Galloway on Film: Challenges From Amazon and Netflix Signal the End of the Studio System

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For 100 years, Hollywood has been defined by the majors. That may be about to change.

In the early part of the 20th century, a handful of larger-than-life hustlers came together to create “an empire of their own,” as the writer Neal Gabler has described it.

They were mostly immigrants, many of whom had fled either the pogroms or the East Coast establishment that had little room for these fire-breathing, patent-busting, nouveaux riches entrepreneurs. Instead of trying to make a name for themselves in New York, they went West, where they could build businesses in their own image.

The studios they created not only survived them, but became the nexus of the global film industry. Companies like MGM, Warner Bros., Paramount, Universal, 20th Century Fox and Columbia Pictures (now better known as Sony) were the bedrock institutions that emerged in the 1920s and 1930s and have largely been dominant ever since.

True, the greatest of them, MGM, fell by the wayside when it sold its lot to Sony in 1990 and ceased to rank among the majors, while a new major, Disney, rose to replace it, thanks to an astonishing revival led by Michael Eisner, who lifted the organization Walt Disney had created to a different orbit.

But these shifts were relatively minor.

The majors are still the first port of call for any significant project; they still have an unparalleled ability to get that project developed, cast, shot, marketed and into theaters; and despite extraordinary technological and economic change, they haven’t allowed any upstarts to challenge their hegemony.

Until now.

* * *

A couple of weeks ago, I met with a handful of publicists who’d dropped by THR’s offices to talk about the upcoming awards season.

The thought of planning for the next Oscars in mid-July was as depressing to me as it must have been to them. But I sat as they unveiled a slate of movies including Woody Allen’s Café Society, the Kate Winslet-starrer The Dressmaker and the Matt Damon-produced Manchester By the Sea.

These were all solid films (and may even include a few genuine contenders), but what struck me more than their quality was their quantity. There were 15 movies in the package and none of them came from the usual suspects — Fox Searchlight, Focus Features, etc.

All were being released by one company: Amazon.

Amazon’s entry in the film business is still relatively small-scale. None of the pictures it has backed (all so far are acquisitions, and all are being released theatrically through various partners) is particularly expensive or likely to be a blockbuster. But the company is just dipping its toes in an industry it knows little about. It has the personnel, the deep pockets and the sheer chutzpah to make its investment much, much bigger. And it will.

Nor is Amazon the only giant trespassing on studio territory.

Netflix has also been in the vanguard of laying siege to the old bastions of Hollywood power, with a war chest of $5 billion to spend on different forms of content — multiples of the amount spent annually by any single studio, and many times what each studio makes in profits. Most newcomers are restricted by a lack of funds, but Netflix has money to throw around. This isn’t a short-term experiment, it’s the beginning of a long-term plan.

In all likelihood, Amazon and Netflix’s fiercest digital competitors will also throw their hats in the mix. It can’t be long before China’s Wanda and Alibaba enter the fray; can Google and Facebook be far behind?

That’s great news for sellers because a fresh supply of buyers means there are more homes for material (along with the inevitable inflation of talent fees).

But it’s terrible news for the studios.

The upstarts aren’t just going to siphon away the biggest and best projects, they’re going to release them in the biggest and best ways, too.

They are financial and artistic behemoths — and they understand the future better than any of the great Hollywood institutions that remain rooted in the past.

* * *

Louis B. Mayer and Darryl F. Zanuck and Irving Thalberg weren’t just smart, they were brilliant.

None had a modicum of education, but they all knew that their studios thrived because they controlled each of the three elements of a vertically integrated industry: Production, distribution and exhibition.

They didn’t just make the movies, they also owned the theaters where the movies played, and they were the middle men who got the movies out of the studios and into the hundreds of little towns, from Poughkeepsie to Peoria, where audiences were eager to watch them.

One of those elements collapsed in 1948 when the Supreme Court forced the majors to divest themselves of their theaters in a landmark ruling.

With the theaters wrested from the moguls’ hands, outsiders might have jumped in. But they didn’t — with good reason.

First, the studios owned soundstages. Renting them or building new ones was prohibitively expensive. (Soundstages built in such tax-friendly states as Georgia — where Marvel, among others, has been shooting its movies — weren’t prevalent then.)

Second, the studios had all the top writers, directors and stars under contract, making it impossible for rivals to scoop up the key talent.

Third, the studios had libraries, which gave them a bulwark against losses once television, with its voracious appetite, arrived on the scene. These libraries could spin off hundreds of millions in revenue, enough to cushion a terrible year.

Fifth, they could spend huge sums on advertising — particularly when television arrived — that the indies could rarely afford, and also pay the fat salaries of the best ad executives around.

There was a sixth reason, too, maybe the most important. That was distribution — or “Big D,” as my late colleague A.D. Murphy used to call it. The studios owned and operated the infrastructure of Big D. They were the middle-men; they ran the vast machinery of getting pictures into theaters, and no system could function without them.

* * *

The studio system came about thanks to two great inventions. One was moving pictures. The other was the automobile (and by extension, trucks).

Thanks to cars, audiences could get to theaters. And thanks to trucks, the studios could ship their movies to the theaters where audiences would see them.

Big D needed a massive infrastructure, with field offices and hundreds of staffers involved in getting prints of films, packing them into heavy cans and shipping those cans all over the world.

In the past, whenever newcomers came along, they lacked the money and long-term viability to create their own infrastructure. The majors enjoyed an edge because they could guarantee theaters 15 to 20 movies a year — the biggest titles and the biggest stars — and thereby get the best playdates and terms. They made the movies and knew how to deliver them to their end point.

The studios were in the same business as UPS and FedEx, but with only one product to transport: movies.

The digital revolution, however, has eliminated the need for trucks, it’s brought an end to the role of field offices, and it’s made those bulky and expensive prints a thing of the past.

All you need today is a computer to ship your movie into almost any theater in the country, along with a staff that knows how to oversee the operation.

Amazon and Netflix don’t need the trucks. They don’t need field offices. They don’t need prints. They need knowledgeable executives — and with veterans such as Fox’s Jim Gianopulos and Warners’ Dan Fellman available or soon to become untethered, it can’t be long before they find them.

These companies don’t even blink at the kind of dollars involved, while most of the studios are slashing costs and employees and playing defense.

The studios lost the first pillar of their empire when they were forced to give up theaters. They lost the second pillar when they ended the “factory” system through which they held talent in their control. They lost the third pillar when rivals such as Netflix managed to create their own libraries.

Now there’s only one pillar left: distribution.

And soon that will be gone, too.

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