified by the consent decrees. The marriage was approved in December 1988, but Warners was ordered to operate at arm's length from the theater circuit by keeping the circuit's assets and executive staff separate from WCI holdings. The dash for theater circuits in the previous three years had made the original consent decree issues (of restrictive trade practices) newly relevant, especially because Cineamerica, the circuit jointly operated by G&W and Warners, had a strong regional concentration in the Los Angeles market. The federal judge who okayed the partnership noted its potential for trouble: "There appears to be continued anti-competitive behavior by exhibitors and distributors in this industry. We find this apparent climate of noncompliance with the Paramount decrees and with the antitrust laws to be fraught with serious problems. We cannot allow that climate to go unchecked and unsupervised."⁹¹ (As evidence of continued anticompetitive behavior, the Supreme Court in 1990 upheld a lower court's conviction of 20th Century-Fox on block-booking charges.)⁹²

By decade's end, however, the laudable ideal of competition existed in tension with an economic context in which there was an increasing concentration of media markets and of giant operators in those markets. The industry had moved throughout the decade toward ever bigger combinations of owner-operators and toward the vertical integration of film entertainment and its delivery systems. Time Warner exemplified this principle, and two of the era's spectacular acquisitions—Sony's buy of Columbia and Matsushita's buy of MCA—were founded on the conviction that the ultimate synergy was in the union of hardware and software. Sony and Matsushita would manufacture televisions, videocassette, and videodisc players, and their Hollywood subsidiaries would manufacture the programming the machines needed. In this way, their media empires would be self-supporting and self-sustaining. Many analysts, though, questioned whether the expense involved in attaining these unions of hardware and software was really justified. Herb Schlosser, former president of NBC, said, "The synergies are overrated. For $500 million you could license all the software in the world for a new system."⁹³ One did not need to buy a whole company to accomplish this.

Like the synergy that was to have prevailed between Coke and Columbia Pictures, the hardware-software synergy (aside from the enormous acquisition expense) is a less strategic one than those accomplished by the Time Warner merger or the Fox—News Corp. pairing. In these cases, the combination of programming and distribution outlets is key. The best synergies are those obtained by controlling film production, its distribution and consumption venues, and those markets and products that may be tied in to film products (e.g., music, books, and magazines). Thus the redesign of Gulf and Western into Paramount Communications, Inc., and the union of Time Warner are exemplary models of synergy, whereas the bubble-headed attempts to unite the movies with soft drinks or video hardware conjoin product lines that are nonsynergistic. These latter attempts resulted from the synergy fever that raged from the mid-to late 1980s and made the studios hot properties for acquisition. Everybody was looking to jump into the business. As Coke and others discovered, though, synergies were not omnidirectional. Movies did not combine well with diverse leisure-time products. They might work well inside entertainment and communications empires, but the film business had always been highly uncertain, marked by recurrent revenue spikes and troughs. Thus, synergies had a constrained potential, and they required careful design. But they did exist, and the maturation of alternative distribution venues gave them an unprecedented importance. No major could prosper without control of these venues, and the majors did prosper, surviving the "shake-out years," by gaining a significant measure of this control.

By decade's end, Hollywood had become a vital means for multinational communications conglomerates to service their global markets. These media giants, and the Hollywood industry that now belonged to them, attained a vertical integration far greater than what the old Hollywood majors represented with their theaters in the 1940s when antitrust action was taken against them. The new oligopoly was far more powerful, and it pervaded much bigger markets. Like the coming of sound in the late 1920s, the transformation of the American film industry in the 1980s is a point of transition that redefines all that follows and separates it from what has come before. Before there was cinema. Now, and in the future, there is software.